Shaw Wallace - UB Group Merger - A case study Merger and acquisition of any company always interesting for people

who are in business. Every cases of this type helps us to understand the mechanism of amalgamation. Although this case is 4 years old but still have some importance. Silence of government authority is also notable in the case.
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Shaw Wallace Company Shaw Wallace is started in 1886 in Calcutta. In 1987 it came under Jumbo Group, lead by Mr. M R Chhabria. Jumbo Group is an international business conglomerate based in the United Arab Emirates. The group is a diversified group with business includes beverages, Tyres, Gelatines, Agrichem, Engineering, Tanneries, Freight Forwarding and Electronics. Its business is established across Hong Kong, Singapore, Japan, South Korea, Vietnam, Russia, United Kingdom, Sri Lanka, South Africa and India. Shaw Wallace was comprises of following divisions: Liquor Division Beer Division Wine Division International Business Traditional Business After demise of Mr. M.R. Chhabria in April 2002, Ms. Vidya Chhabria became chairperson of the group. Chhabrias daughter Komal Chhapria became executive director of Indian flagship of Shaw Wallace & Co (SWC). The $2 billion Jumbo groups Indian operations include flagship Shaw Wallace Co Ltd, Falcon Tyres, Dunlop India Ltd, Hindustan Dorr-Oliver, Mather & Platt, Gordon Woodroffe and New Video Ltd. UB Group The UB (United Breweries) Group was founded by Thomas Leishman in 1915. It started its business with manufacturing of beer. Vittal Mallya became first Indian Director of UB group in 1947. In 1983, Vijay Mallya, son of Vittal Mallya, become chairman of the group. He handled the group with more professional management. In 1988, group acquired Berger Paints. Group divested paint business in 1996. UB group has following divisions: Beverage Alcohol Pharmaceuticals Media

International Trading Fertilizer Research and Development Aviation How Merger Proceed Shaw Wallace controls 10% of the market of the country liquor in States where it operates. As per Ms. Komal C Wazir, Shaw Wallace was present only in Uttar Predesh. Company would try to enter Maharashtra, Karnataka and Rajasthan. Companys beer sales share in country also increased from 33% in the previous year to 35% in the year 2003-2004. In 2004, Shaw Wallace Breweries Limited (SWBL) was a joint venture between Shaw Wallace and South African Breweries was having market share of 36% in India. United Breweries was in the 1st place with 43% market share in the breweries market. Ready to Drink (RTD) is not selling well in India. RTD was introduced in 2002. Bacardis Breezer, United Breweries Shotz, Balarampur Chinis Xotica, Shaw Wallaces Vebe were hardly selling in the market. In 2003-2004 3.3 lakh cases of RTD sold. High price seemed to be reason of less selling. In October 2004, Shaw Wallace announced that they were eyeing on the export market Australia, France and also ramping up export in Australia. In India, Royal challenge, a premium whisky, increased 54% market share in last year to 65% last year in its segment. Its other brands like Antiquity, Antiquity Super, Directors special, Haywards Fine etc were controlling 16% market share. Shaw Wallace was aiming to become number one or two in every category over the next years. Shaw Wallace president Mr. Samsuddin announced that company was upgrading its machinery to improve manufacturing process. It was expecting 17% y-o-y growth in the next year. Cost of molasses was a concern for the company. Prof Phillip Kotler was added as a long term investment and company was expending more on golf as a part of marketing. Shaw Wallace was doing brand extension and new product lunch in the premier segment only. They said that they did not have any plan to lunch any new product in the regular segment. They started brand extension with White Mischief brand. They already launched gin, vodka, brandy and Black Mischief rum. The entire product range belongs to Mischief line of brand. They also had a plan of launching new brand of malt whisky shortly. United Brewers informed BSE, in November 22, 2004 that it was evaluating unsolicited offer strategic alliance with equity alliance. UB already had Rs. 250 Crore investment from Scottish and Newcastle (S&N) couple of years back. In India only 60-65% bottles were returned to the company and rest of the bottles are injected by the companies. The injection rate is around 15% per annum. Taking advantage to the shortage, second hand

bottlers increased price of bottle from Rs. 3.50 to Rs. 7. This price is equal to the price of new bottle. To break monopoly of bottlers UB group and SWBL came together because it was affecting bottom line of both the company. Earlier they had a so bitter relationship that there was undercutting to the extent of loss. In November 2004, Manu Chhabrias widow Vidya Chhabria told McKinsey (based on Singapore) to search buyers for several Chhabria companies. There was an inheritance problem in daughters of Late Manu Chhabria. Ms. Komal K. Wazir was only interested to run the company but others wanted to sell it. In December 2004, Vijay Mallya of UB group announced that he had entered into an agreement with Britains largest brewer S&N for selling 37.5% stake in the company. Under the terms of the deal S&N would have 17.5% stake in the flagship company UB Ltd for Rs. 217 Crore (Rs. 575/share). British company will further infuse Rs. 247 Crore through non convertible redeemable preference share. They would also come with the open offer of 20%. Post deal UB and S&N both will have 37.5% each in the UBL. Rest of the shares will be with the Indian Public and Indian Financial Institutions. Through the deal UB was expecting to capture more than 50% market of Indian Bear Market. This deal would create more pressure on second company Shaw Wallace. Vidya Chhabria, chairperson of $2 billion Jumbo group was in the list of 50 most powerful women in business internationally in 2004. She ranked 38th place in the list and only Indian in the list. She was in the list for third time in succession. On February 10, 2005 BSE SENSEX closes at 6,577.83 points. Shaw Wallace gains 10% and closes at Rs. 204.15. Mc Dowell & Co Ltd, a flagship of the UB Group also increases 10% to Rs.153.05. UB group was the highest bidder for sprit division of SWC which was put in the block. The UB group had bid Rs. 1251 Crore. Later SWC changed it plan and invited bid for 55% stake in the holding company. On February 23, 2005, Mr. Vijay Mallya announced 25% open offer for Shaw Wallace Rs. 250. This is an 8.2% premium over the last closed price. He also indicated a breakdown of talks between UB group and Ms. Vidya Chhabria of Shaw Wallace Company (SWC). This offer valued Shaw Wallace Rs. 1200 Crore which is 120% premium over market capitalization of last 12 months. Mr. Mallya also said that none of his company has acquired any stake in Chhabria Group Company. Total cost of the open offer will be Rs.300 Crore. Open offer of UB group is through group companies McDowell & Co, Phipson Distillery and United Sprits. After the acquisition UB group will become worlds second largest breweries company with 49.5 cases volume. Business volume of UB group was 35 million and SWC had 14.5 million cases. Share holding pattern of SWC is shown in Exhibit 2. It is clear that open offer of UB group is targeted part of institutional investor also. Although Mr. Mallya clarified that he needs to come up with offer after the getting promoters share also. SWC has 40% of the equity of Shaw Wallace Distilleries, the sprit company, and has a 50% stake in SAB Miller India which is a joint venture between South African

Breweries and Shaw Wallace for bear business. All group companies of Jumbo Group including SWC has cross holding. Move of the financial institution would be vital in SWC. If they opted for open offer to sell their entire stake then UB group will have mandatory 26% stake to move or block any special resolution. Financial performance of Shaw Wallace had been slackening. Its revenue is stand still at Rs 100 Crore. Its Profitability has slipped since 2002 and operating income has also fallen dramatically. It was the time liquor and tobacco companies were making profit worldwide. Corporate governance of SWC board needs to show that they are for all stock holders not only for promoters. Next day of the open offer announcement by UB group for SWC, share price of SWC had fallen 2.5% to Rs. 225. Share price of UB flagship Company McDowell & Co. had rose 10% to Rs.172.55. Shaw Wallace said they were considering legal option against the UB group bid but it is an open offer and legal options are limited. LIC chairman LN Bhardwaj told that they were considering the offer. February 26, 2005, Shaw Wallace announced that it had dropped 6 brands. Stopped brands are Malkajgiri Malt Whisky, Punch Fine, High Command, Gold Medal Brandy, Black Panther Rum and Kings Blend Brandy. They said the increase in the raw material cost is the reason for this discontinuation. Shaw Wallace said that they reworked their brand strategy and now the focus would be on improving the product mix and enhancing the value of existing brands. Calcutta High Court passed a stay order on selling of SWC stock after a petition by three companies Visishth Chai Vyapar Pvt Ltd, MKJ Enterprises and MKJ Developers Ltd. They appealed that they had given a short term loan of Rs. 80 Crore to SWC in 1993-94. Now if ownership trademark and brand names are transferred then recovery of money will not be possible. Later there was an out of court settlement of Rs 57 Crore. In March 20, 2005, SWC announced that they are open to any fair price for selling off. Earlier they hold the sell off of 55% stake of Chhabria family. March 31, 2005. Vijay Mallya announced that UB group had closed the deal with Chhabria family owned Jumbo World Holdings Ltd (JHWL) for Rs. 1330 Crore ($300 m) for a stake of 54.54% share of SWC. The deal is evaluated as Rs 325 per share. UB group also said than open offer price has been revised to Rs.260 per share. Majority control of Narmada Gelatine Ltd will be divested to Jumbo affiliate as soon as practicable to maintain Jumbo Management Team. UB group also in the process of Herbertsons Ltd, the make of Bagpiper whisky, after the out of court deal with Kishore Chhabria. When asked about the over valuation of Rs1300 Crore for SWC Mr. Mallya said the every year SWC and UB spend Rs 200 Crore each for just fighting with each other. This will now be added to the bottom line. There would be two companies United Breweries and SWC still FY 2006 and then they would be merged to United Sprit. Mallya also clarified that he was only interested in sprit business and no other business.

This also excludes bear joint venture of SWC. Industry estimate for valuation is Rs. 80 Crore for a million cases. Regulatory and Legal Issues Competition Committee of India (CCI) might investigate any deal (involving two Indian companies) in which exceeds Rs.1000 Crore or where the combines asset exceeds Rs. 300 Crore. When two Indian companies involved the threshold limit is Rs 4000 Crore for assets and Rs. 12000 Crore for revenues. UBSWC deal qualified for both the counts. India market capacity is 110 million cases of Indian Made Foreign Liquor (IMFL). UB and SWC will have together 55 million case capacity i.e. more that 50%. A huge gap between other player and the group is also a matter of concern. Other players like Radico Khaitan, Mohan Meakins and Seagram having market share of 6-7 million cases. How the Deal was financed The deal was financed by borrowing $300 million from ICICI bank win equal proportion of foreign and domestic currency. UB group has paid Rs 1545 Crore including Rs.312 Crore for acquisition of 25% share through open offer. Post open offer UB group has 75% share. Realization of Intended Object UB Group becomes the third largest sprit company in the world. Britains Diageo Plc is in the first place and Frances Pernod Ricard PA (after buying Britains Allied Domecq) is in the second position. Synergy in the merged entity Increased bargain power with monopolistic customer (Government share of market is 65% and Private market share of about 16%) Economics of scale of distribution system. Increased bargaining power with the suppliers like bottles Organizational savings arising from consolidation through elimination of multiple offices and duplication of manpower Reduced promotion spent and improved market realization Post Merger Situation In August 2006, Shaw Wallace Financial Services and Shaw Wallace Breweries limited merged. It was declared in 59th AGM of Shaw Wallace in September 2005. It was also declared that combined entry had 130 brands out of which 35 brand fetch 90% of the profit. McDowell announced that following eight companies were amalgamated into one entity of McDowell India Sprits Ltd and later named as United Sprit Ltd. Phipson Distillery Ltd

United Spirits Ltd Herbertsons Ltd Triumph Distillers and Vintners Pvt Ltd Shaw Wallace Distilleries Ltd Baramati Grape Industries Ltd United Distillers India Ltd McDowell International Brands Ltd. Long standing legal battle of Shaw Wallace ended on October 1, 2007. It had been settled for mere Rs 34.44 Crore, which is only 7.5% of the original demand i.e. Rs. 464 Crore. This had cleared the barrier of legal merger of Shaw Wallace into UB Group. Shaw Wallace passed board approved merging of the company with United Sprit Ltd. Shaw Wallace shareholder got four share of United Sprit for every 17 share they hold. Gains to shareholder of target and acquirer Gains of Target (Shaw Wallace Company) EPS has increased significantly from 0.02 in 2003-2004 to 6.14 in 2007-2008. Details are given in Exhibit 4. Net profit also increased from Rs.0.09 Crore in 2003-2004 to Rs. 29.48 Crore in 2007-2008. Details are given in Exhibit 5. Operating profit margin, Gross profit margin and Net profit increased significantly. Details are given in Exhibit 5. Net Cash flow from operating activity also increases. Details are given in Exhibit 7 Dividend percentage also increased. Details are given in Exhibit 8 Stock Price of Shaw Wallace was below Rs. 250 before Jan 2005 but it was more than Rs 250 at after June 2007. Merger has created a large amount of share holders value for Shaw Wallace Company. A study by Assocham said that Shaw Wallace was in the 10food and beverages company in terms of market capitalization. It had given 261 percent return in 2004-2005 against 123 percentage return in 2003-2004. It occupied last slot in terms of market capitalization in 2003-2004.

Exhibit 1 - Breweries company position in 2005 Company Diageo (UK) Pernod Ricard Allied Domecq UB Group Business Volume (Million cases) 96 45 43.6 35

Exhibit 2 - Shareholding pattern of Shaw Wallace Company in January 2005 Institutional Investor Indian Public Promoter Holding Institution Holding Details: Unit Trust of India Financial Institution and Insurance Company LIC 7.84% 14.03% 28.80% 14% 57.20%

4.60%

Exhibit 3 - Income Statement Shaw Wallace Mar ' 07 Mar ' 06 Mar ' 05 Mar ' 04 Mar ' 03 Income: Operating income Expenses Material consumed Manufacturing expenses 95.12 2.99 79.45 3.33 80.31 2.86 57.57 2.49 82.39 4.57 138.2 115.52 112.54 103.89 147.08

Personnel expenses Selling expenses Administrative expenses Expenses capitalized Cost of sales Operating profit Other recurring income Adjusted PBDIT Financial expenses Depreciation Other write offs Adjusted PBT Tax charges Adjusted PAT Non recurring items Other non cash adjustments Reported net profit Earnings before appropriation Equity dividend Preference dividend Dividend tax Retained earnings

8.9 5.83 28.66 141.5 -3.31 13.99 10.68 6.76 1.19 2.73 9.46 -6.73 78.89 9.92

9.78 0.94 40.38 133.88 -18.36 13.57 -4.79 3.94 1.4 -10.13 41.78 -51.91 95.69 3.07

8.35 0.65 22.1 114.28 -1.74 5.83 4.08 9.61 1.39 -6.92 3.65 -10.57 0.75 -15.06

9.19 0.43 25.57 95.24 8.65 10.69 19.35 7.48 2.06 9.8 5.81 4.00 3.79 -4.2

20.92 11.99 29.07 148.94 -1.87 5.86 4 7.7 2.57 -6.28 6.48 -12.75 11.28 -3.26

82.08 82.31

46.86 5.71

-24.88 -41.91

3.59 4.47

-4.74 -4.12

7.2 1.22 73.89

4.8 0.67 0.24

-41.91

4.47

-4.12

All figures are in Rs. Crore (other than ratio)

Exhibit 4 - Shaw Wallace Company Ltd, Annual Result Brief Mar ' 08 Mar ' 07 Mar ' 06 Mar ' 05 Mar ' 04 Sales 189.19 249.14 -2.21 204.24 -72.71 192.05 -4.49 163.93 -13.29

Operating 31.96 profit Interest Gross profit EPS (Rs) 10.34 47.8

6.27 81.39

4.96 99.19

6.79 4.92

2.93 4.49

6.14

14.53

12.5

-0.97

0.02

Exhibit 5 - Annual Result Details, Shaw Wallace Company Mar ' 08 Mar ' 07 Mar ' 06 Mar ' 05 Mar ' 04 Other income Stock adjustment Raw material Power and fuel Employee expenses Excise Admin and selling expenses Research and development expenses Expenses capitalized Other expenses Provisions made Depreciation 26.18 -3.97 42.01 9.24 16.74 89.87 2.51 48.62 8.62 108.88 176.86 3.41 39.48 9.79 88.73 16.2 2.18 39.16 8.35 79.52 20.71 -4.96 29.02 9.19 60.04 -

93.21 2.98

82.72 1.53

106.54 29 1.4

67.33 1.39

62.43 21.5 2.06

Taxation Net profit / loss Extra ordinary item Prior year adjustments Equity capital Equity dividend rate Agg.of non-prom. shares (Lacs) Agg.of non promoter Holding (%) OPM (%) GPM (%) NPM (%)

15.34 29.48 16.54 48.01 120.02 25 16.89 22.19 13.69

10.11 69.75 48.01 120.02 25 -0.89 24.01 20.57

37.78 60.01 48.01 120.02 25 -35.6 26.03 15.75

3.65 -4.66 -4.54 -20.22 48.01 218.22 45.46 -2.34 2.36 -2.24

5.81 0.09 3.47 -18 48.01 218.37 45.49 -8.11 2.43 0.05

All figures are in Rs Crore (other that ratio)

Exhibit 6 - Balance Sheet, Shaw Wallace Company Mar ' 07 Mar ' 06 Mar ' 05 Mar ' 04 Mar ' 03 Sources of funds Owner's fund Equity share capital Share application money Preference share capital Reserves & surplus Loan funds Secured loans Unsecured loans 106.36 0.52 107.7 5.42 149.03 12.01 117.2 31.37 77.1 48.01 73.89 48.01 0.24 48.01 -41.15 48.01 -16.27 48.01 1.64

Total Uses of funds Fixed assets Gross block Less : revaluation reserve Less : accumulated depreciation Net block Capital work-in-progress Investments Net current assets Current assets, loans & advances Less : current liabilities & provisions Total net current assets Miscellaneous expenses not written Total Notes: Book value of unquoted investments Market value of quoted investments Contingent liabilities Number of equity shares outstanding (Lacs) All Figures in Rs. Crore

228.25

156.46

161.3

160.94

158.12

31.85 3.54 15.44 12.87 0.7 158.69

35.73 8.48 15.29 11.96 0.01 94.01

37.07 10.18 15.14 11.75 0.26 139.21

38.91 11.43 14.48 13 139.21

53.45 16.43 20.04 16.98 0.12 140.26

168.65 112.67 55.98 228.25

156.97 106.49 50.48 156.46

94.06 83.98 10.08 161.3

99.36 90.62 8.73 160.94

109.21 108.45 0.76 158.12

76.51 851.8 28.53 480.06

11.83 0.57 60.68 480.06

139.08 0.38 61.79 480.06

139.08 0.2 566.83 480.06

140.13 0.26 784.63 480.06

Exhibit 7 - Cash flow statement, Shaw Wallace Company Mar ' 07 Mar ' 06 Mar ' 05 Mar ' 04 Mar ' 03

Profit before tax Net cash flow-operating activity Net cash used in investing activity Net cash used in fin. activity Net inc/dec in cash and equivalent Cash and equivalent begin of year Cash and equivalent end of year All figures in Rs. Crore

114.81 57.98 20.84

88.64 129.26 -15.02

-1.02 -26.15 8.41

23.93 -29.62 7.27

17.82 11.1 22.21

-8.87 69.95

-54.69 59.55

18.05 0.31

21.87 -0.48

-36.79 -3.48

61.84

2.29

1.98

2.46

5.55

131.79

61.84

2.29

1.98

2.07

Exhibit 8- Dividend, Shaw Wallace Company Year Month Dividend (%) 10 15 10 -

2008 2007 2006 2001

Dec Sep Feb Aug

Exhibit- 9 Stock Price Shaw Wallace Month Stock Price (Rs.) Month Stock Price (Rs.) Month Stock Price (Rs.) 116.25 175.65

Apr-03 May-03

28.10 34.15

Apr-05 May-05

231.45 181.90

Apr-07 May-07

Jun-03 Jul-03 Aug-03 Sep-03 Oct-03 Nov-03 Dec-03 Jan-04 Feb-04 Mar-04 Apr-04 May-04 Jun-04 Jul-04 Aug-04 Sep-04 Oct-04 Nov-04 Dec-04 Jan-05 Feb-05 Mar-05

42.65 49.00 41.30 50.45 57.70 70.55 73.25 47.60 64.55 59.75 75.10 68.90 69.25 60.70 104.15 99.60 99.20 146.55 154.60 136.90 223.80 215.20

Jun-05 Jul-05 Aug-05 Sep-05 Oct-05 Nov-05 Dec-05 Jan-06 Feb-06 Mar-06 Apr-06 May-06 Jun-06 Jul-06 Aug-06 Sep-06 Oct-06 Nov-06 Dec-06 Jan-07 Feb-07 Mar-07

155.60 175.30 187.30 163.15 139.15 138.45 145.15 158.20 165.85 182.75 225.55 149.80 120.65 114.75 135.55 149.30 149.90 160.20 143.25 161.85 130.10 115.10

Jun-07 Jul-07 Aug-07 Sep-07 Oct-07

284.85 287.25 259.70 320.60 349.55

Exhibit- 10 Stock Price UB Holding Month Stock Price Month Stock Price Month Stock Price

(Rs.) Apr-03 May-03 Jun-03 Jul-03 Aug-03 Sep-03 Oct-03 Nov-03 Dec-03 Jan-04 Feb-04 Mar-04 Apr-04 May-04 Jun-04 Jul-04 Aug-04 Sep-04 Oct-04 Nov-04 Dec-04 Jan-05 Feb-05 Mar-05 16.6 19.75 21.2 25.25 24.65 25.15 21.2 27.45 43.3 35.5 39.05 38.45 37.85 34.8 33.85 33.3 34.45 37.65 36.3 75.35 99.8 85 98.6 168.75 Apr-05 May-05 Jun-05 Jul-05 Aug-05 Sep-05 Oct-05 Nov-05 Dec-05 Jan-06 Feb-06 Mar-06 Apr-06 May-06 Jun-06 Jul-06 Aug-06 Sep-06 Oct-06 Nov-06 Dec-06 Jan-07 Feb-07 Mar-07

(Rs.) 305.6 290.85 446.95 458.4 523.55 437.4 358.5 468.2 524.85 598 595.75 726.9 840.85 685.2 444.95 192.2 227.6 265.45 289.8 350.15 345.05 425.35 345.3 359.5 Apr-07 May-07 Jun-07 Jul-07 Aug-07 Sep-07 Oct-07

(Rs.) 840.85 685.2 444.95 192.2 227.6 265.45 289.8

Exhibit- 11 Share Holding Details

raktim banerjee., all rights reserved.

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Mergers and Acquisitions

An entrepreneur may grow its business either by internal expansion or by external expansion. In the case of internal expansion, a firm grows gradually over time in the normal course of the business, through acquisition of new assets, replacement of the technologically obsolete equipments and the establishment of new lines of products. But in external expansion, a firm acquires a running business and grows overnight through corporate combinations. These combinations are in the form of mergers, acquisitions, amalgamations and takeovers and have now become important features of corporate restructuring. They have been playing an important role in the external growth of a number of leading companies the world over. They have become popular because of the enhanced competition, breaking of trade barriers, free flow of capital across countries and globalisation of businesses. In the wake of economic reforms, Indian industries have also started restructuring their operations around their core business activities through acquisition and takeovers because of their increasing exposure to competition both domestically and internationally. Mergers and acquisitions are strategic decisions taken for maximisation of a company's growth by enhancing its production and marketing operations. They are being used in a wide array of fields such as information technology, telecommunications, and business process outsourcing as well as in traditional businesses in order to gain strength, expand the customer base, cut competition or enter into a new market or product segment. Mergers or Amalgamations A merger is a combination of two or more businesses into one business. Laws in India use the term 'amalgamation' for merger. The Income Tax Act,1961 [Section 2(1A)] defines amalgamation as the merger of one or more companies with another or the merger of two or more companies to form a new company, in such a way that all assets and liabilities of the amalgamating companies become assets and liabilities of the amalgamated company and shareholders not less than nine-tenths in value of the shares in the amalgamating company or companies become shareholders of the amalgamated company. Thus, mergers or amalgamations may take two forms:-

Merger through Absorption:- An absorption is a combination of two or more companies into an 'existing company'. All companies except one lose their identity in such a merger. For example, absorption of Tata Fertilisers Ltd (TFL) by Tata Chemicals Ltd. (TCL). TCL, an acquiring company (a buyer), survived after merger while TFL, an acquired company (a seller), ceased to exist. TFL transferred its assets, liabilities and shares to TCL. Merger through Consolidation:- A consolidation is a combination of two or more companies into a 'new company'. In this form of merger, all companies are legally dissolved and a new entity is created. Here, the acquired company transfers its assets, liabilities and shares to the acquiring company for cash or exchange of shares. For example, merger of Hindustan Computers Ltd, Hindustan Instruments Ltd, Indian Software Company Ltd and Indian Reprographics Ltd into an entirely new company called HCL Ltd.

A fundamental characteristic of merger (either through absorption or consolidation) is that the acquiring company (existing or new) takes over the ownership of other companies and combines their operations with its own operations. Besides, there are three major types of mergers:-

Horizontal merger:- is a combination of two or more firms in the same area of business. For example, combining of two book publishers or two luggage manufacturing companies to gain dominant market share. Vertical merger:- is a combination of two or more firms involved in different stages of

production or distribution of the same product. For example, joining of a TV manufacturing(assembling) company and a TV marketing company or joining of a spinning company and a weaving company. Vertical merger may take the form of forward or backward merger. When a company combines with the supplier of material, it is called backward merger and when it combines with the customer, it is known as forward merger. Conglomerate merger:- is a combination of firms engaged in unrelated lines of business activity. For example, merging of different businesses like manufacturing of cement products, fertilizer products, electronic products, insurance investment and advertising agencies. L&T and Voltas Ltd are examples of such mergers.

Acquisitions and Takeovers An acquisition may be defined as an act of acquiring effective control by one company over assets or management of another company without any combination of companies. Thus, in an acquisition two or more companies may remain independent, separate legal entities, but there may be a change in control of the companies. When an acquisition is 'forced' or 'unwilling', it is called a takeover. In an unwilling acquisition, the management of 'target' company would oppose a move of being taken over. But, when managements of acquiring and target companies mutually and willingly agree for the takeover, it is called acquisition or friendly takeover. Under the Monopolies and Restrictive Practices Act, takeover meant acquisition of not less than 25 percent of the voting power in a company. While in the Companies Act (Section 372), a company's investment in the shares of another company in excess of 10 percent of the subscribed capital can result in takeovers. An acquisition or takeover does not necessarily entail full legal control. A company can also have effective control over another company by holding a minority ownership. Advantages of Mergers & Acquisitions The most common motives and advantages of mergers and acquisitions are:-

Accelerating a company's growth, particularly when its internal growth is constrained due to paucity of resources. Internal growth requires that a company should develop its operating facilities- manufacturing, research, marketing, etc. But, lack or inadequacy of resources and time needed for internal development may constrain a company's pace of growth. Hence, a company can acquire production facilities as well as other resources from outside through mergers and acquisitions. Specially, for entering in new products/markets, the company may lack technical skills and may require special marketing skills and a wide distribution network to access different segments of markets. The company can acquire existing company or companies with requisite infrastructure and skills and grow quickly. Enhancing profitability because a combination of two or more companies may result in more than average profitability due to cost reduction and efficient utilization of resources. This may happen because of:-

Economies of scale:- arise when increase in the volume of production leads to a reduction in the cost of production per unit. This is because, with merger, fixed costs are distributed over a large volume of production causing the unit cost of production to decline. Economies of scale may also arise from other indivisibilities such as production facilities, management functions and management resources and systems. This is because a given function, facility or resource is utilized for a large scale of operations by the combined firm. Operating economies:- arise because, a combination of two or more firms may result in cost reduction due to operating economies. In other words, a combined firm may avoid or reduce over-lapping functions and consolidate its management functions such as manufacturing, marketing, R&D and thus reduce operating costs. For example, a combined firm may eliminate duplicate channels of distribution, or crate a centralized training center, or introduce an integrated planning and control system.

Synergy:- implies a situation where the combined firm is more valuable than the sum of the individual combining firms. It refers to benefits other than those related to economies of scale. Operating economies are one form of synergy benefits. But apart from operating economies, synergy may also arise from enhanced managerial capabilities, creativity, innovativeness, R&D and market coverage capacity due to the complementarity of resources and skills and a widened horizon of opportunities.

Diversifying the risks of the company, particularly when it acquires those businesses whose income streams are not correlated. Diversification implies growth through the combination of firms in unrelated businesses. It results in reduction of total risks through substantial reduction of cyclicality of operations. The combination of management and other systems strengthen the capacity of the combined firm to withstand the severity of the unforeseen economic factors which could otherwise endanger the survival of the individual companies. A merger may result in financial synergy and benefits for the firm in many ways:-

By eliminating financial constraints By enhancing debt capacity. This is because a merger of two companies can bring stability of cash flows which in turn reduces the risk of insolvency and enhances the capacity of the new entity to service a larger amount of debt By lowering the financial costs. This is because due to financial stability, the merged firm is able to borrow at a lower rate of interest.

Limiting the severity of competition by increasing the company's market power. A merger can increase the market share of the merged firm. This improves the profitability of the firm due to economies of scale. The bargaining power of the firm vis--vis labour, suppliers and buyers is also enhanced. The merged firm can exploit technological breakthroughs against obsolescence and price wars.

Procedure for evaluating the decision for mergers and acquisitions The three important steps involved in the analysis of mergers and acquisitions are:-

Planning:- of acquisition will require the analysis of industry-specific and firm-specific information. The acquiring firm should review its objective of acquisition in the context of its strengths and weaknesses and corporate goals. It will need industry data on market growth, nature of competition, ease of entry, capital and labour intensity, degree of regulation, etc. This will help in indicating the product-market strategies that are appropriate for the company. It will also help the firm in identifying the business units that should be dropped or added. On the other hand, the target firm will need information about quality of management, market share and size, capital structure, profitability, production and marketing capabilities, etc. Search and Screening:- Search focuses on how and where to look for suitable candidates for acquisition. Screening process short-lists a few candidates from many available and obtains detailed information about each of them. Financial Evaluation:- of a merger is needed to determine the earnings and cash flows, areas of risk, the maximum price payable to the target company and the best way to finance the merger. In a competitive market situation, the current market value is the correct and fair value of the share of the target firm. The target firm will not accept any offer below the current market value of its share. The target firm may, in fact, expect the offer price to be more than the current market value of its share since it may expect that merger benefits will accrue to the acquiring firm. A merger is said to be at a premium when the offer price is higher than the target firm's premerger market value. The acquiring firm may have to pay premium as an incentive to target

firm's shareholders to induce them to sell their shares so that it (acquiring firm) is able to obtain the control of the target firm. Regulations for Mergers & Acquisitions Mergers and acquisitions are regulated under various laws in India. The objective of the laws is to make these deals transparent and protect the interest of all shareholders. They are regulated through the provisions of :-

The Companies Act, 1956 The Act lays down the legal procedures for mergers or acquisitions :-

Permission for merger:- Two or more companies can amalgamate only when the amalgamation is permitted under their memorandum of association. Also, the acquiring company should have the permission in its object clause to carry on the business of the acquired company. In the absence of these provisions in the memorandum of association, it is necessary to seek the permission of the shareholders, board of directors and the Company Law Board before affecting the merger. Information to the stock exchange:- The acquiring and the acquired companies should inform the stock exchanges (where they are listed) about the merger. Approval of board of directors:- The board of directors of the individual companies should approve the draft proposal for amalgamation and authorise the managements of the companies to further pursue the proposal. Application in the High Court:- An application for approving the draft amalgamation proposal duly approved by the board of directors of the individual companies should be made to the High Court. Shareholders' and creators' meetings:- The individual companies should hold separate meetings of their shareholders and creditors for approving the amalgamation scheme. At least, 75 percent of shareholders and creditors in separate meeting, voting in person or by proxy, must accord their approval to the scheme. Sanction by the High Court:- After the approval of the shareholders and creditors, on the petitions of the companies, the High Court will pass an order, sanctioning the amalgamation scheme after it is satisfied that the scheme is fair and reasonable. The date of the court's hearing will be published in two newspapers, and also, the regional director of the Company Law Board will be intimated. Filing of the Court order:- After the Court order, its certified true copies will be filed with the Registrar of Companies. Transfer of assets and liabilities:- The assets and liabilities of the acquired company will be transferred to the acquiring company in accordance with the approved scheme, with effect from the specified date. Payment by cash or securities:- As per the proposal, the acquiring company will exchange shares and debentures and/or cash for the shares and debentures of the acquired company. These securities will be listed on the stock exchange.

The Competition Act, 2002 The Act regulates the various forms of business combinations through Competition Commission of India. Under the Act, no person or enterprise shall enter into a combination, in the form of an acquisition, merger or amalgamation, which causes or is likely to cause an appreciable adverse effect on competition in the relevant market and such a combination shall be void. Enterprises intending to enter into a combination may give notice to the Commission, but this notification is voluntary. But, all combinations do not call for scrutiny unless the resulting combination exceeds the threshold limits in terms of assets or turnover as specified by the Competition Commission of India. The Commission while regulating a 'combination'

shall consider the following factors :-

Actual and potential competition through imports; Extent of entry barriers into the market; Level of combination in the market; Degree of countervailing power in the market; Possibility of the combination to significantly and substantially increase prices or profits; Extent of effective competition likely to sustain in a market; Availability of substitutes before and after the combination; Market share of the parties to the combination individually and as a combination; Possibility of the combination to remove the vigorous and effective competitor or competition in the market; Nature and extent of vertical integration in the market; Nature and extent of innovation; Whether the benefits of the combinations outweigh the adverse impact of the combination.

Thus, the Competition Act does not seek to eliminate combinations and only aims to eliminate their harmful effects.

The other regulations are provided in the:- The Foreign Exchange Management Act, 1999 and the Income Tax Act,1961. Besides, the Securities and Exchange Board of India (SEBI) has issued guidelines to regulate mergers and acquisitions. The SEBI (Substantial Acquisition of Shares and Take-overs) Regulations,1997 and its subsequent amendments aim at making the take-over process transparent, and also protect the interests of minority shareholders.