Mergers and Amalgamations-The Concepts: Chapter-Iv

CHAPTER-IV
MERGERS and AMALGAMATIONS-

THE CONCEPTS
The chapter has summarized some basic terminology and concepts,
providing a foundation for developing further knowledge and
understanding of mergers and amalgamations. Merger activity is driven by
economic and cultural trends. Recent changes driving mergers include
globalization, technology, deregulation, favorable economic and financial
conditions and changes in industrial organization
A restructuring wave is sweeping the corporate world. From banking to oil

exploration and telecommunication to power generation, companies are coming
together as never before. Not only this, new industries like e-commerce and bio-
technology have been exploding and the old industries are being transformed. As
consequence corporate restructuring through mergers, amalgamations, takeovers and
acquisitions have become integral to corporate strategy today.'
In India, the concept has caught like wild fire with a merger or two being reported
every second day and has turned out to be a regular feature both in the developing as
well as developed nations like Japan, United States of America and European
countries particularly United Kingdom, where hundreds of mergers take place every
year. Also the merger and takeovers of multinational corporate houses across the
borders have become a normal phenomenon. Never have the mergers and
amalgamations been so popular, from all angles namely policy considerations,
businessmen's outlook and even consumers point of view. In recent years United
Kingdom has been the most important foreign investor in the United States of
America with British companies making large acquisitions.
With the advent of single market European Union now represents the single largest
market in the world. It is to be noted that Euroland would see hectic mergers and
acquisitions activity in the next couple of years more for strategic reasons than
operational ,due to the inherent strength of the 11 European union countries. Euro. ^
' {-) "Handbook on Mergers, Amalgamations and Takeovers- Law and Practice," The Institute of
company Secretaries of India, 2004,at p. 1
^ ibid
3
id., at p. 2.
152
4.1 Meaning and Definitions
Merger, Amalgamation, acquisition and takeover, all through the globe have become
universal practice in the corporate world, covering different sectors within the nation
and across borders for securring survival, grov^h, expansion, globalization of
enterprise and achieving multitude of objectives.
4.1.1 Mergers'. Although the word merger hasn't been defined in the Companies
Act, 1956. But in its literal sense it means joining two together. This expression has
been explained differently in dictionaries and law lexicons.
OXFORD DICTIONARY defines merger as 'combination' carrying a sense of
mixing or uniting two or more things together or in the corporate sense uniting or
combining two undertakings together. '*
ENCYCLOPEDIA BRITANNICA says that merger is the corporate combination of
two or more independent corporations into a single enterprise, usually the absorption
of one or more firms by a dominant one. The reasons for merger are various. The
acquiring firms may seek to eliminate a competition to increase its efficiency, to
diversify its products, services and markets or to reduce its tax liability. Merger
activity varies with the business cycle, being higher when the business is good. ^
CONCISE LAW DICTIONARY defines the term merger in the similar way as is
defined in the Transfer of Property Act, 1882 as ^''extinguishment of a right estate,
contract, company, action, etc by absorption in another.
According to the Transfer of Property Act, 1882 a merger occurs when two estates
held in the same legal right become united in the same person. A merger in respect of
mortgage arises conmionly (i) by mortgagee acquiring the equity of redemption; (ii)
by mortgagor redeeming to mortgagee; (iii) by the purchaser of the equity of
redemption redeeming the mortgagee.
WEBSTER'S DICTIONARY explains merger as the combination oi''Commercial or
Q
Industrial firms" or "/o lose identity by being absorbed in something else ".
Not only this eminent scholars and practitioners have given different meanings to
merger. According to J.C. VERMA merger is a combination of two or more
Oxford Dictionary, 2003, at p. 564.

{-),Encyclopedia Britannica, Inc,(l 194-2002), The MacmilIan.,NY,2002.
Aiyar, P. Raqmantha, "Concise Law Dictionary", (1997) at 173.
For details see. Section 101 of The Transfer of Property Act, 1882.
Editorial, "Amalgamation: When Courts Can Refiase a Meeting", The Financial Daily, Jan 28,
2002.
153
companies into a single company, where one survives and other loses the corporate
existence. The survivor acquires the assets as well as liabilities of the merged
company or companies. Generally the buyer company survives and the seller
company extinguishes, losing its identity. That means merger is the fusion of two or
more existing firms or companies. All the assets and liabilities of one company gets
transferred to transferee company in consideration of payment, in the form of equity
shares of Transferee Company or debentures or cash or mix of two or three modes. ^
Another view was given by J.F. WESTON and K WANG S. CHUG. They define
merger as any transaction that forms one economic unit from two or more previous
ones. '" According to Section 6 of The Monopolies and Merger Act, 1965 (United
Kingdom), merger means, "/wo enterprises by or under the control of a body
corporate ceasing to be a district enterprises. Similar definition was given by
WYATT and KIESO. '^ P.S. SUDARSHANAM explains that in a merger, the
corporations come together to combine and share their resources so to achieve
common objectives. The shareholders of the combining firms often remain as joint
owner of the combined entity.
According to S. SHIVA RAMU'S opinion, in a merger a new corporation is created
by uniting companies voluntarily, thereby, relinquishing their independence and
corporate existence which results in a new corporation. ''' JAMES, I.
WITTERNBACH and MATT, M. STARVICH has given an illustration, thereby
explaining the concept of merger. According to them merger occurs when one firm
acquires the assets of another firm, with the acquiring firm surviving and the acquired
firm being dissolved. A merger may be described by the formula X+Y=
X the Y is absorbed by the X firm and is dissolved. '^ Similar view was
expressed by SUDARSHAN LAL. '^
It is to be noted that laws in India use the term amalgamation for merger
Verma, J.C. 'Corporate Mergers, Amalgamations and Takeovers, (2002) at 52.

Western, J. Fred and Chug, K Wang.s, 'Merger and Corporate Control', (1998) at 4.
For details see, Section 6 of The Monopolies and Merger Act, 1965, (U.K.) as quoted in Sen. S.C.,
'Merger, Amalgamation and Takeover,. (1969) at 4.
Wyatt and Kieso, 'Business Combination: Planning and Action,' (1969) at 1.
Sudarasanam, P.S. 'The Essence of Merger and Acquisition,' (1977) at 1.
Ramu, Shiva. S, 'Corporate Growth through Merger and Acquisitions,' (1988) at 15.
Matt, M. Starcevich and James, I. Wittenbach, 'Introduction to Business- A System Approach,'
(1975) at 441.
Sudarshan Lai, 'How to Prevent Industrial Sickness', (1978) at 123.
154
> Merger through absorption.
> Merger through consolidation.
> Merger through absorption: Absorption is a combination of two or more

companies into an existing company. All companies except one lose their identity
in a merger through absorption. For example., absorption of Tata Fertilizers
Limited (TFL) by TCL, an acquiring company (a buyer), survived after merger
while 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 type of merger, all companies are legally
dissolved and a new entity is created. In a consolidation, the acquired company
transfers its assets, liabilities and shares to the acquiring company for cash or
exchange of shares. For example., the merger of Hindustan Computers Ltd.,
Hindustan Instruments Limited and India Reprographics Limited to an entirely
new company called HCL Limited.
4.1.1 (a) Types of Mergers: Mergers can be broadly classified as foUows-
• Cogeneric Mergers
o Horizontal Mergers
o Vertical Mergers
• Conglomerate Mergers
o Managerial Conglomerates
o Financial Conglomerates
• Cogeneric Mergers: In this merger the acquirer and target companies are related
through basic technologies, production process or markets. The acquired company
represents an extension of product line, market participants or technologies of the
acquiring company. These mergers represent an outward movement by the
acquiring company from its current set of business to adjoining business. The
acquiring company derives benefits by exploitation of strategic resources and
from entry into a related marketm having higher return than it enjoyed earlier. The
potential benefit from these mergers is high because these transactions offer
opportunities to these mergers to diversify around a common case of strategic
resources. '^
17
ibid,
18
ibid
19
ibid
155
Cogneric Mergers are further classified into product extension and market extension
types. When a new product line allied to or complementary to an existing product line
is added to existing product line through merger, it is defined as product extension
merger. Similarly market extension merger help to add a new market either through
same line of business or adding an allied field. Both these types bear some common
elements of horizontal, vertical and conglomerate mergers.'^^ For example., merger
between Hindustan Sanitary War Industries Ltd and associated Glass Limited is a
product extension merger and merger between GMM Company Limited and Xpro
Limited contains elements of both product extension and market extension merger.
Cogeneric Mergers are of two types:
o Horizontal Mergers
o Vertical Mergers
o Horizontal Mergers: Horizontal mergers involve the unity of two or more firms in
the same filed, in the same kind of business activity or at the same stage of
industrial process. ^' The acquiring firms belong to the same industry as the target
company. The main purpose of such mergers is to obtain economies of scale in
production, by eliminating duplication of facilities and operation as well as
broadening of the product line, reduction in investment in working capital,
elimination of competition, concentration in products, reduction of the advertising
cost, increase in market segments and the exercise of better control on market. ^^ It
is to be noted that horizontal mergers are being regulated by the government for
their potential negative effect on competition. The number of firms in an industry
is decreased by horizontal mergers and this may make it easier for the industry
members to collude for the monopoly profits.
The mergers of Tata Oil Mills Corporation Limited with the Hindustan Lever Limited
are an example of horizontal merger. In case of horizontal merger, the top
management of the company being meted, is generally replaced by the management
of the transferee company. One potential repercussion of the horizontal merger is that,
it may result in monopolies and restrict the trade. Thus in case of horizontal mergers it
supra, note 13, at p. 19.

^' 5Mp/-a note, 14 at p.40.
supra note, 9 at p. 59.
^^ supra note, 10 at p. 83.
156
can be said that, the primary function of the firm is not changed by simply enlarged.
The additional advantages of horizontal mergers are as follows:
> Plant specialization

y Marketing economies
> Production or marketing companies
> Eliminating competition^^
> Plant Specialization: The entire time and effort of individual plants may be
devoted to the production of various styles of a particular product.
> Marketing economies: Goods may be delivered from the nearest plant, thus saving
transportation cost. The duplication of advertising and sales effort may be
eliminated. Eliminating competition.
> Production or Marketing economies: Competition between the individual plants
and sale territories may lead to greater efficiency. Technical improvements
perfected at one plant or sale programmes effective in one territory may be
extended to other..
> Eliminating competition: Horizontal merger is the type most likely to link up the
direct competitors, in which case, such competition is abruptly eliminated. The
danger in such cases is the likelihood of government antitrust surveillance and
possible intervention. Due to the above mentioned advantages horizontal mergers
are also known as Trade or Parallel or Unit Integration and affords opportunities
for effecting external economies in the sphere of buying, manufacturing, selling
98
and research.
o Vertical Mergers: Vertical mergers are also known as sequence or process or
industry mergers and refers to integration of companies having supplementary
relationships- either production or distribution of products and services which
90
means, where companies are at different stages of production operation.. For

example in oil industry distinctions are made between exploration and production,
24
25
ibid.
26
ibid.
27
ibid
28
Tambi, Mahesh Kumar, "Impact of Merger and amalgamation on Performance of Indian
Companies," Financial Daily, June 17, 2002.
29
Bhushan, V.K., ^'Fundamentals of Business Organizations and managentenf, 1975,at p.B.E.
30.
157
30
refining and marketing to ultimate consumers. Similarly in pharmaceutical

industry there could be distinction between research and development of new
drugs, the production of drugs and marketing of drug products through retail drug
stores. ^' Vertical mergers are of the following types:
> Backward vertical mergers.

> Forward vertical mergers.
> Backward Vertical Mergers: In these mergers a company merge with the suppliers
company supplying raw material.
> Forward vertical mergers: In these mergers a company merge with its consumers
or when one of the two companies is an actual or potential supplier of goods of the
other, so that these companies become engaged at different stages of production
cycle within the same mdustry. Vertical merger may result in many operating
and financial economies. The transferee company will get a stronger position in
the market as its production/distribution chain will be more integrated than that of
the competitors. Vertical mergers provide a way for total integration to those
firms, which are striving for owning of all phases of the production schedule
together with the marketing network (that is from the acquisition of raw material
to the relating of final products).^^
Reasons for Vertical Mergers: Many reasons can be elaborated by firms which are to
be vertically integrated.
> To reduce cost and dependence.

y Remove the wasteful and unnecessary expense which is involved in carrying on the connected
process separately.
y To eliminate middleman functioning between various units with a view to avoid unnecessary
expense on them.
> To secure economies in marketing, advertising and transport.
y To maintain control over the quality of raw material andfinished products.
Vertical Mergers are suited to the industries showing the following characteristics
> Where the finished objects of one constitutes the raw material to another firm.
> One process is complementary to another.
> Balance product is important s in case of spinning and weaving of cloth.
> Control over the supply of raw material is a must to maintain certain standards of quality for the
finished products as n the case of sugar industry.''
30
Kuchhal, S.C, 'The Industrial Economy of India", (1970) ,at p.390.
31
supra, note 29, at p. BE 30.
32
ibid
33
ibid
34
supra, note 29, at p. BE 30.
158
• Conglomerate Mergers: It is the merger of two companies which are engaged in
unrelated industries like Delhi cloth Mills and Modi Industries or we can say that
a firm becomes a conglomerate, when it acquires other companies which produce
the products that are unrelated to the product produced by the acquiring firm. ^^
Conglomerate includes industries like Gulf and Western, Litton Industries, Textron
Insurance. Conglomerate mergers neither constitutes the bringing together of neither
competitors nor have a vertical cormection. It involves a predominant element of
diversification of activities. This may consist a company deriving most of the
reserves fi"om a particular industry, acquiring companies or constitutes operating in
other industries for one or more of the following reasons:
> Obtain greater stability of earnings through diversification.

> Employ spare resources whether of capital or management.
> Obtain benefits of economy of scale.
^ Provide an outlet of ambitions of management where the antimonopoly law may make fiirther
38
growth in the company's own field impracticable.
Thus a merger is conglomerate which is neither horizontal nor vertical and involves
predominant element of the diversification of activities. Aim is to bring about the
stability of income and profits, since the two belong to different industries.The
adverse factors in sales and profits arising due to trade cycles may not hit all the
industries at the same time. In these mergers the actual direction of growth is lateral
39
and is commonly called as economic diversification. For example Torrent Group
Indentified power as one of the growing field acquired Ahemdabad Electric company
and Surat Electric Company in order to diversify the risk of its existing line of
pharmaceutical business.
Conglomerate are of the following types:
> Managerial Conglomerates

> Financial Conglomerates
35
36
37
Chakravarthy, S, "Two Heads Better Than One, " Financial Daily, 1998, atp.15.
38
ibid.
39
supra, note 12, at p. 23
40
ibid
159
> Managerial Conglomerates: They carry the attributes of financial conglomerates.
By providing managerial council and with management specialist groups
interacting with and providing services for the individual operating activities.
They increase the potential of improving performance of firms. This theory further
holds that in managerial conglomerates, economic benefits are achieved through
corporate head-quarters, that provide the individual operating entities with
expertise and council on the generic management fimctions. '
> Financial Conglomerates: In financial conglomerates the corporate level provides
finance and maintain the financial responsibility and control, but does not attempt
to interfere with managerial decisions. The financial conglomerates provides a
flow of funds to each segment of their operations, exercise control and are the
ultimate financial risk takers and thus they undertake the strategic planning.
Financial conglomerates improve returns ratio through diversification, avoids and
maintain economic activity with long run value in case of gamblers ruin {an
adverse run of losses which might cause bankruptcy). Advantage of
conglomerate form of organization is that, it can achieve a more stable earning
record because cyclical decline in an industry are offset by the cyclical expansion
in another industry. '*'
Mergers may further be categorized as:
Cash Mergers
Defacto mergers
Within Stream Mergers
Short form Mergers
Triangular Mergers
Reverse Mergers
Circular Mergers
Diagonal Mergers
Lateral/allied Mergers
Cash Mergers: A merger in which certain shareholders are required to accept cash
for their shares while other shareholders receive shares in the continuing
enterprises. '*^
Kaveri, V.S,''Financial Analysis of Company Mergers in India,'' (1966) at p.l6.

43
ibid.
supra, note 1, at p. II.
160
Defacto Mergers: Defacto mergers have been defined as a transaction that has the
economic effect of a statutory merger but is cast in the form of acquisition of
assets. '*^
Within Stream Mergers: Such mergers take place when the subsidiary company
merges with the parent company or vice-versa. The merger of parent company
into its subsidiary is called downstream merger and the merger of subsidiary
company into its parent company is called as upstream merger. For example
merger of ICICI limited a parent company with its subsidiary ICICI Bank is an
example of down-stream merger. "^^
Short form Mergers: A number of statutes provide special company rules for the
merger of a subsidiary into its parent where the parent owns substantially all of the
shares of the subsidiary. This is called as a short form merger. They may generally
be affected by adoption of a resolution of merger by the parent company and
mailing a company of plan of merger to all shareholders of subsidiary and filing
the executed documents with the prescribed authority under the statute. This type
of merger is less expensive and time consuming than the normal type of merger. ''^
Triangular Merger: It means the amalgamation of two companies by which the
disappearing company is merged into subsidiary of surviving company and
shareholders of the disappearing company receive shares of the surviving
48
company.
Reverse Merger: It takes place when a healthy company amalgamates with a
financially weak company. In the context of provisions of the Company Act, 1956,
these exist no difference between regular merger and a reverse merger. It is like
any other amalgamation. It is to be noted that reverse merger can be carried out
through the High Court route, but where one of the merging companies is a sick
industrial company under the Act, such mergers must take place through the
Board of Financial Restructuring (BIFR). On the amalgamation becoming
effective, the sick company's name may be changed into that of the healthy
company. Reverse mergers automatically makes the transferor company entitled
for the benefit of carry forward and set-off of loss and unabsorbed depreciation of
45
ibid.
45
ibid.
47
ibid
48
ibid
161
the transferee-company. There is no need to comply with section 72A of Income
Tax Act, 1961.''^
Circular Mergers: They are also known as mixed combination and refers to the
circumstances when firms belonging to different industries and producing
altogether different products combine together under the banner of the central
agency. None of the features of the other types of combinations are found in this
type. The aim of this type of combination is to secure the advantage of
administrative integration is preferred by the ambitious and enterprising
businessmen, who want to extend their operations to diverse fields of industry. For
example if a sugar mill combines with a steel work and a cement factory it is a
mixed combination. In circular combinations the acquiring company obtains
benefits in the form of economies of resource sharing and diversification. ^° These
combinations are in a sense a mild form of drastic diversification and are
advantageous when the product lines combined, use the similar raw materials or
similar processes or can be sold through the same distribution channels. In India
business empires like Tata Birla, Martin Bum and Co-operation etc have been
affecting such type of combinations on a very large scale. ^'
Diagonal Mergers: They are also called as service mergers and takes place when a
unit providing essential auxilliary goods and services to an industry is combined
with a unit operating in the main line of production. In such a case, the goods and
services required for the main process of production will be provided inside the
organization itself. If an industrial enterprise combines a repair workshop for
maintaining the tools and machines in good order, it will be effecting the diagonal
mergers. Advantage of such mergers is that, it enables the main unit to become
self-sufficient and save them from dependence from outside sources of supply for
auxiliaries. ^^
Lateral/Allied Mergers: These merges are the result of lateral integration and
refers to the combination of those firms which manufacture different-kinds of
products, though they are allied in some way. They are of the following types:
49
id., at p. 12. For a detailed analysis of the concept of Reverse Mergers, refer to Gujarat high Court
judgment in Bihari Mills Limited case (1985) 58 Com Cas 6.
50
supra, note 29, at p. BE. 30.
51
52
162
• Convergent lateral integration.,and
• Divergent lateral combination
• Convergent Lateral integration: It occurs when various firms join together with
major firms, to supply the requirement of raw material or the basic material. Thus
different types of products manufactured by the combing units become the raw
material of a single unit, which in turn can be regarded as the centre of the nucleus
of this type of combination. For example a printing press may combine units
engaged in the manufacturing of paper's ink types, card board, printing machinery
etc. to get supply of equipment and raw material from the integrated units.
• Divergent Lateral Combination: In this type of merger a major firm supplies its
products to the other combining firm, which use it as their raw material. Thus the
product of one firm becomes the raw material of many other firms. For example a
steel mill which supplies steel to a number of allied concerns for the manufacture
of variety of products like tubing, wire, nails, machinery, building material and
locomotives. ^
4.1.2 Amalgamations: According to CONCISE LAW DICTIONARY
'amalgamation' means merging of two or more business concerns into one.
According to MITRA'S LEGAL and COMMERCIAL DICTIONARY the term
'amalgamation'' means merger. ^^
HALSBURY'S LAW OF ENGLAND mentioned that the amalgamation does not
have any precise legal meaning. It simply refers to the blending of two or more
existing undertakings into one undertaking. The shareholders of each blending
company becoming substantially the shareholders in the company which is to carry on
the blended undertaking. There may be amalgamation either by transfer of two or
more undertakings to a new company or by the transfer of one or more undertakings
to an existing company. ^^
According to WEBSTER'S DICTIONARY 'amalgamation' means to compound,
CO
consolidate or combine (business) interest of firms.

OXFORD ECONOMIC PAPERS define amalgamation as uniting of two companies,
the shareholders in each unit emerging as shareholders in the resultant organization.
" supra, note 29, at p. BE 30.
'' ibid
^' supra, note 6, at p. 68.
^* Mitra's Legal and Commercial Dictionary as quoted in Supra Note 9 at 54.
" {-XHalsbury 's Law of England, Vol. VIII, para 539, at p .855.
'* supra, note 8.
163
The companies are often of similar size. Thus, the success of the consumer co-
operative movement depends upon the extent to which the smaller units are
amalgamated with similar neighboring primary consumers stores to secure the
benefits of economies of scale and provide diversified services, to cater to the tastes
and needs of consumers. ^^
OXFORD DICTONARY defines amalgamation as combining to form new corporate
or structure. ^°
The meaning of the term amalgamation is incomplete without discussing the
definition of the term given in Section 2 (IB) of the Income Tax Act, 1961 which has
peculiar characteristics to be found in a transaction to be covered under the definition,
viz. (1) Vesting of all properties of amalgamating company in the amalgamated
company (2) Vesting of all liabilities of the amalgamating company in the
amalgamated company (3) the shareholder of the amalgamating company holding not
less than 90 percent of the shares should become shareholders of the amalgamated
company.
GOWER opines that under an amalgamation two or more companies are merged
either de-jure by consolidation of their undertaking or de-facto, by the acquisition of a
controlling interest in the share capital of one by the other, or by capital of both by a
new company.
M.A WEINBERG explains amalgamation as an arrangement whereby the assets of
two or more companies become vested in or under the control of one company which
may or may not be one of the original company. The shareholding in the combined
enterprise will be spread among the shareholders of two or more original companies.
In Hooper versus Southwest Telephone Corporation it is held that "TTie effect of an
arrangement would be, one of the companies involved to absorb the business and all
assets and liabilities of the other, the latter being the dissolved, or alternatively, both
companies might be absorbed into a new company for that purpose ".^
59
(-),"Acquisition Objectives and policies," Oxford Economic Papers, Vol. 49, No.3, 1997.
60
supra, note, 4.
61
For details see, Section 2 (IB) of Income Tax Act, 1961.
62
Gower's, "Modern Company Law", (2002) at 550.
63
Weinbergs, M.A. 'Takovers and Amalgamations," Financial Daily, Jan 28, 2002.
64
For details see, Hooper vs Western Countries and South Western Telephone Corporation, 41,
WR 84 (PC).
164
Not only this ,the Andhra Pradesh High Court held in the leading case of SS Somajulu
versus Hope Pradhomme and Corporation that "the word amalgamation has no
definite legal meaning. It contemplates a state of things under which two companies
are so joined as to form a third entity or one company is absorbed or blended with
another company. Amalgamation does not involve a formation of new company to
carry on the business of old company.
According to S.C. SEN the term amalgamation which is used in relation to companies
has no technical meaning and thus falls under one or other of the following heads (a)
Transfer of an existing company to another existing company, of which all the
members of the transferring company become members, and the subsequent
dissolution of the transferring company (b) The transfer of undertaking of two or
more existing companies to a new company formed to take over the same, of which
all the members of the transferring company become or have the right to become
members, and the subsequent dissolution of transferring company (c) The acquisition
by one company of the whole of or a controlling interest in the shares of another
company. ^
S.SHIVA RAMU has given similar definition for the merger/amalgamation. He
defines in amalgamation a new corporation is created by uniting companies
voluntarily. ^^
According to BROOKFIELDS LAWYERS COMMERCIAL TAX an amalgamation
involves the blending of business of one company with the business of one or more
companies to form an amalgamated company. Shareholders of each blending
company become the shareholders in the amalgamated company. The result of
amalgamation is that each of the amalgamated company ceases to exist. If company
'A' amalgamates with company 'B' and company 'A' is the amalgamated company,
company 'A' survives and company ' B ' does not. Alternatively, it might be desirable
to establish a new company. Company ' C , to be the amalgamated (surviving
company to which the business of company 'A' and company 'B' are to be
transferred. In that case both companies 'A' and 'B' would stick off and ceases to
exist. There business would continue to operate through company ' C .
*' For details see, S.S. Somajulu v/s Hope Pradhomme & Corporation (1963) 2 Comp LT 61 (AP).
** supra, note 11, at p. 2.
*^ supra, note 14, at p. 15.
** Brookflelds Lawyers- Commercial Tax, "Tax Issues Mergers and Acquisition", 2002, at p. 57.
165
In Financial Daily, S. CHAKRAVARTHY has defined amalgamation as blending of
two or more existing undertaking into one, the blended companies loosing their
identities and forming themselves into separate legal entity. ^^ In view of J.A
HORNBY an amalgamation occurs when business and undertaking of two or more
existing companies are brought together under the ownership of one company formed
for the purpose. A similar result is achieved when one company acquires a controlling
interest in which case it may be said that although the latter company still owns its
previous undertaking, there has been a defacto amalgamation. '^
SUDERSHANLAL opines that under 'amalgamation' asets of two companies
become vested in or under the control of one company {which may or may not be one
of the original two companies) which has its shareholders all or substantially all the
shareholders of the two companies. ^'
According to the Accounting Slandered, As-14, issued by the Institute of Chartered
Accountants of India amalgamation has been classified under the following:
4.1.2 (a) Amalgamation in the nature of merger,and

72
4.1.2 (b) Amalgamation in the nature of purchase.
4.1.2. (a) Amalgamation in the Nature of Merger'. As per AS-14, an amalgamation is

called in the nature of merger if it is satisfies all the following conditions.
• Shareholders holding not less than 90 percent of the face value of the equity
shares of the transferor company (other than the equity shares already held
therein, immediately before the amalgamation, by the transferee company or its
subsidiaries or their nominees) become equity shareholders of the transferee
company by virtue of the amalgamation. ^^
• The consideration for the amalgamation receivable by those equity shareholders of
the transferor company who agree to become equity shareholders of the transferee
company is discharged by the transferee company wholly by the issue of equity
share in the transferee company, except that cash may be paid in respect of any
fractional shares.
*' %upra, note 37.

™ Hornby, J.A, 'An Introduction to Company Law" 1969, at p. 190.
' ' supra, note 16, at p. 124.
72 »„ 1 „* _ n
73
ibid.
166
• The business of the transferor company is intended to be carried on after the
amalgamation, by the transferee company. ^'*
• No adjustments are intended to be made in the book values of the assets and
liabilities of the transferor company when they are incorporated in the financial
statements of the transferee company except to ensure uniformity of accounting
policies. ^^
• Amalgamation in the nature of merger is an organic unification of two or more
entities or undertaking or fiision of one with another. It
4.1.2. (b) Amalgamation in the nature of purchase: Amalgamation in the nature of

purchase is where one company's assets and liabilities are taken over by another and
lump sum is paid by the latter to the former. It is defined as the one which does not
satisfy any one or more of the conditions satisfied above.
As per Income Tax Act, 1961 merger is defined as an amalgamation under Section 2
(IB) with the following three conditions to be satisfied.
o All the properties of the amalgamating company(s) should vest with the amalgamated company
after amalgamation. ^*
o All the liabilities of the amalgamating company(s) should vest with the amalgamated company
after amalgamation.
o Shareholders holding not less than 75 percent in value or voting power in amalgamating
company(s) should become shareholders of amalgamated companies after amalgamation.
o Amalgamation does not mean acquisition of a company by purchasing its property and resulting in
its winding up. According to Income Tax Act, 1961 exchange of shares with 90 percent of
shareholders of amalgamating company is required. "
4.1.3 Acquisitions: CONCISE LAW DICTIONARY defines term acquisition in the

same way as it has been defined under various statutes including the Constitution of
India, as the act by which a person acquires property in a thing.
According to OXFORD DICTIONARY acquisition means something that has
recently been acquired that is the process of acquiring. ^^
'" ibid, id, at p. \0.

'' ibid
^* ibid at p. 11.
" ibid
^* supra, note 6, at p. 32.
^ supra, note 4, at p. 8.
167
OXFORD ECONOMIC PAPERS defined acquisition as the process wherein the
company 'B' acquires the whole of or a controlling interest in the share capital of
company 'A'. The practical result is for many purposes much the same as an
amalgamation of the two companies, although legally the two companies and their
on
undertakmgs still remain distinct.

The word acquisition as used in Section 23 of the Land Acquisition Act, 1894,
includes the purpose for which the land is taken, as well as actual taking. Acquisition
in every case must mean the transfer of ownership. ^' The word has quite a wide
meaning under Article 31 of the Constitution before 44"' Amendment Act ,referring to
procuring of property or taking of it permanently or temporarily. It does not
necessarily imply the acquisition of legal title by the state in the property taken in
possession. In common parlance acquisition refers to acquiring the ownership in the
property.
J.C. VERMA described acquisition as the purchase by one company of the controlling
interest in the share capital of another company (in existence) and is affected by (a) an
agreement with the person holding interest in the company management like members
of board or major shareholders commanding majority of voting rights (b) purchase of
shares in open market (c) to make takeover offer to general body of shareholders (d)
purchase of new shares by private treaty (e) acquisition of share capital of one
company may be either by all or any one of the following form of the consideration
for example means of cash issuance of loan capital or issuance of share capital. *^
According to S. SHIVA RAMU 'acquisition' implies that a company unilaterally
relinquishes its independence and adapts to another firms plan that means in
acquisition one company acquires another company's total or controlling interest.
Subsequently, the acquired company operates as a separate division or subsidiary. ^'^
P.S. SUDARASANAM opines acquisition resembles more of an arm's length deal,
with one firm purchasing the assets or shares of another and with the acquired firm's
shareholders ceasing to be owner of that firm.
80
(-), "Impact of Acquisition on Company Performance", Oxford Economic Papers, Vol. 49, No 3,
(1997)
81
For details see, Section 23 of The Land Acquisition Act, 1894.
82
For details see, Article 31(2) of the Constitution of India before 44* Amendment Act.
83
84
85
168
Another explanation describes an acquisition as the combination of two or more
independent entities into a single entity and a similar opinion was given by S.
CHAKRAVARTHY. Thus, acquisition refers to the acquiring of ownership right in
the property and asset without any combination of companies. Thus in acquisition two
or more companies may remain independent, separate legal entity, but there may be
change in control of companies. Acquisition results when one company purchase the
controlling interest in the share capital of another existing company in any of the
following ways.
> Controlling interest in the other company. By entering into an agreement with a person or persons
holding.
> By subscribing new shares being issued by the other company.
> By purchasing shares of the other company at a stock exchange.
> By making an offer to buy the shares of other company, to the existing shareholders of that
company. ^
4.1.4 Takeover: It is to be noted that usually terms 'takeover' and 'acquisition' are
used interchangeably.
According to OXFORD DICTIONARY takeover means an act of taking control of
something such as company from someone else.
CONCISE LAW DICTIONARY defines takeover as an act, thereby succeeding to
management or ownership of company/business or to take charge/responsibility.
OXFORD ECONOMIC PAPERS define takeover as when one company acquires a
controlling interest in the share capital of another company, in which case it is said
that although the latter company still owns its previous undertaking, there has been a
defacto amalgamation or that the former company has 'taken over' the latter. Such a
takeover may be effected either by agreement between the former company and
persons owing a controlling interest in the latte company or by purchase of shares in
on
the latter company or at stock exchange.

J.C. VERMA explains takeover as unilateral act in which the offeror company decides
about the maximum prize. Time taken in completion of transaction is less in takeover
than in merger. Top management of the offeree company being more co-operative. ^^
In view of P.S. SUDARSANAM term 'takeover' is similar to an acquisition and also
86
87
supra, note 13, at p.20.
supra, note 81.
90
169
imjjlies that acquirer is much larger than the acquired. When the acquired firm is
larger than the acquirer, the acquisition is referred to as 'Reverse Takeover'. ^'
S.C. SEN explains 'takeover' as a transaction or series of transactions whereby a
person (individual, group of individual company) acquires control over the assets of a
company, either directly by becoming the owner of those assets or indirectly by
controlling of the admimstration of the company.
Where the shares are closely held (by a small number of persons) a takeover will
generally be affected by agreement with the holders of whole of the share capital of
company being acquired. Where the shares are held by public generally, the takeover
may be affected (i) by the agreement between the acquirer and the controller of
acquired company (ii) by the purchase of shares of stock exchange and (Hi) by means
of a takeover bid.' Similar definition was given by SUDARSHANLAL. ^^
N.L. BHATIA and JAGUTI SAMP AT defines takeover as acquisition of a certain
block of equity capital or controlling interest in a company which enables the acquirer
to exercise control over the affairs of a company. "*
According to S.SHIVA RAMU takeover means one company acquiring another
company's total interest or controlling interest. Subsequently the acquired company
operates as a separate division or subsidiary. ^
4.1.4 (a) Types of Takeover: Takeover may be of different types depending upon the
purpose of acquiring a company.
Negotiated/friendly takeover
Open market/Hostile Takeover
Tender offer
Bailout takeover. **
Negotiated/FriendlyTakeover: Thus takeover is being organized by the present

management with a view to part with the management of another group on the
terms and the conditions mutually agreed by and between the groups. This is done
through negotiation. The acquiring firm negotiates directly with the management
of the target company. So the two firms reach an agreement, the proposal for
91
supra, note 13, at p. I.
92
93
94
Bhatia, N.L. and Sampat Jagruti, ''Takeover and Security Board of India Regulations," 2002,at p.
13.
95
96
170
merger may be placed before the shareholders of the two companies. However, if
the parties do not reach at an agreement, the merger proposal stands terminated
and dropped out. Usually these negotiations and takeover bids occur with the
consent of majority or all the shareholders of the target company. For example the
merger oflTC Classic Limited with ICICI Limited.
Open Market/Hostile Takerover: When an acquirer company does not offer to the
target company the proposal to acquire its undertaking, but silently an unilaterally
acquire its undertaking or pursues efforts to gain control against the wishes of
existing management, such acts of acquirer are known as 'hostile takeover bids' or
'takeover raids'. This takeover can be made effective by acquiring shares from the
open market to take over the management of the company whose shares are
acquired. Thus these shares which are required for the control of management
may be bought from the open market financial institutions or mutual funds or
from the shareholders of the company, who would be willing to part with the
shares at a price higher than the prevailing market price. It is also called as raid on
the company and when organize in specific ways are called as '^ takeover bids'.
The forces of competition and product failure provide strength and weakness to
the rivals in the industry, trade or commerce as well as battle to win competitors
enhances these takeovers. For example Swaraj Paul and Sethia Group attempted
raids on Escorts limited and PCM Limited but did not succeed. Similarly NRI
Chhabaria Group acquired Stake in Shaw Wallace. It is to be noted that the new
takeover code, as annoimced by Security Exchange board of India hereinafter
mentioned as SEBI deals with the hostile takeover bids. ^^
Tender Offer: A tender offer is a bid to acquire controlling interest in a target
company by the acquiring firm by purchasing shares of the target firm at a fixed
price. The acquiring firm approaches the shareholders of the target firm directly so
as to convince them to sell their shareholding to the acquiring firm at a fixed price.
This offered price is generally, kept at a level higher than the current market price
in order to induce the shareholders to disinvest their holding in favour of the
acquiring firm. The acquiring firm may also stipulate in the tender offer as to how
many shares it is willing to buy or may purchase all the shares that are offer for
97
98
99
171
sale. In case of tender offer, the acquiring firm does not need the prior approval of
the management of the target firm.'°° The offer is kept open for a specific period
within which the shares must be tendered for sale by the shareholders of target
firm. For example., Consolidated Cojfee Limited was takeover by Tata Tea
Limited by making a tender offer to the shareholders of the former, at a price
which was higher than the prevailing market price. In India, in recent times,
particularly after the announcement of new takeover code by SEBI, several
companies have made tender offers to acquire the target firm. A popular case is
the tender offer made by Sterlite Limited and then counter offer by Alean to
acquire the control of Indian Aluminium Limited. '^'
• Bailout Takeover: This takeover refers to substantial acquisition of shares in a
financially weak company not being a sick industrial company in pursuance of a
scheme of rehabilitation approved by the public financial institutions which are
responsible for ensuring compliance with the provisions of Substantial Acquisition
of Shares and Takeover Regulation, 1997 issued by SEBI which regulated the
bailout takeover.
4.1.5 Difference between Merger and Amalgamation: The terms merger,

amalgamation and consolidation are sometimes used interchangeably and denotes the
situation where two or more companies, keeping in view their long term business
interest, combine into one economic entity to share risks and financial rewards. In
strict sense, merger is commonly used for the fusion of two companies. Merger is
normally a strategic vehicle to achieve expansion, diversification, entry into new
markets, and acquisition of desired resources, patents and technology. It also helps
companies in choosing business partners with a view to advance long term corporate
strategic plans. Mergers are also considered as a revival measure of industrial
sickness. ^^^
Amalgamation is an arrangement for bringing the assets of two companies under the
control of one company, which may or may not be one of the original two companies.
Amalgamation signifies the transfer of all or some part of the assets and liabilities of
one or more existing business entities to another existing or new company. ^^
«« ibid.
'"' /£/., at p. 27.
"*^supra, note 9, at p.71.
'"^supra, note 1, at p.4.
"» ibid
ihirl
172
4.1.6 Meaning of ^Compromise*' and *'Arrangement: According to Section
391 of Company's Act 1956, a compromise or arrangement may be proposed (a)
between a company and its creditors or any class of them or (b) between a company
and its members or any class ofjhem. '"^
It is to be noted that none of the terms "compromise", "arrangement",
'reconstruction" and "amalgamation", although used in the Section 391 "'ôf the
Companies Act, 1956, is defined in the Act, and has no precise legal meaning.
Generally speaking, however, these terms may be regarded as describing any form of
internal reorganization of the company or its affairs, as well as schemes for the
merger of two or more companies or for the division of one company into two or
more companies. '^'
Compromise means a settlement of differences by mutual concessions on agreement,
by adjustment of conflicting or opposing claims by reciprocal modification of
demands. Arrangement denotes a final settlement, adjustment by agreement. It is to be
noted that these expressions are invariably used in the phrase "Scheme of Compromise
I OR
or Arrangement". Section 390 (b) of Companies Act, 1956 states that the
expression "arrangement" includes a reorganization of share capital of the company
by the consolidation of shares of different classes, or by dividing of shares into shares
of different classes or both these methods. The word "arrangement" in Section 390(b)
is an inclusive definition and contemplates all arrangements and not only the
reorganization of share capital. The word "arrangement" has a very wide meaning,
and is wider than the word "compromise". These can be no compromise unless there
is first a dispute but a scheme which is not a compromise may nonetheless be an
arrangement under Section 391.
4.1.7 Meaning of "Reconstruction" and "Amalgamation'': According to
Section 394, any such compromise or arrangement may be for the purpose of, or in
connection with, a scheme for the reconstruction of any company or companies, or the
amalgamation of any two or more companies which involves the transfer of the whole
or any part of the undertaking, property or liabilities of one company ("transferor-
company") to another company {"transferee-company"). A reconstruction or
•"' ibid.
'"* id., at p. 5. For details see, Section 391 of Companies Act, 1956.
'" ibid.
'"* ibid. For details, see, Section 390(b) of Companies Act, 1956.
173
amalgamation is essentially a kind of a compromise or arrangement proposed between
a company and its members or creditors of any company or companies. It is to be
noted that for purpose of Companies Act, 1956, the terms ^^mergers" and
'âmalgamation" are synonymous. "'^
In Saraswati Industrial Syndicate Limited versus CIT, the Supreme Court observed
"Amalgamation or reconstruction has no precise legal meaning. In amalgamation two
or more companies are fused into one by merger or by taking over by another, when
two companies are merged and are so joined as to form a third company or one is
absorbed into one or blended with another, the amalgamating company loses its
identity.^'*'
4.2. Economic Aspects of Mergers and Amalgamations
The recent liberalization of the earlier state controlled sluggish Indian economy has
made mergers more necessary and acceptable. Competitive forces certainly from
globalization and deregulation in many industries across the border have forced most
corporate to consolidate. As consequence the European and Asian markets have
become more receptive to merger and amalgamation activity.'''
These merger and acquisition activities are primarily the result of following factors
and strategies, which are classified under the following heads.
4.2.1 Motives for Mergers: As follows:
4.2.1 (a) Strategies motives.,

4.2.1(b) Organizational motives.,and
4.2.1. (c) Financial motives^ '^.
4.2.1 (a) Strategic Motives'. These motives include:
• Expansion and growth: One of the common reasons for merging is to sustain
growth. It could be achieved by increasing market share, gaining access to
additional customers (as in the case of telecom and financial sector mergers). It
could also result from better access to distribution and marketing through the
partner. A most attractive mode for grovv1;h is by getting access to promising
foreign markets. Thus mergers and amalgamations are favoured route to establish
109
supra, note 1, pp 6-7. For details see, Section 394 of Companies Act, 1956.
110
For details see, Saraswati Industrial Syndicate Limited versus Commissioner of Income Tax
(1991) 70 Comp Case 164.
111
112
Subramanian.S, "Evaluation of Strategies for Mergers, Amalgamations and Acquisition", The
Management Accountant, Vol 31, No 11, 1996, at p.829.
174
a foothold in foreign markets, to increase market share and also to exploit other
country's resources. It is to be noted that expansion and growth are carried out
through vertical integration. "^
• Synergies through consolidation: If the resources of one company are capable of
merging with the resources of another company effortlessly, resulting in higher
productivity in both the units, it is case of synergy. For example, if the technical
manpower in one unit can exploit the modem machineries in another organization
it will be fruitful to both the organizations. "'* Synergies can be realized either
through cheaper production bases as in the case of Jindal Strip purchase of two
unit from Bethlehemem in United States, or by cost saving and pooling of
resources in research and development marketing and distribution, as in the case
of Astra's $36 billion mergers with Zeneca, Hoechst merger with Rhone Poulene
or other pharma mergers. "^ It is to be noted that the concept of synergy can be
simply defined as 2+2=5 phenomenon. The value of company formed through
merger will be more than the sum of the value of the individual companies just
merged.
V (A)+V(B)<V(AB)
V (A) =Value of company A
V (B)= Value of company B
V (AB)= Value of merged company. "^
• Dealing with the entry of multinational companies: Mergers and joint stock
enterprises are a possible strategy for survival with the arrival of multinational
companies. It may be difficult to beat the multinational companies without
strategically aligning with them. "^ Joint stock or corporate form of industrial
organization is a 'facilitating' cause of combinations in two ways. They bring
together a large number of persons and a large aggregation of capital into one
business unit. They can be combined by taking the approval of all their constituent
members.'
113
114
115
supra, note 1, atp.56.
116
Josh, Arindham and Das, Bratati, 'Mergers and Takeovers', The Management Accountant, Vol.
38, No.7, 2003,at p. 544.
117
118
175
Economies of scale: The bigger is always thought to be better in the industrial era.
Pooling of resources definitely will bring about economies of scale. The
economies of scale may result in one or more of the critical functions namely
production marketing and finance. "^ Research has also shown that return on
capital goes up as the concentration index rises. This has been proved especially in
the cases of pharmaceuticals industries, pulping and air compressors. '^°
Market penetration: A number of multinational companies have used mergers and
amalgamations route to enter and strengthen these presence in the market, to cut
down the bureaucratic delays and the long time involved in establishing,
manufacturing and distributive facilities as well as market development involved
in greenfield venture route. Introducing a product for other market segment will
be easier by acquiring a company which has a good market share in the specified
122
segment.
Acquiring the competition: It is said 'if you cannot fight them, join them.' It is not
uncommon for the leading player in a market to acquire the second or third player
in the market to retain market position. Thus merger can help the company to
reduce completion in the market. It also helps to increase market power. For
example Tata Oil mills and Hindustan lever Limited merger, premier and Apollo
tyres merger etc. '^^
Backward and forward integration: When the supply of raw material is critical,
acquiring a company producing the raw material will be an added advantage. This
is a case of backward integration. Similarly, if the critical value additions are done
in the subsequent stages, it may be profitable for an organization to engage in
merger and acquisition activities resulting in forward integration. '^'^
119
120
121
Greenfield venture route refers to foreign direct investment where a parent company Status a
New venture in a foreign country by constructing new operational facilities from the ground up,
www.investopedia.com http://www.investopedia.eom/term/E/greenfield.asp.(last accessed 10-09-
2010).
122
123
Ghosh, Arindham and Das Bhatai, 'Merger and Takeovers', The Management Accountant, Vol.
38, No. 7 ,2003) at 544.
124
ibid.
176
New product entry: Entering into a new product market is a time consuming
effort. Companies with adequate resources will do well in new product market
through mergers and amalgamations.'^^
New market entry: Advertisement and market promotion activities will be more
cost effective if the organization has presence in many places. Taking a new
market from a competitor will be a costly affair. Merger and amalgamation may
provide this advantage. '^^
Surplus Resource: To obtain additional mileage from an existing resource (be it
funds, production capacity, marketing, network, managerial talent) merger and
amalgamation might offer good potential. '^^
Minimum size: Apart from the advantages brought about by the economies of
scale, it may be required for a company to look forward to merger and
amalgamation just for survival. For example investment in research and
development might be crucial and the independent units may not be able to
support it. Similarly, in a growing market it is difficult to survive for long without
growing big. The prospects of continuation of small or medium size enterprises as
an independent unit may be questioned by the prospective customers.
Diversification of risk: Merger could also be a strategy to diversify operations so
as to increase returns or to reduce risk of the shareholders. However there is a
school of thought who feels that diversification of companies is of no value to the
shareholders as they can diversify their own portfolio more cheaply and efficiently
as an individual.
Balancing product Cycle: Combining with a complementary industry to
compensate for the boom and doom in a product cycle might be a good strategy. If
the main product is seasonal-say Sugar, it will be beneficial to add another non-
seasonal product, say Ceramics, in the organizational field.
'^' ibid.
'^^ ibid.
'^' ibid.
''' ibid.
129 supra, note 1, at p.58.
130 supra, note 113, at p. 830.
177
• Arresting Downward Trend: If the trend in the industry is pointing a downward
trend when projected for the next five years, it is provident to take over the
business belonging to a young and potential industry'""
4.2.1 (b) Organizational Motives: There are as follows
• Ego satisfaction: The money power available with the top management of big
corporate houses does prompt the managers to explore possibilities of mergers and
amalgamations. The size of the combined enterprise satisfies the ego of the
entrepreneurs and the senior managers. '^^
• Retention of managerial talent: Human resources are considered essential and
important. To assure growth to the senior management personnel in order to retain
the management talent, it may be required to attempt merger and
amalgamations' ^
• Removal of inefficient management: Merger and amalgamation is a quick remedy
to replace the inefficient management from the organization which has, say high
product strength. '^'^
4.2.1 (c) Financial Motives: There are as follows
• Tax planning: The merging of a sick unit with the healthy unit, brings tax
advantages by allowing the losses of the sick unit to be set-off against the profits
of the healthy company. Also, vertical merger that is with the raw material
suppliers and the downstream units, could also reduce the incidence of sales tax
and other levies. '^^
• Revival of Sick Units: If a viable unit has become sick, a health company may
like to merge with it so as to reap the benefit of the hidden potentials of sick
units.'^^
• Asset Stripping: If the market value of the shares is quoted below the true net
worth of a company, it will be a target for acquisition.
'^' ibid.
"^ ibid.
'" ibid
"^ ibid
'^' /fif., at p. 830.
''' ibid
'" ibid
178
4.2.7 (d) Other Motives: In addition to the above mentioned reasons, some of the
unstated reasons for mergers and amalgamations are:
• Avoidance of statutory provisions: Mergers and amalgamations have been need to
avoid statutory provisions. When restrictions were imposed in India as to then
number of managed companies under the same managing agency house, merger
devices are used to avoid statutory provisions. For example a managing agency
house managing 60 companies could have a merger of 4 companies each as 1 unit
and thereby could have only 15 companies under their management instead of 60
and thereby avoid the maximum limit of 20 companies imposed by the statute. '^^
• Promoters gain: Merger does offer to the company promoters, the advantage of
increasing company size, financial structure and strength. They can convert a
closely held private limited company into a public company without contributing
much wealth and losing control. For example., in Hindustan Computers only
Hindustan Reprographic limited was a public company whereas other three
merging entities were private companies. The promoters of Hindustan Computers
were allotted shares worth Rs. 1.27 crores on merger in a new company called
Hindustan Computers Limited which gave them an 86 percent stake in Hindustan
Computers equity of Rs. 1.48 crores shares which was against their original
investment of merger Rs. 40 lakh in Hindustan Computers and they did not invest
any extra money in getting shares worth Rs. 1.48 crore.
• Megalomania: Megalomania refers to being excessively self obsessed and arises
from a high level of over confidence. Some managers have an aura about their
own managerial competence and believe that they deserve to preside over large
corporate empires. They tend to acquire firms to satisfy their own ego. Very often,
the benefits of such mergers are only illusory and end up in failures.
• Hurbis Spirit: Hurbis spirit refers to an animal spirit which leads to paying an
excessive price to make a merger or an acquisition. This is particularly evident in
case of competitive tender offer to acquire a target. The parties involved in the
contest may revise the price upwards time and again. The urge to win the game
often results in winners curse. The winners curse refers to the ironic hypothesis
that states that the firm which overestimates the value of the target, mostly wins
'^* Sen, S.C, ''Merger, Amalgamation and Takeover" 1969, at p. 19.

" ' supra, note 13, at p. 19.
'**' Financial Management for Managers, ICFAI, 2004, at 473.
179
the contest. The factors that result in the hubris spirit are the desire to avoid a loss
of face, media praise, urge to project as an ''aggressive'' firm, inexperience,
overestimation of the synergies, overenthusiastic investment bankers, etc.''"
• Customer Demands: The Grand Metropolitan and Guinness Merger to create
Diageo was to increase the number of product offerings. The more such products,
the greater the ability to fight retailers with the power to either make or break a
brand. In an industry where there are no 'must-stock' spirit brand including a
number of in-demand products is the key to greater profitability companies can
use this consumer pull to negotiate better deals with fewer retailers. '"'^
• Technology: A high level of technology was the reason for the merger of Digital
Computers and Compaq as well as IBM and Lotus Corporation earlier. Compaq's
hold in the lower-end products regiment and Digital's strengths in mini-computers
were brought together by these mergers.'
Table 4.1: Motives for Mergers and Amalgamation Business v. Shareholders Reasons
Business Reasons Shareholders Reasons
• Complete or extend an existing product line. • Executive status; the larger the company, the more
• Acquire distribution and a broader market important are its executives.
• Better control material supply. • Executive compensation; compensation levels do
• Secure key personal. correlate with company size.
• Secure needed technology or patents. • Find a position for relatives of key shareholders or
• Replace product in a declining market. the chief executive officer.
• Secure manufacturing facilities or develop • Buy block of stock for 'investment" purposes,
products for idle facilities. which will be sold at a profit to increase buyer's
• Secure a place to more an existing product share and executive option value.
line. • Raise the value of buyer's stock by acquiring
• Combine operation with a similar company companies in industries currently in favours with
and solve overwhelming economic Wall Street.
problems. • Cover up poor management of existing companies
• Use non productive assets to acquire other by acquiring new.
businesses. • Move capital from one country to another.
• Develop a concept that would provide a • Liquidate the acquired at a profit that will be non-
"unique" service or product. recurring.
• Increase purchasing power. • Real, imagined, or contrived inside information that
• The price was low because of the seller's a company is about to boom.
need to sell and the buyer had little or no • Conglomerating- propping up an earnings record by
risk. acquiring sellers having low price/earnings ratio
• Add strength to weak area of the acquired stock (PE) with the buyer's high PE stock.
such as add needed capital, and greatly • Acquire companies because other companies
increase earnings. acquire companies.
• Keep acquisition executives busy and justify their
presence.
Source: Reproduced from
*Sharda. v, 'T/ie Theory of Corporation', 1986, pp. 7-8.
* Bing, Gorden, 'Corporate Acquisition', 1980, at p. 9
141
id, at p. 414.
'""^ supra, note 1, at p. 57.
'"^ /c/., at p. 58.
180
4.3 Theories of Merger
It is observed that there exit two views about the growth of large firms. Some
contended that growth is mainly through the internal expansion while other considers
external expansion responsible for the growth that is through mergers, acquisitions,
consolidations, amalgamations etc. It is to be noted that the changing economic and
financial environment may encourage some types of mergers during certain time
periods and stimulate other type of mergers under different situations. Following are
the theories of mergers.
Figure 4.1 Snapshot of theories of mergers
4.3.1 The Harvard Theory
4.3.2. The Efficiency Theory
4.3.2(a) Differential Managerial Efficiency Theory

4.3.2 (b) Inefficient Management Theory
4.3.2 (c JOperational Synergy Theory
4.3.2 (d) Financial Synergy Theory
4.3.2 (e) Pure Diversification Theory
4.3.2 (f) Strategic Realignment to Changing Environment Theory
4.3.2 (g) Undervaluation Theory:
• Short Term Myopia

• Market Based Replacement Cost
4.3.3 The Information and Signaling Theory

4.3.4 The Agency problem and Manageriallsm Theory
4.3.5 The Free Cash Flow Theory
4.3.6 The Market Power Theory
4.3.7 The Tax Consideration Theory
4.3.8 The Redistribution Theory
4.3.9 The Shareholder Wealth Maximizing Theory
4.3.10 The Managerial Utility Theory
4.3.11 The Internal Capital Market Theory
4.3.12 The Cheap Capacity Theory
4.3.13 The Earning Per Share Theory (EPS)
4.3.14 The Linkage Theory
4.3.15 The Borrowing Capacity Theory
4.3.16 The Wrong Theory
4.3.1 The Harvard Theory-. According to this theory mergers help the capital
market discipline itself. Inefficient and errant companies get taken over as
consequence of their low book values and share prices. If the acquirer feels there is
potential in acquiring and merging such companies and rewarding shareholders better.
181
the merger generally goes through. In short, this theory stresses on creation of value to
the shareholders. '*'*
4.3.2 The Efficiency Theory: This theory holds that mergers and other forms of
asset redeployment have potential for social benefits in addition to gains for
participants. They generally involve improving the performance of incumbent
management or achieving a form of synergy. It is to be noted that all or most of the
efficiency theories have been incorporated in the conglomerate merger activities
which were at peak during the late 1960s. ^^^ Efficiency theory is of the following
types:
4.3.1. (a) Differential Managerial Efficiency
4.3.1. (b) Inefficient Management
4.3.1. (c) Operating Synergy
4.3.1. (d) Financial Synergy
4.3.1. (e) Pure Diversification
4.3.1.0 Strategic Realignment to Changing Environment
4.3.1. (g) Undervaluation
• Short-term results versus long run investment programmes.
• Market below replacement cost.
4.3.1. (a) Differential Managerial Efficiency. This theory says that more efficient
firms will acquire less efficient firms and realize gains by improving their efficiency.
This implies excess managerial capabilities in the acquiring firms. It is to be noted
that differential efficiency would be most likely to be a factor in mergers between
firms in related industries where the need for improvement could be more easily
identified. '*^ For example if the management of firm A is more efficient than the
management of firm B and if after firm A acquires firm B, the efficiency of firm B is
brought up to the level of efficiency of firm A. One difficulty in this theory is that if
carried to its extreme it would result in only one firm in the economy - The firm with
the greatest managerial efficiency. Clearly, problems of co-ordinating in the firm or of
managerial capacity would arise before the result was reached. ' ^ This theory can be
more appropriately called as managerial synergy hypothesis. In this theory, the
acquiring firm's management seeks to complement the management of the acquired
firm and has experience in the particular line of business activity of the acquired firm.
''*'' Hariharan, P.S., "Concepts of Mergers and Takeover", Chartered Secretary, Vol. I, No. 8,2002, at
p. 39.
''" supra note, 10 at p. 190.
supra note, 10 at p. 215.
' " /W., at p. 191.
182
Thus the differential efficiency theory is more likely to be the basis for horizontal
148
mergers.
4.3.1.(b) Inefficient Management: This theory suggests that target management is so
inept that, virtually any management could do better, and thus could be an explanation
for mergers between firms in unrelated business {conglomerate mergers)}"*^ Manne
(1965), as an original inspirer of this theory suggested that mergers for corporate
control will principally be of the horizontal and vertical types in which the acquiring
firms' management is familiar with the enviroimient of the acquired firms activities.
Proponents of the theory argues that mergers do not imply the inability of the owners
to replace their inefficient manager's but the scarcity of able manager's in the market.
The only limitation of this theory is its implication that agency costs are so high that
shareholders have no way to discipline managers short of costly mergers. '^*^
4.3.1.(c) Operational Synergy: This theory postulates economies of scale or of scope
and that mergers help achieve levels of activities at which they can be obtained. It
includes the concept of complementarily of capabilities. For example, one firm might
be strong in research and designing but weak in marketing, while another has a strong
marketing department without the research and designing capability. Merging the two
firms would result in operating synergy. '^'
Operating economies may be involved in horizontal or vertical mergers. For the
horizontal mergers the source of operating economies must represent a form of
economies of scale. These economies, intum, may reflect indivisibilities and better
utilization of capacity after merger or important complementarities in organizational
capabilities may be achieved in vertical integration. Combing firms at different level
of an industry may achieve more efficient coordination of the different levels.
4.3.1.(d) Financial Synergy: This theory hypothesizes complementarities between the
merging firms, not in management capabilities, but in the availability of investment
opportunities and internal cash flows. A firm in a declining industry will produce
large cash flows since there are few attractive investment opportunities. A growth
industry has more investment opportunities than cash with which to finance them. The
merged firm will have a lower cost o capital due to lower cost of internal funds as
'** W.,atp. 192.

'"> ibid.
"** id., at p. 198. Manne, 1965 quoted in this footnote.
'" /c/., at p. 215.
'« ibid
183
well as possible risk reduction, savings in floatation costs, and improvements in
capital allocation. '^^
For example acquisition by Phillip Morris of General Foods in 1987 and of Kraft
F00J5 in 1988.'^^
4.3.].(e) Pure Diversification: It is to be noted that this theory of mergers differs from
shareholder portfolio diversification. Shareholders can efficiently spread their
investments and risk among industries, so there is no need for the firms to diversify
for the sake of their shareholders. Managers and other employees, however are at
greater risk if the single industry in which these firms operates should fail, their firm
specific human capital is not transferrable. Therefore, firms may diversify to
encourage firm specific human capital investments, which make their employees
more valuable and productive, and to increase the probability that the organization
and reputation capital of the firm will be preserved by transfer to another line of
business owned by the firm in the event its initial industry declines. '^^ Thus
according to this theory diversification by managers and other employees,
preservation of organizational and reputational capital and financial and tax
advantages. Diversification of firms can provide managers and other employees with
job security and opportunities for promotion and other things being equal, results in
lower labour costs.
Moreover diversification can ensure smooth and efficient transition of the firms'
activities and the continuity of the teams and the organization. It helps to preserve the
firm's reputational capital which will cease to exist if the firm is liquidated.
Diversification can increase corporate debt capacity and decrease the present value of
future tax liability. '^
4.3.1.0) Strategic Realignment to Changing Environment: This theory states that
mergers takes place in response to environmental changes. External acquisitions of
needed capabilities allow firms to adopt more quickly and with less risk than
developing capabilities internally. It is to be noted that the literature on long range
strategic planning has exploded in recent years and was propounded by summer,
1980. ""
' " zW., at p. 198.

'*" /W., at p. 198.
' " /£/.,atp.215.
"^ ibid.
' " (W., at p. 252.
184
4.3.1.(g) Undervaluation: This theory states that the mergers occur when the market
value of the target firm stock for some reason does not reflect its true or potential
value or its value in the hands of an alternative management. The q-ratio is also
related to this undervaluation theory. Firms can acquire assets for expansion more
cheaply by buying the stock of existing firm than by buying or building the assets
when the Target's Stock price is below the replacement cost of its assets. '^^ Thus this
theory has many aspects and the nature and implications of each of them is very
different. These are as follows:
Short-term myopia
Market below replacement cost.
• Short-term Myopia: This theory propounds that the problem lies with market
participants especially institutional investors who emphasize short-term earnings
performance. As a consequence, it is argued that corporations with long-term
investments programs are undervalued. When the firms are undervalued they
become attractive targets or individual investors with large resources at their
command (raiders). '^^
• Market-below replacement cost: According to this theory one reason that the firms
have stepped up diversification programs is that in recent years entry into new
product market areas could be accomplished on a bargain basis. Moreover
inflation had double - barreled impact which resulted in decline of the q-ratio. In
recent years the q-ratio had been running very low which intrun is providing a
broad base for the operation of the undervaluation theory. It is to be noted that for
companies in natural resources industries, q-ratios have been as low as 0.2 and
provides a base for even more substantial premiums where natural resource firms
were involved in mergers.
4.3.3 The Information and Signaling Theory-. According to this theory the
tender offer sends a signal to the market that the target management shares are
undervalued, or alternatively, the offer signals information to target management
which inspires them to implement a more efficient strategy on their own. Another
''* ibid, q-ratio is defined as the market value of the firms shares to the replacement costs of the assets
represented by those share as quoted in Weston, J .Fred ;and Chug, Kwang. S, 'Merger and
Corporate Contrail', 1998, at p. 252.
" ' ibid.
' ^ /J., at p. 253.
185
school holds that the revaluation is not really permanent, but only reflects the
likelihood that another acquirer will materialize for a synergistic combination. Other
respects of takeovers may also be interpreted as signals of value, including the means
of payment and target managements response to the offer. '^'
4.3.4 The Agency Problem and Managerialism Theory: This theory was
formulated by Jevsen and Mecking (1976). According to them agency problem arises
when managers own only fraction of the ownership shares of the firm. Partial
ownership may cause the mangers to work less vigorously than otherwise and/ or to
consume more perquisites (such as luxurious officer, company cars, memberships in
clubs) because the majority owners bear most of the cost. For example in large
corporations individual owners as consequence of widely dispersed ownership do not
have sufficient incentive to expand the substantial resources required to monitor the
behavior of managers. According to this theory agency problem basically arise
because contracts between managers decision or control agents and owners (risk
bearers) cannot be costlessly written and enforced. This problem may be efficiently
controlled by some organizational and market mechanisms. Moreover a number of
compensation arrangements and the market for managers may mitigate the agency
problem Fama (1980). When these mechanisms are not sufficient to control agency
problems, the market for takeover provides an external control device of last resort
Manne{\965). A takeover through a tender offer or a proxy fight enables outside
managers to gain control of the decision processes of the target while circumventing
existing managers and the board of directors. '^^ Manne emphasized mergers as a
threat of takeover if a firms management lagged in performance either because of
inefficiency or because of agency problem. ' ^
Managerliasm, on the contrary, views takeover as a manifestation of the agency
problem rather than its solution. It suggests that self-serving managers make ill-
conceived combinations solely to increase firm size and their own compensation. The
manageralism explanation for conglomerate merges was set forth by Mueller (1969).
He hypothesized that managers are motivated to increase the size of their firms. He
'*' /^., at p. 215.

'*^ id., at p. 253. Jensea and Meckling, 1976 quoted in this footnote.
'" id., at p. 202. Fama, 1960 quoted in this footnote.
'*^ ibid
186
assumes that the compensation to managers is a function of the size of the firm and
thus the managers adopt a lower investment hurdle rate. '^^
It is to be noted that the Hubris Theory is another variant on the agency cost theory, it
implies acquiring firm managers commit errors of over optimism {winner's curse) in
bidding for targets. '^^
4.3.5 The Free Cash Flow Theory: Michael Jensen (1986, 1988), the chief
propounder of this theory observes that takeovers take place because of the conflicts
between managers and shareholders over the payout of free cash flows. The
hypothesis posits thatfiêecash flows (that is, in excess of investment needs) should
be paid out to shareholders, reducing the power of management and subjecting
managers to the scrutiny of the public capital markets more frequently. Debt-for-stock
exchange offers are viewed as a means of bonding the managers promise to pay out
fiiture cash flows to shareholders. '^^
4.3.6 The Market Power Theory: This theory advocates that merger gains are
the result of increased concentration leading to collusion and monopoly effects. It is to
be noted that empirical evidence on whether industry concentration causes reduction
in competitions not conclusive. There is much evidence that concentration is the result
of vigorous and continuing competition which causes the composition of the leading
firm to change overtime.'
4.3.7 The Tax Consideration Theory: This theory is all about acquiring and
merging a loss making company to get a tax shelter. The accumulated losses of the
acquired company are self-off against the profits of the acquiring company. Thus the
tax liability of the latter company is reduced. Provisions are mentioned under Section
72A of the Income Tax act, 1961 '^ for this purpose. Tax savings affected through the
mergers are utilized for paying off excess debts and reducing the interest burden. The
'" W.,atp.203.
'** ;W., at p. 217.
'*^ ibid. Michael Jensen, 1986-1988 quoted in this footnote
'*' /W., at p. 217.
'*' supra, note 145, at p. 39.
187
idea is to create a debt loan company through the merger. For example the merger of
International Harvest or with Mahindra and Mahindra. '^^
4.3.8 The Redistribution Theory: According to this theory the source of the
value increases in merger is redistributed among the stakeholders of the firm. Possible
shifts are from the bondholders to stockholders and form the labors to stockholders or
consumers. To the extent that taxes are part of the explanation for mergers,
redistribution is involved. Thus according to this theory value increase to shareholders
-in takeovers is that the gains come at the expense of other stakeholders in the firm.'''
4.3.9 The Shareholder Wealth Maximizing Theory: This theory stresses that
a firms decision of merger or acquisition should be based on the objective of
maximizmg the wealth of shareholders of the firm. This approach hypothesis that
managers try to pursue those mergers and acquisitions which offer positive net present
value and the basic pattern of merger and acquisition activity is that, the divesting
company moves from a diversifying strategy to concentrate on core activities in order
to increase competitiveness. Both patterns are based on an attempt to create value for
the shareholders.
Management buyouts (MBOs) help to restructure the firms, resulting in a realignment
of the interests of the shareholders and mangers. Management Buyouts provide
incentives to mangers (who are shareholders themselves to maximize shareholdings.
The shareholder wealth maximization criterion is satisfied when the added value
created by acquisition exceeds the cost of acquisition. '*
Added value from Value of acquirer and Their aggregate value
acquisition = acquired after the before
acquisition —
Increase in the acquirer nil — Cost of acquisition
share value =
Cost of acquisition = Acquisition transaction Acquisition premium' '^

cost +
170
id., at p. 40.
'^' supra, note 10, at p. 217.
"^ supra, note 14, at p. 37.
'^^ supra, note 13, at p. 14.
"' supra, note 13, at p. 14.
188
Acquisition transaction cost is incurred when an acquisitions made, in the form of
various advisers fees Hke the stock exchange fees, cost of underwriting, regulators
fees. The acquisition premium is in excess of offer price paid to the target over the
target pre-bid-price and is also known as the control premium. Shareholders may
gains from mergers in different ways viz. from realization of monopoly profits,
economies for scale, diversification of the product line and better investment
opportunities. '^^
4.3.10 The Managerial Utility Theory: According to the agency cost theory in
the modem corporate economy mangers does not act in the interest of the
shareholders. And the cost of such behavior at the part of managers towards the
shareholders is called as the agency cost theory. Thus the managers act in disregard to
their principal thereby, promoting their own self interest. In merger and acquisition
context self interest results in bad merger or acquisition as well as loses of shareholder
value and is undertaken to satisfy the following manager at objectives. '^^
> To pursue growth in size of their firm, since their remuneration status, perquisites and power are
functions of firms size (the empire building syndrome).
> To deploy their currently underused managerial talents and skills (the self fulfillment motive).
> To diversify risk and minimize the cost of financial distress and bankruptcy (the job security
motive).
> To avoid being taken over (the job security motive). '^'
4.3.11 The Internal Capital Market Theory: According to this theory

companies are liable to pay corporate tax and when the post tax profit is distributed as
dividend to shareholders, they are liable to pay tax on them also. A company can try
to save this double taxation by having low payouts, generate internal cash flows and
funding these investible fiinds into the acquisition of more profitable companies and
then merging finally. This creates an internal capital market for funding expansion
and diversification. For example the merger oflCI Group of companies. ^^^
176
/W., at p. 15.
177
supra, note 9, at p. 68, Managers are also described as the agent of company and shareholders are
described as the principal of company.
189
4.3.12 The Cheap Capacity Theory: According to this theory mergers can also
provide an efficient and cheap route for acquiring production capacity. For example
merger ofStepan Chemicals with Hindustan Lever. ^°
4.3.13 The Earning per Share Theory (Eps): This theory states that
companies are even know to play earning per share game through mergers. For
example when Hindustan Computer Limited was formed through a merger the
promoters of the merged companies got more than what they would have if those
companies had been sold. Assets of the merging companies could be revalued at a
higher rate to create capital reserves. On paper, the book value of the merged
company's share moves up, while the purchase consideration is low. Thus the equity
capital base is small, but reserves are hug. An Earnings per share is enhanced
automatically.
4.3.14 The Linkage Theory: Mergers provide efficient forward or backward

linkages. Control over a critical input could come through an acquisition and merger.
For example., merger ofTISCO with special Steel. '^^
4.3.15 The Borrowing Capacity Theory: This theory says that a company
could enhance its borrowing capacity significantly through mergers. For example the
merger of all finance companies Lloyd Steel Group with its flagship finance company.
Magnificent leasing and Investments were affected for this purpose. ^^^
4.3.16 The Wrong Theory: According to this theory merges are at times affected
to get around restrictions. When licensing restrictions were running riot, companies
used mergers as a way of getting licenses. For example merger of Mynyton with
Reliance Industries for the purpose of acquiring polyester filament yam license.' '*
''» ibid.
'«' ibid.
''' ibid..
''' ibid.
•^ ibid.
190
4.4 Timings of Merger Activity
To obtain a suitable historical perspective on the current wave of merger, one needs a
long comprehensive, consistent set of data on mergers. Unfortunately, no such data
series on merger exists and we must compromise. The present discussion will focus
on the data available for the period pre World War II and then discuss the data for the
post World War 11 period.
Many authors including Nelson (1959, 1966), Meliches, Leadolter and D' Antonio
(1983), who studied the timing question were not guided by any general merger
hypothesis and only established links between merger activity and stock prices,
1 XS
industrial activity and interest rates.

Thus the series mentioned herein are not completely comparable as they are
constructed bared on different information resources, different standards of inclusion
and different size measures of firms acquired or consolidated. Therefore, the different
series carmot be combined to form a consistent time series for longer periods without
necessary adjustments which may not entirely be possible.
4.4.1 Pre-World War-IL During the pre-World War II period the Timing's of
Merger activity has been studied as follows:
Figure 4.2 Time Series of Merger Activity (Pre-World War-II)

4.4.1 (a) The Nelson Series (1895-1920)
4.4.1 (b) The Willard Thorpe Series (1919-1939)
187
4.4.1 (c) The Federal Trade Commission Overall Merger Series (1972-1979)
Source: Reproduced from
*Auerback, Alian.J, ^Mergers and Acquisitions', (1987) at 29.
4.4.1 (a) The Nelson Series (1895-1920): The main source of data for the period 1895-
1920 is the study conducted by Ralph Nelson. His data covers only manufacturing and
mining sectors. The cutoff limits are not explicit rather. Nelson relies on financial
reporting during the period covered. He provides annual and quarterly series for the
number of transactions and the book value of the acquired firms.
This series includes considerations whose size are greater than $ 1 million for the
period 1895-1914 or $ 2 million for the period 1915-1920 in which price rose rather

'** /Vf., at p. 277.
' " ibid.
Auerback, Alian.J, 'Mergers and Acquisitions', (1987) at 29.
191
"rapidly". The list also includes acquisitions that were greater than $ 35,000 for the
1895-1914 period or $ 65,000 for the later period. The measures of merger activity is
available both by the member of net firm disappearances through consolidations and
acquisitions and by the size of consolidations or acquisitions. '^^
In the Nelson Series, size of a consolidation or a merger by acquisition is measured as
the authorized capitalization of the firm resulting from a multiform consolidation or a
merger by acquisition. Because of this, the Nelson series by size is subject to an
upward bias relative to the currently conventional measurement of size by the value
paid to the acquired firm shareholders or the total asset value of the acquired firms
shareholders or the total asset value of the acquired firm. '^° For the 1895-1920 period
of merger activity, approximately 70 percent of the firms that disappeared were
absorbed into multi firm consolidations, while the remaining 30 percent disappeared
through merger by acquisition. This series was complied on a quarterly basis. The rule
used in assigning dates was to record the date of transfer of control of the acquired
firm or the date of incorporation in consolidation.' '
4.4.1 (b)The Thorpe Series (1919-1939): For the period of 1919-1939, Willard Thorpe
compiled a quarterly series on the number of mergers in the manufacturing and
mining sectors, which is reproduced by nelson. But the criterion for inclusion is
unclear. This series was continued in 1949 by the broad federal trade commission
series discussed in the text above, and the two series appear to be consistent and
compatible.
This series overlaps the Nelson series of 1919-1920 and includes about three times as
many firm disappearances as the Nelson Series. He concluded his series from the
Standard Daily Trade Services. The Thorpe Series gives only the number of
disappearances and not by size, in mining and manufacturing industries.
4.4.1(c) The Federal Trade commission Series (1940-1971): After, 1939 the Federal
Trade Commission (1972) continued to compile merger series which maintained
comparability to the Thorpe Series. Data were limited to merger and acquisitions
reported by Moody's Investors Service Inc. and Standard and Poor's Corporation.
This series was discontinued in 1972 when the Federal Trade Commission introduced.

^"^ /W., at p. 278.
'" ibid.
192
'" supra, note 10, at p. 278.
192
The Overall Merger Series combined with the Thorpe Series; this Federal Trade
Commission Series is the longest time series of the merger activity in the United
States.'''
4.4.1 (d) The Federal Trade Commission Overall Merger Series (1972-1979): In
1972, the Federal Trade commission introduced a new series which was not
comparable to the 1940-1971 series for several reasons. Firstly, the Overall Merger
Series was competed from a greater number of source materials than previously used.
Secondly, it included acquisitions of firms outside the manufacturing and mining
industries, while still excluding the industries over which the Federal Trade
Commission did not have jurisdiction (commercial banks, transportation entities and
communication concerns). Thirdly, in the previous series, a count was made of partial
acquisitions where less than 50.1 percent of the company had been acquired. This was
no longer done in the Overall Merger Series. Fourthly, a distinction was made
between completed and pending acquisitions, and the new series included the
completed ones only. The full series is available as Federal Trade Commission (1981)
which has been the last merger-related publication by the Federal Trade
Commission.'
4.4.2 Post World War-II: During the Post-World War-II period the timings of
merger activity has been studied as follows:
Figure 4.3 Time Series of Merger Activity(Post World War-II)
4.4.2 (a) The Federal Trade commission Large Merger Series (1948-1979)
4.4.2 (b) The W.T. Grimm Series 91963)
4.4.2 (c) The Periodical Merger and Acquisition Since 1972 to present.
Source :Adopted from
Auerback, Alian.J, 'Mergers and Acquisitions', (1987) at 29.
4.4.2 (a)The Federal Trade Commission Large Merger Series (1948-1979): The
Federal Trade Commission collected and published data on the mergers in the
manufacturing and mining sector of United States economy for the years 1948-1979.
One basic set data covered all mergers in which the acquired firm was in the
manufacturing or mining sectors, had at least $ 10 million in assets (book value), and
for which information on the acquisition was publically available. The Federal Trade
Commission published annual figures for both the numbers of mergers and the book
value of the assets acquired. It also provided the relevant information on each
194
ibid.
195
id., at p. 278.
1%
supra. note 189, at p. 27.
193
transaction, so that quarterly series on numbers of mergers and their value could be
constructed.'^^ A second Federal Trade Commission series also covered the
manufacturing and mining sector, with annual number of merger transactions
extending from 1940 through 1979 and quarterly numbers extending from 1940
through 1954. He second series appears to have been more inclusive than the first,
since a far larger number of transactions are registered. But unfortunately, the Federal
Trade Commission did not indicate the inclusion criterion for this series.'^^
This data had a number of short comings. Firstly they cover only the manufacturing
and mining sectors, which declined substantially in relative importance during the
1948-1979 period and currently constitute only a quarter of united States Gross
National Product. Secondly, the $ 10 million lower limit clearly created distortions,
since the general price level tripled over the thirty two year covered by the data.
Thirdly, the series excluded acquisitions by an individual or groups of individuals and
hence would appear to exclude most leveraged buyouts of divisions or of whole
companies. Fourthly, the Federal Trade Commission ceased collecting and publishing
these data in 1981 so the series does not cover the merger wave of 1980s. ' ^
4.4.2 (b) The W.T. Grimm A Co Series (1963): This series published data on the
number of merger and acquisition announcements in the entire United State economy.
Their published annual series extends from 1963 through the present; their quarterly
series extends from the first quarter of 1974 through the present. The lower limit for
inclusion is a transaction involving at least a $ 500,000 purchase price. The Grimm
data have the same problem as the merger and acquisition data like a limited historical
reach, fixed lower limit for inclusion and difficulties of interrogation with the Federal
Trade Commission. Also the Grimm data pertain to announcements rather than
completions. "^"^^
4.4.2 (c) The periodicals Mergers and Acquisitions Since 1972 to present: The
quarterly issues of the periodical mergers and Acquisitions list the number of mergers
and acquisitions consummated in recent quarters for the entire United States
economy. Prior to the fourth quarter of 1980, the lower limit for inclusion in the series
was a purchase price of at least $ 700,000, in that quarter the lower limit was raised to

"* /W., at p. 28.
"^ ibid.
^'^ W., at p. 29.
194
$ 1,000,000. ^"' A quarterly series on domestic companies being purchased (either by
domestic or foreign companies) extends from the first quarter of 1967 to the present.
A series that also includes domestic companies' purchases of foreign companies
extends from the fourth quarter of 1972 to the present. Both series include leverage
buyouts. This series have the number of drawbacks: firstly they do not extend back as
far as the Federal Trade Commission Series. Secondly, the lower limit for inclusion
charged abruptly in the middle of the series and, even so, does not properly adjust for
the tripling of prices that occurred during the period covered. Thirdly, integrating or
splicing the merger and acquisition series vvith the Federal Trade Commission Series
so as to create a longer overall series that would be up-to-date cannot be done easily
or automatically, since the series cover different universes and have different criterion
for inclusion.
In sum while data series that include the recent history of mergers and acquisitions
exits, they do not extend back to provide adequate historical perspective. The Federal
Trade Commission data do provide sufficient historical reach, but they end in 1979.
Further, they exclude the service sector, an increasingly important part of United
States economy. The in consistencies of the more recent data series with the Federal
Trade Commission data complicate statistical inference. ^"^
'"' W., at p. 28.

'"' ibid.
"" ibid.
195

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CHAPTER-IV

MERGERS and AMALGAMATIONS-

A restructuring wave is sweeping the corporate world. From banking to oil

Oxford Dictionary, 2003, at p. 564.

Verma, J.C. 'Corporate Mergers, Amalgamations and Takeovers, (2002) at 52.

> Merger through absorption: Absorption is a combination of two or more

Cogeneric Mergers are of two types:

supra, note 13, at p. 19.

> Plant specialization

means, where companies are at different stages of production operation.. For

refining and marketing to ultimate consumers. Similarly in pharmaceutical

> Backward vertical mergers.

> To reduce cost and dependence.

> Obtain greater stability of earnings through diversification.

> Managerial Conglomerates

Kaveri, V.S,''Financial Analysis of Company Mergers in India,'' (1966) at p.l6.

consolidate or combine (business) interest of firms.

4.1.2 (a) Amalgamation in the nature of merger,and

4.1.2. (a) Amalgamation in the Nature of Merger'. As per AS-14, an amalgamation is

*' %upra, note 37.

4.1.2. (b) Amalgamation in the nature of purchase: Amalgamation in the nature of

4.1.3 Acquisitions: CONCISE LAW DICTIONARY defines term acquisition in the

'" ibid, id, at p. \0.

undertakmgs still remain distinct.

the latter company or at stock exchange.

Negotiated/FriendlyTakeover: Thus takeover is being organized by the present

4.1.5 Difference between Merger and Amalgamation: The terms merger,

4.2.1 (a) Strategies motives.,

4.2.1 (a) Strategic Motives'. These motives include:

4.2.1 (b) Organizational Motives: There are as follows

4.2.1 (c) Financial Motives: There are as follows

'^* Sen, S.C, ''Merger, Amalgamation and Takeover" 1969, at p. 19.

4.3.2(a) Differential Managerial Efficiency Theory

• Short Term Myopia

4.3.3 The Information and Signaling Theory

'** W.,atp. 192.

' " zW., at p. 198.

'*' /^., at p. 215.

Cost of acquisition = Acquisition transaction Acquisition premium' '^

4.3.11 The Internal Capital Market Theory: According to this theory

4.3.14 The Linkage Theory: Mergers provide efficient forward or backward

industrial activity and interest rates.

Figure 4.2 Time Series of Merger Activity (Pre-World War-II)

'*' supra, note 10, at p. 276.

'*' supra, note 10, at p. 277.

'^^ supra, note 10, at p. 276.

'"' W., at p. 28.

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