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8/2/2019 Complete Merger Nice

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Merger,acquisition

And Corporate

Restructuring


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Structure Conceptual framework

History of M&A

Financial framework

Corporate restructuring

Accounting for amalgamation Tax benefits

Exercise


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CONCEPTIONAL

FRAMEWORK

MEANING OF

MERGERS

ACQUSITIONS

AMALAMATIONS TAKEOVERS

ABSORPTIONS


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TYPES OF MERGERS

HORIZONTAL MERGER SIMILAR LINES OF

ACTIVITY

as Ford announced the sale of the two British iconiccars to Tata Motors Ltd.

Ford acquired Jaguar for $2.5 bn in 1989 and Land

Rover for $2.75 bn in 2000 but put them on the

market last year after posting losses of $12.6 bn in

2006 - the heaviest in its 103-year history.


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HDFC Bank's merger with Centurion Bank ofPunjab and Walt Disney Company's acquisition of17.2per cent stake in UTV SoftwareCommunication to increase its stake to 32.10 percent in the company.

In February 2008, as many as 38 cross-border deals

were announced with total value of $2.80 billion, ofwhich 27 were outbound deals with a value of$2.57 billion.


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Diologic Report

Meanwhile, global financial information providerDiologic in its latest report said that India-targetedM&A volumes reached $11.9 billion through 345deals so far this year. US was the leading acquiringcountry with deals worth 1.6 billion dollars,followed by the UK with $904 million andGermany with USD 584 million.


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ADVANTAGES

REDUCTION OF COMPETITION

PUTTING AN END TO PRICE CUTTING

ECONOMIES OF SCALE IN

PRODUCTION

RESEACH AND DEVELOPMENT

MARKETING AND MANAGEMENT


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VERTICAL MERGER

FIRMS SUPPLYING RAW MATERIALS

MERGE WITH FIRM THAT SELLS

ADVANTAGE

LOWER BUYING COST OF MATERIAL

LOWER DISTRIBUITION COST

ASSURED SUPPLIES AND MARKET

COST ADVANTAGE


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CONGLOMERATE MERGER

UNRELATED INDUSTRIES MERGE

PURPOSE

DIVERSIFICATION OF RISK

Ex:Time warner-(they were into media &movie production) & AOL-(leading

American website)


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Expansion

Merger and Acquisition

Asset acquisition

Joint ventures

Tender offer


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Contraction

1.Spin off-shares in subsidiary distributed to itsown shareholders

Kotak Mahendra Capital finance Ltd formed asubsidiary called Kotak Mahendra CapitalCorporation by spinning off its investment division.

2.Split off- A new company is created to takeover

an existing division or unit. It does not result in any cash inflow to the parent

company


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HISTORY


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The First wave

1897-1904-horizontal Mergers

Monopolistic Market structure

Mega merger between US Steel and CarnegieSteel.It also merged with 785 separate firms-75%of Steel production of US.

More than 3000 companies disappeared.

General Electric,Navistar, Standard Oil, Du-Point,American Tobacco-90% of market share

Transformation of regional firms into nationalfirms.

Exploited the economies of scale.


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Table-1

Year Number of mergers

1897 69

1898 303

1899 1208

1900 340 1904 79


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Problems of the first Wave

Financial factors

Fraudulent financing

Stock Market crash in 1904 and Banking panicof 1907

Closure of many banks and formation of FederalReserve System.

Easy finance ends here. The US President Teodore Roosevelt and President

William Taft made a crack down on LargeMonopolies.

As a result: ???? What happened to Standard Oil?


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Standard Oil(SO)

Broken in to 30 Companies.

SO of New Jersey named EXXON

SO of New York named MOBIL

SO of California renamed CHEVRON

SO of Indiana renamed AMOCO


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The Second Wave

1916-1929

Oligopolies industry structure

Industries like primary metals, petrolium products,food products, chemicals

Outside the previously consolidated heavymanufacturing industries.

Product extension merger like IBM and GeneralFoods

Vertical mergers In the mining and metalindustries(1920)


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Prominent Corporations

General Motors, IBM, Union Carbide, John DEERE

Between 1926 and 1930- there were 4600 mergers took

place

Result of which between 1919 and 1930 12,000

manufacturing , mining,public utility and banking firms

disappeared.

This period rail transportation, motor vehicle transportation

became national market.

Radios in homes, entertainment enhanced the competition.

Mass merchandising, national brand advertising


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Enhance productivity as a part of war effect.

The firms were urged to work together rather than

compete

The second wave came to an end when stock

market crashed on October 29,1929. Investment Bankers played in the first two phases

of mergers.


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The 1940s

The second world war with merger of small

firms with larger firms

Motive of tax relief

High estate taxes

There were no increased concentration of

wealth

Mergers were small.


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The third Wave-1965-1969

Merger activity reached its highest level during thisperiod

Booming of economy Conglomerate merger period-80%

Diversification strategy

It is because of ANTI TRUST enforcement

Federal government adopted a stronger antitrustenforcement both with horizontal and verticlemerger.

1963-1361 mergers; 1970-5152 mergers


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Management sciences

Management principles were applied in industries.

Management graduates were employed to manage

conglomerate mergers. There were 6000 mergers which leads to 25000

firms disappeared.

Investment Bankers do not finance most of thesemergers

Finance:-????


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Finance for mergers

Equity financing

Boom in stock market prices

Many conglomerate merger failed

The Revlon cosmetic entered into health

care and failed and suffered in cosmetic

industry.


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The Fourth Wave-1981-1989

Recession in 1974-75

Hostile merger

Take over or targeting on target companys boardof directors.

If the board accepts, it is considered friendly, and ifit opposes it, it is deemed to be hostile.

The great mergers such as Oil companies-21.6%Of dollar values of merger and acquisitions

Drugs and medical equipment industries due toderegulation in some industries

Dere ulation of airline industries


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Investment bankers played an aggressive

role.

M&A advisory services became a lucrativesource of income for Goldman Sachs

Innovation in acquisition techniques


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The Fifth Wave-1992-till date

Once again increased activity in merger in 1992

Mega mergers

Strategic mergers Equity based

Deregulations and technological changes

Banking , telecommunications entertainment and

media industries High growth in banking sectors in 1990 as banks

grew greater than central banks.

Banks fund M&A rather than new ventures.


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Oligopoly market structure

Competition declined

Very few competitors Example: Coco-Cola-44.5%,Pepsi-31.4%,Cadbury

Schweppes-14.4%

Globalisation Not confined to US companies

1995-US companies were acquired


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1981-2395

1989-2366

1990-2074 companies

2001-7528 companies merged


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Major Mergers in the telecom

Acquirer Target

Vodafone Mannes man

MCL worldcom Spirit

Bell atlantic GTE

AT&T MeCaw Celluar

SBC Pacific Telesis


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Major Mergers in Media and

Entertainment sector AOL Time Warner

VIOCOM CBS

WALT DISNEY CAPITAL ITIES/ABC

AT&T MEDIA ONE

TIME WARNER TURNER BRODCAST


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M&A IN INDIA

License era-Unrelated diversification

Conglomerate merger

Friendly take over and hostile bids by buyingequity shares

Example: Swaraj paul attempted to raid on EscortsLtd.and DCM Ltd but could not succeed.

The Hindujas raided and took over Ashok leylandand Ennore Foundaries.

Chhabria Group acquired stake in Shaw Wallace,Dunlop india and Falcon Tyres.


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Goenka group from culcutta took over Ceat

tyres.

The Obroi-Pleasant hotels of Rane group.

1989- Tata Tea acquired 50% of the equity

shares of Consolidated Coffee Ltd from

resident shareholders. merged to form HCL Ltd??.


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HCL

Hindustan Computers, Hindustan

Reprographic, Hindustan

Telecommunications and Indian SoftwareLtd.


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Comparative study

US India

Strategic By default(ANZ&Standard chartered

Gains by invest Not benefited by banksment bankers

Capital goods consumer goods

Borrowed

Earlier debt later by equity cash/FDI

Anti trust MRTP later The competitionbill 2001


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FINANCIAL FRAMEWORK

IT COVERS THREE INTERRELATED

ASPECTS

1.DETERMINING THE FIRMS VALUE

2.FINANCING TECHNIQUES IN MERGER

3.CAPITAL BUDGETING


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DETERMINIG THE FIRMS

VALUEQUANTITATIVE FACTORS BASED ON

1. THE VALUE OF THE ASSETS

BOOK VALUE OWNERS EQUITY

DEPENDS ON FIXED ASSETS AND WORKINGCAPITAL

2. APPRAISAL VALUE- INDEPENDENT APPRISALAGENCIES

3. MARKET VALUE BASED ON STOCK MARKETQUATATIONS ,BUT CHANCE FOR SPECULATION

4. EARNING PER SHARE AND P/E RATIO IMPACTOF EPS AFTER MERGER


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EXERCISE

COMPANY A

NO. OF SHARES 2

LACS MARKET VALUE

PER SHARE RS.25

EPS RS.3.125

COMPANY B

NO. OF SHARES 1

LAC MARKET VALUE

RS.18.75

EPS RS.2.5


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CONCLUSIONS

EXCHANGE AT EPS NO EFFECT ON

EPS AFTER MERGER

EXCHANGE MORE THAN EPS RATIO COMPANY WITH LOWER EPS GAINS

IF LESS THAN EPS RATIO COMPANY

WITH HIGHER EPS BEFORE MERGERGAINS


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PRICE EARNING RATIO

APPROACH MEANING

COMPUTATION :

P/E RATIO = MP/EPS

EPS = EAT/NO. OF EQUITY SHARES

MARKET PRICE = P/E (NO. OF TIMES)

* EPS


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EXAMPLEPRE MERGER

SITUATION

FIRM A FIRM B

EAT 6,25,000 2,50,000

NO. OF SHARES 2,00,000 1,00,000

EPS 3.125 2.5

P/E RATIO(TIMES) 8 7.5

MARKET PRICE PERSHARE(MPS)

25 18.75

TOTAL MARKETVALUE (N*MPS) OR(EAT*P/E RATIO)

50,00,000 18,75,000


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POST MERGER SITUATION 1

(BASED ON CURRENTMARKET PRICE

SITUATION 2

EXCHANE RATIO/ SWAPRATIO (ASSUMING)

2.5:3.125=.8 1 : 1

EAT(COMBINED FIRM) 6.25+2.5=8.75 8,75,000

NO. OF SHARES 2.8 lakhs 2,00,000+1,00,000=3,00,000

EPS 8.75/2.8=3.125 8,75,000/3,00,000=2.91/

P/E RATIO

(ASSUMED TO BE THE

SAME)

8 7.5

MPS 3.125*8=25 21.825

TOTAL MARKET VALUE 70,00,000 65,47,500


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CONCLUSION

IF SHARES ARE EXCHANGED BASED

ON CURRENT MARKET PRICE PER

SHARE , POST MARKET PRICE SHAREINCREASED AT HIGHER RATE THAN

EXCHANGED BELOW THIS RATIO

Boot strap effect


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MARKET VALUE AFTER MERGER =MARKET VALUE BEFORE MERGER =68,75,000

NET GAIN = 15,00,000

? IF EXCHANGE RATIO IS 2.5:1 WHO GAINSWHO LOSES

? IF EXCHANGE RATIO IS 1:1 WHO GAINSWHO LOSES

? HOW TO CALCULATE TOLERABLE SHAREEXCHANGE RATIO

A O O


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DETERMINATION OF

TOLERABLE SHARE

EXCHANGE RATIOTOTAL MV

LESS: MINIMUM TO BE GIVEN TO B

75,00,000

10,00,000

NET BENEFIT TO A 65,00,000

NO. OF SHARES OF A TO A CO. SHAREHOLDERS

1,00,000

DESIRED POST MERGER MPS 65 PER SHARE

NO. OF EQUTY SHARES TO BE ISSUEDBASED ON DESIRED MARKET PRICE

10,00,000/65 = 15,385 SHARES

TOLERANCE SHARE EXCHANGE RATIO 50,000/15385 = 3.25 SHARES OF FIRM B, 1SHARE IN FIRM A

1:3.25


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CONCLUSION

FIRM WITH HIGHER P/E RATIO CAN

ACQUIRE FIRM WITH LOWER P/E

RATIO WHICH WILL INVARIABLYINCREASES MARKET VALUE AFTER

MERGER


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CAPITAL BUDGETING

THE TARGET FIRM SHOULD BE

VALUED BASED ON PV OF

INCREMENTAL CASH INFLOWS


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CORPORATE

RESTRUCTURING FINANCIAL RESTRUCTURING

RESTRUCTURING SCHEMES :

INTENAL AND EXTERNALRESTRUCTURING

DEMERGERS

BUYOUTS


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ACCOUNTING FOR

AMALGAMATION POOLING INTEREST METHOD

CONDITIONS AS PER AS 14:

1. ALL ASSETS AND LIABILITIES OF TRANSFEROR CO. TO

BE THE ASSETS OF THE TRANSFREE CO.2. AT LEAST 90% OF F.V OF EQUITY SHARE HOLDERS

SHOULD BE SHAREHOLDERS OF NEW CO.

3. PURCHACE CONSIDERATION TO BE SETTLED BY THE

NEW CO.

4. THE BUSINESS OF NEW CO. SHOULD CONTINUE

5. NO ADJUSTMENT IS INTENDED TO BE MADE TO BOOK

VALUE OF ASSETS AND LIABILITIES OF TRANSFEROR CO.


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OTHER ACCOUNTING

TREATMENTS1. CROSS HOLDINGS OF SHARES TO BE

CANCELLED SUBSIQUENT TO MERGER

2. INTER CO. TRANSACTIONS LIKE DEBTORSAND CREDITORS SALE OF GOODS FROM

ONE CO. TO ANOTHER

3. SALES TAX PAID ALREADY CAN NOT BE

RECOVERED

INCOME TAX RELATED


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INCOME TAX RELATEDISSUES FOR

AMALGAMATIONCONDITIONS OF AMALGAMATION UNDER INCOME TAX ACT SEC 2 (1B)

1. ALL ASSETS AND LIABILITIES OF TRANSFEROR CO. TO BE THEASSETS OF THE TRANSFREE CO.

2. SHARE HOLDERS HOLDING NOT LESS THAN 3/4TH IN VALUE OF

SHARES OTHER THAN SHARES ALREADY HELD SHOULDBECOME SHARE HOLDERS OF AMALGAMATED COMPANY

EX. NO. OF SHARES OF Altd CO. 1,00,000

NO. OF SHARES HELD BY Bltd IN Altd IS 20,000

NOMINAL VALUE OF SHARE IS RS.10

ASSUME Altd MERGE WITH Bltd THEN 75% OF 1,00,000- 20,000 = 60,000

TO BE THE SHARE HOLDES OF B CO.NOTE:SHARE HOLDERS MAY BE EQUITY OR PREFERNCE SHARE

HOLDERS


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OTHER CONDITIONS

THE AMALGAMATED CO. IS AN INDIAN CO.

EXCEPTION

1. IF SHARES OF INDIAN CO.HELD BY FOREIGN BEFORE

MERGER AND SUCH FOREIGN CO. TAKEN OVER BYANOTHER FOREIGN CO.

2. ATLEAST 25% OF THE FOREIGN CO. (BEFORE MERGER) TO

BE SHARE HOLDERS OF THE NEW FOREIGN CO.

? WHAT IS THE BENEFIT TO THE AMALGAMATED CO.

AMALGAMATING CO.(OLD CO.)


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NO CAPITAL GAIN ON TRANSFER ON CAPITAL ASSETS BY THETRANSFEROR CO. UNDER SEC 47(VI) OF I.T ACT

? CAN NEW CO. CARRY FORWAD AND SET OF LOSS ANDDEPRECIATION

SEC 72 A TO BE FULFILLED

1. ACCUMULATED LOSSES REMAIN UNABSORBED FOR 3 OR MOREYEARS

2. 75% OF BOOK VALUE TO BE HELD ATLEAST FOR 2 YEARSBEFORE AMALGAMATION

3. THE AMALGAMATED CO. CONTINUES TO HOLD 3/4TH OF BOOKVALUE ATLEAST FOR 5 YEARS

4. NEW CO. SHOULD CONTINUE FOR ANOTHER 5 YEARS

5. NEW CO. SHOULD ACHIEVE ATLEAST 50%OF INSTALLEDCAPACITY BEFORE END OF 5 YEARS AND SHOULD CONTINUEFOR 5 YEARS


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6. THE NEW AMALGAMATED CO. SHOULD FURNISH TO ASSESSING OFFICER

ABOUT PARTICULARS OF PRODUCTION

BENEFIT

THIS SCHEME IS ALSO APPLICABLE TO BANKING INSTITUTIONS

?TATA VOLTAS & KELVINATOR HYDERABAD DIVISION vs. CBDT


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EXAMPLE

A LTD AMALGAMATES WITH B LTD

AS ON 2007

PARTICULARS DOES NOTSATISFY SEC2(1B) & 72 A

SATISFIES 2(1B)BUT DOES NOTSATISFY 72 A

SATISFIES BOTH2(1B) & 72 A

A MERGES WITH B(A GOES OUT)

NO BENEFIT TOA & B

DOES NOTATTRACTCAPITAL GAIN

FOR A BUT NOGAIN FOR B

NO CAPITAL GAINTAX &ACCUMULATED

LOSSES &UNABSORBEDDEPERICIATIONCAN BE CARRIEDFORWARD


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? If b merges with a & b goes out of marketwho gains under above 3 situations

? If a&b merge with c what are the taximplication under above situations

Assume b is a loss making co.& Haveaccumulated losses & unabsorbeddepreciation

? If c is not an Indian co.


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OTHER TAX BENEFITS

1. Expenditure on amalgamation or de-merger allowed under sec

35DD both revenue and capital expenditure allowed

2. Expenditure on scientific research can be carried forward

3. Expenditure on acquisition of patent rights copyrights depreciation can be provided

4. Expenditure for obtaining license for tele-communication service

can be written off

5. Preliminary expenses

6. Capital expenditure on family planning7. Bad debts are allowed


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Tax Concession To Share

Holders Of Amalgamating Co.

No capital gain tax provided, new co. is an

Indian co.& Shareholders are acquiredeverything in shares


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EXERCISE

PARTICULARS CO. A CO. B

EAT 1,40,000 37,500

NO. OF SHARES 20,000 7,500

EPS 7 5

MARKET PRICE 70 40P/E RATIO 10 8


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Co. A is acquiring co. B Exchanging one share forevery 1.5 shares of B ltd & p/e ratio will continueeven after merger

? Are they better or worse of than they were before inmerger

? Determine the range of minimum & maximum ratiobetween the two firms

? A is an Indian co.

? A is a foreign co.

? A merges with T & formed a new co. AT ltd? What are the tax planning required before & after

merger

complete merger nice

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