TAKE OVERS

A takeover (or acquisition) involves one business acquiring control of another business

Takeovers (or acquisitions as they are otherwise known) are the most common form of external growth, particularly by
larger businesses. Take over take place usually by acquisition or purchase from the shareholder of the companies share
at a specified price to the extent of at least controlling interest in order to gain control of the company.

Reasons for Undertaking Takeovers

There are many reasons why a firm may decide to undertake a takeover as part of its strategy, including to:

1. Management inefficient of the target company

2. Complementary asset
3. Cost reduction
4. Target companies undervalued
5. Diversification benefits
6. Tax benefits
7. Synergies
8. Increase market share
9. Acquire new skills
10. Access economies of scale
11. Secure better distribution
12. Acquire intangible assets (brands, patents, trade marks)
13. Spread risks by diversifying
14. Overcome barriers to entry to target markets
15. Defend itself against a takeover threat
16. Enter new segments of an existing market
17. Eliminate competition

The word takeover is been coined its significance through competitive pressure and an increasing growth across
geographies and industries. Takeover is an inorganic corporate restructuring strategy which is been adopted by business
houses, enterprises now a days to address future challenges and survive in the competitive world.

Through takeover one company acquires control over another company, usually by purchasing all or a majority of its
shares. Takeover implies acquisition of control of a company, which is already registered, through the purchase or
exchange of shares. Takeovers usually take place when shares are acquired or purchased from the shareholders of a
company at a specified price to the extent of at least controlling interest in order to gain control of that company. The
takeover strategy has been adopted by business houses to achieve corporate value, achieve better productivity and
profitability by optimum use of resources, men, materials and machines.

OBJECT AND ADVANTAGES OF TAKEOVER-

1. To improve productivity and profitability by joint efforts of two undertaking. 2.

2. To effect saving in overhead.
3. 3. To achieve economies of scale.
4. 4. To create shareholder value and wealth by optimum utilization of resources.
5. 5. To increase market share.
6. 6. To diversify the business of the company.
7. 7. Greater profitability and more investment.

CONTRAINTS OF TAKEOVER

When considering a takeover, there are several constraints that need to be taken into account. These constraints can
vary depending on the jurisdiction and industry, but here are some common ones:
1.Legal and regulatory constraints: Takeovers must comply with various laws and regulations, including antitrust laws,
securities laws, and competition regulations. These constraints ensure fair competition, protect shareholders' interests,
and prevent monopolistic practices.

2.Financial constraints: Takeovers require significant financial resources. Acquiring a company usually involves paying a
premium over its market value, and the acquiring company must have the necessary funds or financing arrangements in
place. Financial constraints can include limitations on borrowing capacity, debt-to-equity ratios, and availability of
capital.

3.Shareholder constraints: Shareholders' interests and approval are important in a takeover. The acquiring company may
need to obtain the approval of a certain percentage of the target company's shareholders or fulfill specific conditions
before proceeding with the acquisition.

4.Due diligence constraints: Before proceeding with a takeover, the acquiring company typically conducts due diligence
to assess the target company's financial, legal, operational, and strategic aspects. This process can be time-consuming
and requires access to relevant information, which may be subject to constraints imposed by the target company.

5.Cultural and organizational constraints: In some takeovers, cultural integration and compatibility between the
acquiring and target companies can be significant challenges. Merging two distinct organizational cultures and managing
potential conflicts can impact the success of the takeover.

6.Timing constraints: The timing of a takeover can be crucial. External factors such as market conditions, industry trends,
and regulatory changes may influence the timing and viability of a takeover. Moreover, hostile takeovers may have
additional timing constraints due to legal procedures and shareholder reactions.

7.Synergy constraints: One of the main motivations for a takeover is achieving synergies between the acquiring and
target companies. However, the realization of synergies can face constraints such as technological incompatibilities,
operational challenges, or resistance from employees and stakeholders.

It is important to note that these constraints are not exhaustive and can vary based on the specific circumstances of each
takeover. It is advisable to consult legal, financial, and industry experts to navigate the constraints effectively and ensure
a successful takeover process.

TYPES OF CORPORATE TAKEOVER

TAKE OVER BY LEGAL PERSPECTIVE

1.FRIENDLY TAKEOVER

Also known as negotiated takeover. Friendly takeovers are those takeovers that could be through negotiation ie
;acquiring company negotioate with the executives or BOD of target firms, and get their consent for take over. The
acquiring company make a financial proposal to the target firms mgt and board. This proposal might the merger of the 2
firms,the consolidation of 2 firms,creation of parent/subsidiary relationship. If both the parties do not reach to an
agreement during negotiation process the proposal of acquisition stands terminated and dropped out. Generally this
takeover take place as per the provision of sec 395 of Co’s Act 1956

2.HOSTILE TAKEOVER
ht maynot follow a preliminary attempt at a friendly takeover. ht is the takeover in which acquiring company maynot
offer to target co the proposal to acquire its undertaking but silently and unilaterally may pursue efforts to gain
controlling interest in it against the wishes of the mgt.this take over take place as per the provision of sebi. THE mgt and
bod strongly resist the acquisition.

3.BAILOUT TAKE OVER

Takeover of a financially sick co by a financially rich co as per the provisions of sick industrial co’s spcl provisiom act 1985
to bail out the fomer losses.

4.ENACTMENT TAKEOVER

Takeovers are governed by specific laws. When a co legally forced to takeover another co or takeover happen by law. Eg
Nationalization of banks in India 1969

TAKE OVER BY BUSINESS CONTEXT

1.HORIZONTAL TAKEOVER

Takeover of one co by another co in the same industry. Purpose – achieving the economies of scale or increasing
themarket share and reduce the competition. Hutch by vodafone

2.VERTICAL TAKEOVER

Takeover by one co with its suppliers or customers. Former is backward, latter is forward. Purpose – reduction in cost.
Eg.sona steering ltd by maruty udyog is backward takeover

3. CONGLOMERATE TAKE OVER

Takeover of one co by another co operating in totally different industries. Purpose- diversification.

Eg.general motors and electronic date systems

4.Reverse takeover

This happen when a private co not traded on the stock market buys a publicly traded co. this usually done at the
initiation of the larger privare co. And also when a large co is being acquired or taken by the small co . eg tata steel
acquiring corous

5.Backflip takeover.

It is a takeover in which the acquiring co turns itself into a subsidiary of the purchase co

MERGERS

A merger is a combination of two or more companies into a single entity. In a merger, two or more companies agree to
combine their operations, assets, and liabilities to create a new, larger company. The merger is often described as a
“merger of equals” because both companies typically have similar levels of influence over the newly created
company.The new company has its own name, identity, and stock that is issued to the shareholders of the merging
companies.

ACQUISITION

An acquisition is a process by which one company takes over another company, often by
buying a controlling stake in the target company.In an acquisition, the acquiring company
gains control of the target company’s assets, operations, and liabilities. The acquired
company may continue to operate as a separate entity or be merged with the acquiring
company. In an acquisition, the purchasing company typically has more influence over the
newly combined company than the acquired company. In digest, a merger involves the
combination of two or more companies to form a new entity, while an acquisition involves
one company taking control of another company.

REASONS

1. ECONOMIES OF SCALE
2. OPERATING ECONOMIES
3. ENHANCE MARKETING CAPABILITY
4. INCREASE VALUE OF THE COM
5. BETTER FINANACIAL PLANNING
6. ELIMINATE COMETITION AND REDUCE COST
7. ACCESS NEW TECHNOLOGY

LAWS RELATING TO MERGER

• Companies act 2013

• Sebi
• Competition act 2002
• Foreign exchange mgt act01999
• Income tax act 1961

Indus Bharti 2020

Towers Infratel

2 National ICMR – National 201

Institute of Institute of 9
Miners’ Occupational
Health Health (NIOH)
(NIMH)

3 Indiabulls Lakshmi Vilas 201

Housing Bank Limited 9
Finance (LVB)
Limited
(IBHFL) and
Indiabulls
Commercial
Credit
Limited
(ICCL)

4 Bank of Vijaya Bank and 201

Baroda Dena Bank 9

5 IndusInd Bharat Financial 201

Bank (SKS 9
Microfinance)
6 NBFC Capital IDFC Bank 201
First 8

7 Vodafone Idea Cellular 201

India 8

8 TATA Steel ThyssenKrupp 201

8

9 Housing.com PropTiger.com 2017

10 State Bank Bhartiya Mahila 2017

of India Bank, SB of
Bikaner and
Jaipur, SB of
Patiala, SB of
Travancore

11 Flipkart E-bay India 2017

Acquiring Acquired Year of

Company Company Acquisition

1 Infosys Kaleidoscope 2020

Innovation

2 Reliance Retail Future Group’s 2020

Retail Business

3 Ola Etergo 2020

4 ITC Sunrise Foods 2020

5 Zomato Uber Eats 2020

6 HUL GSK Consumer 2020

7 Hindalco Aleris 2020

8 Ebix Yatra 2020

9 Advent Enamor 2019

International

10 LIC IDBI bank 2019

11 Accenture Droga5 2019

12 Reliance Brands Hamleys Global 2019

Holdings (HGHL)

13 India UPL Ltd. Arysta LifeScience 2019

Inc

14 Silverpush BetterButter 2019

15 Power Finance Rural Electrification 2019

Corporation Corporation
Limited

16 OYO Rooms Europe’s Leisure 2019

Group

17 InMobi Roposo 2019

18 Publicis Groupe Epsilon 2019

19 Famous Three Bags Full 2019

Innovations

20 Havas Group Shobiz 2019

21 Martin Sorrell’s WhiteBalance 2019
S4 Capital

22 Mortgage Lender Apollo Munich 2019

HDFC Health Insurance

23 Disney 21st Century Fox 2019

24 Killer Jeans Desi Belle 2019

25 Bandhan Bank Gruh Finance 2019

26 Apple Intel’s Smartphone 2019

Modem

27 Teleperformance Intelenet Global 2018

Services

28 Flipkart Liv.Ai 2018

29 Tata Steel Bhushan Steel 2018

30 PVR SPI (Sathyam, 2018

Escape, Pallazo)

31 Walmart Flipkart 2018

32 Tata AutoComp TitanX 2017

Systems Ltd

33 Bharti Airtel Tikona 2017

34 Freshdesk Pipemonk 2017

35 BYJU’S Vidyartha 2017

36 ONGC (Oil and HPCL(Hindustan 2017
Natural Gas Petroleum
Corporation Ltd) Corporation
Limited)

37 WNS Global Denali Sourcing 2017

Services Services

38 Aurobindo Part of business 2017

Pharma from TL
Biopharmaceutical
AG of Switzerland

39 Wipro Ltd InfoSERVER S.A. 2017

40 Bharti Airtel Telenor India 2017

41 Nuance mCarbon Tech 2017

Communications Innovations

42 Axis Bank Freecharge 2017

43 Havells India Lloyd Electric’s 2017

Consumer Durable
Business

44 Cyient Certon Software 2017

45 Dr. Reddy Imperial Credit 2017

Laboratories Ltd Private Ltd

46 Cognizant Brilliant Service Co. 2017

Technology Ltd:
Solutions

47 Piramal business from 2017

Enterprises Mallinckrodt LLC
48 Tech Mahindra CJS Solutions 2017
Ltd

49 Taro Pharma Canada’s Thallion 2017

Pharmaceuticals

50 WNS HealthHelp 2017

51 Cadila Sentynl 2015

Healthcare Ltd Therapeutics Inc

52 Sony TEN Sports from 2013

Corporation Zee

S.no Point of Merger Acquisition

Difference

1. Definition When two or more entities come When one company acquires the

forward to work together as one, it is control and management of

termed as merger. another company, it is termed as

acquisition.

2. Terms Mergers are always planned and At times, acquisition can be

happen with the mutual consent of hostile and involuntary.

the parties.

3. Title A new name is given to the merged No new name is given to the

company. target company.

4. Scenario Two or more companies who work It shall be pertinent to consider

similarly tend to choose the process that the target company is

of merger. always smaller in terms of size,

operations, growth, market than

the acquirer company.

 5. Authority Both the companies are same in The acquirer company

terms of authority. supervises and monitors the

operation of the target

company.

6. Stocks New stocks are issued for the No new stocks are issues for the

merged company. acquired company.

7. Legal Legal compliances are more in the Legal compliances are

Formalities process of merger. comparatively less in the process

of acquisition.

8. Purpose The main purpose of the merger is to The main purpose of the

reduce competition and to boost acquisition is to acquire instant

operational competence. growth.

9. Example The merger of Max HealthCare with Acquisition of Jaguar Land Rover

Radiant Life. by the Tata Motors Private Ltd.

MERGER PROCEDURE

1. Examination of object clauses

2. Intimation to stock exchanges
3. Approval of the draft merger proposal by the respective boards
4. Application to high courts
5. Dispatch of notice to share holders and creditors
6. Holding of meetings of share holders and creditors
7. Petition to High Court for confirmation and passing of HC orders
8. Filing the order with the registrar
9. Transfer of assets and liabilities
10. Issue of shares and debentures

Legal Procedure For Bringing About Merger of Companies

(1)Examination of object clauses:
The MOA of both the companies should be examined to check the power to amalgamate is available.

Further, the object clause of the merging company should permit it to carry on the business of the
merged company.

If such clauses do not exist, necessary approvals of the share holders, board of directors, and company
law board are required.
(2) Intimation to stock exchanges:
The stock exchanges where merging and merged companies are listed should be informed about the
merger proposal. From time to time, copies of all notices, resolutions, and orders should be mailed to
the concerned stock exchanges.

(3) Approval of the draft merger proposal by the respective boards:

The draft merger proposal should be approved by the respective BOD’s.

The board of each company should pass a resolution authorizing its directors/executives to pursue
the matter further.

(4) Application to high courts:

Once the drafts of merger proposal is approved by the respective boards, each company should make
an application to the high court of the state where its registered office is situated

so that it can convene the meetings of share holders and creditors for passing the merger proposal.

(5) Dispatch of notice to share holders and creditors:

In order to convene the meetings of share holders and creditors, a notice and an explanatory
statement of the meeting, as approved by the high court, should be dispatched by each company to its
shareholders and creditors so that they get 21 days advance intimation.

The notice of the meeting should also be published in 2 newspapers.

(6) Holding of meetings of share holders and creditors:

A meeting of share holders should be held by each company for passing the scheme of mergers at least
75% of shareholders who vote either in person or by proxy must approve the scheme of merger.

Same applies to creditors also.

(7) Petition to High Court for confirmation and passing of HC orders:

Once the mergers scheme is passed by the share holders and creditors, the companies involved in the
merger should present a petition to the HC for confirming the scheme of merger.

A notice about the same has to be published in 2 newspapers.

(8) Filing the order with the registrar:

Registrar of companies is the centralised body for all the companies registered.

Certified true copies of the high court order must be filed with the registrar of companies within the
time limit specified by the court.

(9) Transfer of assets and liabilities:

After the final orders have been passed by both the HC’s, all the assets and liabilities of the merged
company will have to be transferred to the merging company.

Target companies assets and liabilities will be transferred to acquiring companies

(10) Issue of shares and debentures:

The merging company, after fulfilling the provisions of the law, should issue shares and debentures of
the merging company.
The new shares and debentures so issued will then be listed on the stock exchange.

TYPE OF MERGERS

1. HORIZONTAL
2. VERTICAL
3. CONGLOMERATE
4. CONGENERIC

The financial methods employed by the companies to execute the business transaction are referred to as
payment methods of mergers and acquisitions. The merger and acquisition payment methods include:
CashPayment

This payment method is widely employed across all business sectors due to its ease and transparency. For
businesses, paying in cash upfront seems more dependable and simple than other payment methods. Although
cash is the most practical form of payment, it becomes obsolete when transaction costs are high.

SecurityPayment

The purchasing firm issues fresh securities under a security payment method in order to purchase the assets
or stock of the target companies. It contains the following forms:
Share Payment: The purchasing company issues new shares in exchange for this payment in order to purchase
the stock or assets of the target companies. The most popular of which is the share exchange, in which the
buying company pays the target entity directly in shares to purchase its stock and assets.
Bond Payment: With such payment, the acquiring companies issue a corporate bond to buy the assets of shares
of the target companies. As a payment method for Mergers and Acquisitions, this category of bond has a huge
credit rating and negotiability.
LeveragedBuyout

It refers to a method of payment whereby acquiring companies raise debt in order to fund capital during mergers
and acquisitions. In this method, acquiring companies use the target companies’ expected operating cash flow
as a pledge to expand debt in order to raise capital from investors, and they subsequently pay cash to acquire
the target companies’ ownership. Leveraged buyout results in a greater capital cost as compared to the bond
payment because bank loans have a much higher interest rate than cooperative bonds.

VALUATION OF MERGERS AND ACQUISITION

Importance of valuation in M&A

Irrespective of the purpose for which a merger or acquisition takes place, their main aim is
to help entities expand their size and value in the market. After a merger or acquisition
takes place, the value of the entities involved equals the sum of their independent values.
However, it often happens that mergers and acquisitions tend to have a negative impact on
the entities involved due to incorrect estimation of entity value. Though there are precise
approaches and methodologies to estimate the value of an entity but when they are put to
practical use it becomes a complex process. Therefore, it becomes significantly important to
determine the right value of entities in mergers and acquisitions with the right approach and
methods to avoid financial downfalls.
Need for valuation
During mergers and acquisitions, the intended purpose of the valuation is identified so that
the calculated value matches with the required purpose. Few instances where the valuation
is done based on the purpose are:

• Corporate Restructuring;
• Calculating the consideration for the sale of business or acquisition;
• Liquidation of the company;
• Calculating the consideration for sale or purchase of equity stake;
• During family separation, there is a need to calculate the value of assets and
businesses owned by such a family;
• The portfolio value of investments is calculated by the virtue of Private Equity
Funds or Venture Funds;
• Purchase or sale of intangible assets such as rights, patents, trademarks,
copyrights, brands, etc;.
• For the purpose of getting listed on the Stock Exchange, calculating the fair value
of the shares is required;
• Calculating the fair value of shares for providing Employee Stock Ownership Plan
following the Employee Stock Ownership Plan guidelines.

Indian laws impacting valuation

Valuation of entities is subject to the following Indian laws, authorities and actions –

• Companies Act, 2013

• Foreign Exchange Management Act, 1999
• Securities Exchange Board of India and Stock Exchanges
• Competition Commission of India
• Stamp Duty
• Income Tax
• Takeover Regulations
• Indirect Tax
• Accounting Standards

Valuation approaches
To determine the value of a business, there are three different approaches i.e, Asset-based
approach, Income approach and Market approach. Either a single approach or a combination
of the three approaches can be employed while determining the value.
Asset-Based Approach
This approach states that the buyer shall not pay more value for the purchase of an asset
where a similar asset of the same value could be bought. The asset-based approach focuses
on the net asset value of an entity. The net asset value is determined by subtracting total
liabilities from total assets. The said approach is employed for valuation in a going concern
company as well as the company on a liquidation basis. This approach is also employed
when a target company has tangible assets.

Income Approach
The income approach states that the value of the acquisition candidate must be worth the
future benefit of its revenue channels, discounted to the current value post reflecting the
investment risk and time value of money. Both net cash flow and dividends form income
inflows while determining the value of the acquisition candidate. This estimation is known as
economic income. Capitalization rate or discount rate is applied to the economic income for
valuation. While the capitalization rate represents a particular period’s income channel, the
discount rate represents the total return an investor expects to get based on the invested
amount.

Market Approach
The market approach states that during the process of valuation the valuator must
thoroughly search for such companies in the market that are similar to the acquisition
candidate. A minority interest market value is provided in the market approach. The market
approach helps the valuator to adjust multiple results acquired from a minority interest
value to a control interest value. The relationship between the book value or an identified
revenue stream and the gross purchase price is represented by the multiplier.

Methods of Valuation
Based on the above-mentioned approaches there are specific methods for estimating the
value of an acquisition candidate.

Net Asset Method

This method comes under the asset-based approach. It determines the fair market value of
every asset and liability on the date of valuation. In this method, the equity value is
estimated based on adjusted assets minus the liabilities adjusted. Usually, the
underperforming assets are brought by the acquiring company through this method.

Excess earnings treasury method

This method comes under the asset and income-based approach. It differentiates among
intangible assets and adjusted net tangible assets. The estimation of intangible value is
done by capitalizing those earnings of the company that are more than the earnings relating
to a reasonable return on the fair market value of its net assets. The total value of the
company is calculated by combining the tangible net adjusted assets at fair market value
with the intangible value as estimated above. The excess earnings treasury method makes
use of the average returns on equity from similar companies or industry averages to
estimate a reasonable return while determining the right capitalization rate.

Excess earnings reasonable rate method

This method comes under the asset and income-based approach. In this method, a
reasonable rate of return is applied to the adjusted net assets. The estimation of intangible
value is done by capitalizing those earnings of the company that are more than the earnings
relating to a reasonable return on the fair market value of its net assets. To estimate the
total value of the company, the intangible value is combined with the fair market value of
the adjusted net assets.

Capitalization of earnings method

This method comes under the income approach. This method is used to determine the value
of a profitable company when the investor aims to facilitate an annual return on investment
over reasonable compensation of the owner. The future estimated earnings are determined
and divided by a capitalization rate to obtain a value. In this method, no separation is done
between the tangible and intangible assets. This method is not appropriate for capital-
intensive companies.

Discounted Cash Flow (DCF) method

This method comes under the income approach. It is also known as the Discounted Earning
Method (DEM). In this method, to determine the value of a company, its earnings are
defined. The earnings here may refer to post-tax cash flow and cash flow from operations.
In this method, the capitalization rate is used. The assumption in this method is that the
total value of the company is estimated by determining the current value of the projected
future earning and the current value of the terminal value. The valuator in this method must
be satisfied that the projected earnings are backed by the assumptions of the management
and constitute reasonable future earnings.

Price/Earnings ratio method

This method is a combination of income and market approach. In this method, market
comparisons are used to estimate the multiple to be applied against post-tax earnings. A
weighted average price/earnings ratio of similar publicly traded companies helps in
capitalizing the future estimated net income (post-tax). The main problem in making market
comparisons is finding publicly traded companies that are similar to the targeted company.
This method is generally used to determine the value of large and diversified companies.

Dividend-paying capacity method

This method is a combination of income and market approach. It is usually employed to
determine the value of large companies that pay dividends. A five-year weighted average of
dividend yields of five similar companies helps in capitalizing the future estimated dividend
to be paid or that can be paid. When the valuation of larger and diversified companies is
required, this method is put to use.

Guideline method
This method is based on the market approach. It draws a qualitative and quantitative
comparison between the targeted company and the public companies (guideline companies)
that are similar to it. The evaluator must be satisfied that the public companies and the
target company carry out similar functions, have similar products and services and are
based in the same geographic location. The required adjustments to the financial
statements of the public companies held for comparison must be made by the valuator.

Direct market data method

This method is based on the market approach. It uses the sales transactions of an entity to
compare with the acquisition candidate. However, it is not an easy task to compare the
sales transaction as they often get consummated due to favourable purchase terms,
acquired synergies, etc. Therefore, the valuator is required to adjust the direct market data
used for a premium or discount.

Rule of thumb method

This method is based on the market approach. It is derived from the direct market data
method. A formula is determined based on industry-wide experiences in the marketplace.
This formula is used to ascertain the relations between the sales price and the operational
unit of measurement regarding a particular industry. The method does not include risks that
have the materialistic capability to affect the value. However, this method provides an
effective test to check whether the value estimates determined from other methods are
appropriate or not.