WHAT IS CORPORATE RESTRUCTURING

Corporate restructure means actions taken to expand or contract

a firm's basic operations or fundamentally change its asset or
financial structure.

Corporate restructuring refers to a broad array of activities that expand or

contract a firm’s operations or substantially modify its financial structure or
bring about a significant change in its organizational structure and internal
functioning.
 Need for restructuring

1. To respond to particular business need

2. To make organization more competent

3. To make it as counter strategies

4. Growth & globalization

 FORMS OF CORPORATE RESTRUCTURING
Expansion

· Mergers & acquisition

· Joint venture

Contraction
· Demerger
· Spin- offs
· Split-offs
· Split-ups
Corporate · Divestures
Restructuring · Equity carve outs

Changes in Ownership Structure

· LBO
· Going Private
 WHAT IS MERGER?

Two or more companies combine into one

company
Ono or more companies may merge with
an existing company or
they may merge to form a new company
There is complete amalgamation of the assets
and liabilities as well as shareholder's interests
and businesses of the merging companies
 WHAT IS AMALGAMATION?

Laws in India use the term Amalgamation

for Merger.
 WHAT IS AMALGAMATION?

Amalgamation is the merger of two or more

companies to form a new company in such a way
that all assets and liabilities of the amalgamated
company and shareholders holding the shares in
the amalgamation company or companies
become shareholders of the amalgamated
company.
 TYPES OF MERGER OR AMALGAMATION

Merger through absorption

Merger through consolidation
 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.
Example: Absorption of Tata Fertilizers Ltd (TFL)
by Tata Chemicals Ltd (TCL).
 Mergers
STRUCTURE 1

 A = Amalgamating Company: Ceases to Exist

 B = Amalgamated Company
 B receives all of A’s assets and liabilities
 Shareholders of A receive shares in B and maybe other benefits
like debentures, cash

Transfer assets and liabilities

A B
 CONSOLIDATION

Consolidation is a combination of two or more

companies into a new company. In this form of
merger, all companies are legally dissolved and
a new entity is created. The acquired company
transfers its assets, liabilities and shares to the
new company for cash ore exchange of shares.
 Mergers
STRUCTURE 2

 A, B and C = Amalgamating Companies: Cease to exist

 D = Amalgamated Company: may or may not have existed
before Merger
 All assets and liabilities of A, B and C transferred to D
 Shareholders in A,B and C get shares in D.

B D

C
 CONSOLIDATION

Example:
Consolidation of Hindustan Computers Ltd,
Hindustan Instruments Ltd, Indian Software
Company Ltd, and Indian Reprographics Ltd in
1986 to an entirely new company called HCL
Ltd.
 ACQUISITION

A corporate action in which a company buys most, if not

all, of the target company's ownership stakes in order to
assume control of the target firm. Acquisitions are often
made as part of a company's growth strategy whereby it
is more beneficial to take over an existing firm's
operations and niche compared to expanding on its own.
Acquisitions are often paid in cash, the acquiring
company's stock or a combination of both.

Acquisition is an act of acquiring effective control over

assets or management of a company by another
company without any combination of businesses or
companies.
 MERGER AND ACQUISITION

In merger, the acquiring company takes over the

ownership of other company and combines its
operations with its one operations.
But in acquisition, two or more companies may
remain independent, separate legal entities, but
there may be change in control of companies.
 TAKEOVER

Takeover occurs when the acquiring firm takes

over the control of the target firm.
 TAKEOVER VS ACQUISITION

When acquisition is a forced or unwilling, it is

called a takeover. In an unwilling acquisition, the
management of ‘target’ company would oppose
a move of being taken over.
When management of acquiring and target
companies mutually and willingly agree over the
takeover, it is called acquisition or friendly
takeover.
Different methods of hostile take over:
The two primary methods of conducting a hostile
takeover are the
 tender offer and
 the proxy fight.
 Tender Offer

A tender offer is a public bid for a large chunk of the

target’s stock at a fixed price, usually higher than the
current market value of the stock. The purchaser uses
a premium price to encourage the shareholders to sell
their shares. The offer has a time limit, and it may
have other provisions that the target company must
abide by if shareholders accept the offer. This method
is currently employed by Microsoft as they offered
$44.6 billion which Yahoo hasn’t accepted. The dead
line has already passed.
In a proxy fight, the buyer doesn’t attempt to buy
stock. Instead, they try to convince the
shareholders to vote out current management or
the current board of directors in favor of a team
that will approve the takeover
 EXAMPLE

Takeover
The most famous recent proxy fight was
Hewlett-Packard’s takeover of Compaq. The
deal was valued at $25 billion.
Acquisition
Shaw Wallace, Dunlop, Mather and Platt and
Hindustan Dorr Oliver by Chhabrias.
 CLASSIFCATION OF MERGER

Merger can be of different categories:

Horizontal Merger
Vertical Merger
Conglomerate Merger
 CLASSIFCATION OF MERGER

Horizontal
A merger in which two firms in the same industry
combine Often in an attempt to achieve
economies of scale.
• Horizontal Integration – Buying a competitor
 Acquisition of equity stake in IBP by IOC
 CLASSIFCATION OF MERGER

Motives of Horizontal Merger

1. Elimination or reduction in competition
2. Putting an end to price cutting
3. Economies of scale in production
 CLASSIFCATION OF MERGER

 Vertical
A merger in which one firm acquires a supplier or
another firm that is closer to its existing customers often
in an attempt to control supply or distribution channels.
 Vertical Integration : Internalization of crucial forward or
backward activities
Vertical Forward Integration – Buying a customer
Indian Rayon’s acquisition of Madura Garments
along with brand rights

Vertical Backward Integration – Buying a supplier

IBM’s acquisition of Daksh
 CLASSIFICATION OF MERGER

Motives of Vertical Merger

1. Low buying cost of materials
2. Lower distribution costs
3. Assured supplies and market
 CLASSIFCATION OF MERGER

Conglomerate
A merger in which two firms in unrelated
businesses combine Purpose is often to
diversify’’ the company by combining
uncorrelated assets and income streams
 CLASSIFCATION OF MERGER

Product Extension: New product in Present territory

P&G acquires Gillette to expand its product
offering in the household sector and smooth out
fluctuations in earning
Free-form Diversification: New product & New territories
Indian Rayon’s acquisition of PSI Data Systems
Motives for Conglomerate Merger
-Diversification of risk
 Classification of Mergers

Cross-border (International) M&As

A merger or acquisition involving a Foreign firm
either the acquiring or target company.
 TATA – Tetley Deal

 TATA tea acquired Tetley tea in February 29, 2000

 Value of deal:$431.3 million

Acquisitions 11/04/2021 30
 Tata Tea Limited

 Owned by India’s Tata group

 Set up in 1964 as a joint venture with UK based James
Finlay and Company
 World’s second largest manufacturer and distributor of
tea
 Largest tea brand in India
 Operations in 40 countries around the world
 It is one of India's first multinational companies
 Tetley Tea
 Found in 1822 by Joseph and Edward Tetley

 largest tea company in the United Kingdom

 Inventor of the tea bag

 Tetley blends, packs, markets and distributes tea products

Acquisitions 11/04/2021 32
 Ranbaxy – Daiichi deal

 Daiichi-Sankyo acquired 69.8% stake in Ranbaxy on

12th nov, 2008

 Value of deal : $ 4.6 billion

 Deal scheduled to be completed by March 2009

 M. Singh to remain C.E.O. and M.D. of the company

33
Acquisitions 11/04/2021
 Daiichi Sankyo
 Second largest pharmaceutical company in Japan

 Net sales in the financial year ended March 2008: $8.2 billion

 PAT in the financial year ended March 2008: $915 million

 Presence in 21 countries and employees 18000 people

 Makes prescription drugs, diagnostics, radiopharmaceuticals

And over the counter drugs

34
Acquisitions 11/04/2021
 Ranbaxy

India’s leading pharmaceutical company

 Among the top 10 global generic companies

 Global sales in 2007: $1.6 billion

 PAT in 2007: $190 million

Footprints in 49 countries and manufacturing facilities in 11

 Employees 12000 people including 1200 scientists

35
Acquisitions 11/04/2021
 History of Mergers and Acquisitions

Tracing back to history, merger and acquisitions

have evolved in five stages and each of these
are discussed here.
As seen from past experience mergers and
acquisitions are triggered by economic factors.
The macroeconomic environment, which
includes the growth in GDP, interest rates and
monetary policies play a key role in designing
the process of mergers or acquisitions between
companies or organizations.
 First Wave Mergers

 The first wave mergers commenced from 1897

to 1904.
 During this phase merger occurred between
companies, which enjoyed monopoly over their
lines of production like railroads, electricity etc.
 The first wave mergers that occurred during the
aforesaid time period were mostly horizontal
mergers that took place between heavy
manufacturing industries.
 End Of 1st Wave Merger

Majority of the mergers that were conceived

during the 1st phase ended in failure since they
could not achieve the desired efficiency.
The failure was fuelled by the slowdown of the
economy in 1903 followed by the stock market
crash of 1904. The legal framework was not
supportive either.
 Second Wave Mergers

 The second wave mergers that took place from 1916 to 1929
focused on the mergers between oligopolies, rather than
monopolies as in the previous phase.
 The economic boom that followed the post world war I gave
rise to these mergers.
 Technological developments like the development of railroads
and transportation by motor vehicles provided the necessary
infrastructure for such mergers or acquisitions to take place.
 Cont…

 The 2nd wave mergers that took place were

mainly horizontal or conglomerate in nature.
 The industries that went for merger during this
phase were producers of primary metals, food
products, petroleum products, transportation
equipments and chemicals.
 End Of 2nd Wave Mergers

The 2nd wave mergers ended with the stock

market crash in 1929 and the great depression.
The tax relief that was provided inspired mergers
in the 1940s.
 Third Wave Mergers

 The mergers that took place during this period

(1965-69) were mainly conglomerate mergers.
 Mergers were inspired by high stock prices,
interest rates.
 Mergers were financed from equities; the
investment banks no longer played an important
role.
 End Of The 3rd Wave Merger

 The 3rd wave merger ended with the plan of the

Attorney General to split conglomerates in 1968.
 It was also due to the poor performance of the
conglomerates.
 Fourth Wave Merger

 The 4th wave merger that started from 1981 and ended
by 1989 was characterized by acquisition targets that
were much larger in size as compared to the 3rd wave
mergers.
 Mergers took place between the oil and gas industries,
pharmaceutical industries, banking and airline industries.
 Foreign takeovers became common with most of them
being hostile takeovers.
 The 4th Wave mergers ended with Financial Institutions
Reform.
 Fifth Wave Merger

 The 5th Wave Merger (1992-2000) was inspired by

globalization, stock market boom and deregulation.
 The 5th Wave Merger took place mainly in the banking
and telecommunications industries.
 They were mostly equity financed rather than debt
financed. The mergers were driven long term rather than
short term profit motives.
 The 5th Wave Merger ended with the burst in the stock
market bubble.
 Cont…

Hence we may conclude that the evolution of

mergers and acquisitions has been long drawn.
Many economic factors have contributed its
development. There are several other factors
that have impeded their growth.
 BENEFITS OF MERGER

Increased Market Power

Acquisition intended to reduce the competitive balance of
the industry

Overcome Barriers to Entry

Acquisitions overcome costly barriers to entry which may make
“start-ups” economically unattractive
 BENEFITS OF MERGER

Increased Speed to Market

Closely related to Barriers to Entry, allows market entry
in a more timely fashion

Diversification
Quick way to move into businesses when firm currently lacks
experience and depth in industry
 BENEFITS OF MERGER

Lower cost and risk of new product

development
Buying established business reduces risk of
start up ventures.
Economies of scale
They can make savings from being bigger this is
known as gaining ‘economies of scale
 Problems

 Incompatibility of partners:
Alliance between two strong companies is a
safer but than between two weak companies.
Many strong companies actually seek small
partners in order to gain control while weal
companies look for stronger companies to bail
them out.
 Problems

Integration Difficulties
Differing financial and control systems can make integration
of firms difficult

Large or Extraordinary Debt

Costly debt can create onerous burden on cash outflows
 Problems

Overly Diversified
Acquirer doesn’t have expertise required to manage
unrelated businesses

Too Large
Large bureaucracy reduces innovation and flexibility
The top 10 acquisitions made by Indian companies worldwide:

Acquirer Target Company Country targeted Deal value ($ Industry

ml)

Tata Steel Corus Group plc UK 12,000 Steel

Hindalco Novelis Canada 5,982 Steel
Videocon Daewoo Electronics Corp. Korea 729 Electronics

Dr. Reddy's Betapharm Germany 597 Pharmaceutic

Labs al

Suzlon Energy Hansen Group Belgium 565 Energy

HPCL Kenya Petroleum Refinery Kenya 500 Oil and Gas

Ltd.
Ranbaxy Labs Terapia SA Romania 324 Pharmaceutic
al
Tata Steel Natsteel Singapore 293 Steel
Videocon Thomson SA France 290 Electronics
VSNL Teleglobe Canada 239 Telecom
 B. JOINT VENTURE

Joint ventures are new enterprises owned by two or

more participants. They are typically formed for
special purposes for a limited duration.

It is a contract to work together for a period of time

each participant expects to gain from the activity but
also must make a contribution.
 Example for JV
PARTNERS Product Strategic Objective

GM & TOYOTA Autos Cut-cost

 Reasons for forming a joint venture

 Build on company's strengths

 Spreading costs and risks
 Improving access to financial resources
 Economies of scale and advantages of size
 Access to new technologies and customers
 Access to innovative managerial practices
 DEMERGERS

A demerger results in the transfer by a company of one or more of

its undertakings to another company. The company whose
undertaking is transferred is called the demerged company and the
company (or the companies) to which the undertaking is
transferred is referred to as the resulting company.
A demerger may take the form of
• A spin-off or
• A split-up.
• A split off
 DEMERGERS STRUCTURE

 Demergers are one type of spin-offs: (under/section 391)

 A = Demerging Company
 B = Resulting Company: may or may not have existed earlier
 A transfers undertaking to B
 B issues shares to shareholders of A

Transfers undertaking Y
X Y Y

Company A Company B
Shareholders of Issues shares
A
 SPIN OFF’S

 Spin-off is a transaction in which a company

distributes on a pro-rata basis all the shares it owns
in a subsidiary to its own shareholders.
 In a spin-off an undertaking or division of a company
is spun off into an independent company.

 After the spin-off, the parent company and the spun

off company are separate corporate entities.

Ex: AT &T
 SPLIT – OFF

 A transaction in which some, but not all, parent co.,

shareholders receive shares in a subsidiary in return for
relinquishing their parent co., share.

In other words……………….

Some parent company shareholders receive the subsidiary’s

shares in return for which they must give up their parent
company shares.

Features
 A portion of existing shareholders receives stock in a
subsidiary in exchange for parent company stock.
 SPLIT - UP
In a split-up, a company is split up into two or more independent
companies.

As a sequel, the parent company disappears as a corporate entity

and in its place two or more separate companies emerge.

In other words a transaction in which a co., spins off all of it

subsidiaries to its shareholders & ceases to exist.

Features
 The entire firm is broken up in a series of spin-offs.
 The parent no longer exists and
 Only the new offspring survive.
 DIVESTITURES
• Represent the sale of a segment of a company (assets, a
product line, a subsidiary) to a 3rd party for cash and or
securities
Ex: VSNL
Features:
 It is used as a means of eliminating or separating:
a) Product line
b) Division
c) Subsidiary.
 It represents the sale of a segment of a co., to a 3rd
party.
 The assets are revalued, by the sale, for purpose of
future depreciation by the buyer.
 MOTIVES FOR DIVESTITURES

 Change of focus or corporate strategy

 Unit unprofitable can mistake

 Sale to pay off leveraged finance

 Need cash

 Good price.
 Equity carve-out

 A transaction in which a parent firm offers some of a

subsidiaries common stock to the general public, to bring in a
cash infusion to the parent without loss of control.

 In other words……………………..
Equity carve outs are those in which some of a subsidiaries
shares are offered for a sale to the general public, bringing an
infusion of cash to the parent firm without loss of control.
 Difference between Spin-off and Equity carve outs:

1. In a spin off , distribution is made pro rata to shareholders of

the parent company as a dividend, a form of non cash
payment to shareholders

In equity carve out , stock of subsidiary is sold to the public

for cash which is received by parent co

2. In a spin off , parent firm no longer has control over

subsidiary assets

In equity carve out, parent sells only a minority interest in

subsidiary and retains control
LAWS GOVERNING M & A
 Regulations for Mergers & Acquisitions

Mergers and acquisitions are regulated under various laws in

India. The objective of the laws is to make these deals
transparent and protect the interest of all shareholders. They
are regulated through the provisions of :-
The Companies Act, 1956
The Act lays down the legal procedures for mergers or
acquisitions :
• Permission for merger:-
Two or more companies can amalgamate only when the
amalgamation is permitted under their memorandum of
association. Also, the acquiring company should have the
permission in its object clause to carry on the business of
the acquired company. In the absence of these provisions in
the memorandum of association, it is necessary to seek the
permission of the shareholders, board of directors and the
Company Law Board before affecting the merger.
• Information to the stock exchange:- The acquiring and
the acquired companies should inform the stock exchanges
(where they are listed) about the merger.
• Approval of board of directors:- The board of directors
of the individual companies should approve the draft
proposal for amalgamation and authorize the managements
of the companies to further pursue the proposal.
• Application in the High Court:- An application for
approving the draft amalgamation proposal duly approved
by the board of directors of the individual companies
should be made to the High Court.
 • Shareholders' and creditors' meetings:- The individual
companies should hold separate meetings of their shareholders
and creditors for approving the amalgamation scheme. At least,
75 percent of shareholders and creditors in separate meeting,
voting in person or by proxy, must accord their approval to the
scheme.
• Disclosure of all material information to the creditors and members
whose meeting has been called
(a)Requires that with every notice calling the meeting, which is sent to
the creditors or members, a statement needs to be sent setting forth
the details of the arrangement and explaining its effect and in
particular stating any material interests of the directors.
(b)Requires that in case the notice is given by way of an advertisement
and not by sending individual notices, the advertisement has to
either include the above mentioned statement or include the name
and address of the place where such statement will be available to
the creditors or members as the case may be.
• Sanction by the High Court:- After the approval of the
shareholders and creditors, on the petitions of the companies, the
High Court will pass an order, sanctioning the amalgamation
scheme after it is satisfied that the scheme is fair and reasonable.
The date of the court's hearing will be published in two
newspapers, and also, the regional director of the Company Law
Board will be intimated.
• Notice to the Central Government:
The High Court is required to give notice to the Central
Government of every application made to it and take into
consideration the representations, if any, made by the Central
Government.
• Filing of the Court order:- After the Court order, its certified true
copies will be filed with the Registrar of Companies.
• Effective date and appointed date:
The order passed by the High Court approving the amalgamation or
demerger does not become effective unless filed by every company
involved in the amalgamation or demerger with the Registrar of
Companies (ROC). It is mandatory for every such company to file
the same with the ROC within thirty days of the High Court
passing the same. The date on which the order is so filed is called
the Effective date.
On the other hand, while formulating the scheme of amalgamation
or demerger, the companies are required to specify an appointed
date, i.e., the date from which the aseets and liabilities shall be
transferred from the books of the transferor company to the books
of the transferee company.
• Transfer of assets and liabilities:- The assets and
liabilities of the acquired company will be transferred to
the acquiring company in accordance with the approved
scheme, with effect from the specified date.
• Payment by cash or securities:- As per the proposal,
the acquiring company will exchange shares and
debentures and/or cash for the shares and debentures of
the acquired company.
 Scheme of Merger/Amalgamation
Whenever two/more companies agree to merge with
each other, they have to prepare a scheme of
amalgamation. The acquiring company should
prepare the scheme in consultation with the
merchant bankers/financial institutions.
(i) Contents of the scheme
(ii) Approvals for the scheme
The main contents of a model scheme are as follow:
1.) Description of the transfer, the transferee company
and the business of the transferor.
2.) Their authorized, issued and subscribed/paid up .
Capital.
3.) Basis of the scheme: main terms of the scheme, in self-contained
paragraphs, on the recommendation of the valuation report,
covering transfer of assets/liabilities, transfer date and so on.
4.) Change of Name, Object clause.
5.) Management: Board of directors, their number and participation of
the transferee company’s directors on the board.
6.) Application under sections 391 and 394 of the companies act, 1956
to obtain High Court approval
7.) Expenses of Amalgamation
8.) Effective date and appointed date of Amalgamation
 Approvals for the Scheme:

The scheme of merger/amalgamation is governed

by the provisions of Sections 391-394 of the
Companies Act. The legal process required
approval to the schemes, as detailed below:
(a)Approval from shareholders
(b)Approval from Creditors/Financial
Institutions/Banks
(c)Approval from Respective High Court
(a) Approval from Shareholders
In terms of Section 391, shareholders of both the amalgamating and
the amalgamated companies should hold their respective meetings
under the directions of the respective high courts and consider the
scheme of amalgamation. A separate meeting of both preference and
equity shareholders should be convened for this purpose. Further, in
terms of section 81(A), the shareholders of the amalgamated company
are required to pass a special resolution for the issue of shares to the
shareholders of the amalgamating company, in amalgamation.
(b) Approval from Creditors
Approvals are required from the creditors, to the scheme of
amalgamation in terms of their respective agreements/arrangements
with each of the amalgamating and the amalgamated companies.
(c) Approvals from Respective High Court
Approval of the respective High Court scheme is required to confirm the
amalgamation. The court issues orders for dissolving the amalgamating
company, without winding up, on receipt of reports from the official
liquidator and the regional director, Company Law Board, stating that
the affairs of the amalgamating company have not been conducted in a
manner prejudicial to the interests of its members or to public interest.
 Step-wise procedure of Scheme of Amalgamation

1.) Object Clause:

The first step is to examine the objects clauses of
the memorandum of association of the transferor
and the transferee companies so as to ascertain
whether the power of amalgamation exists or not.
The object clause of the transferee company should
allow for carrying on the business of the transferor
company. If it is not so, it is necessary to amend the
objects clause.
2.) Preparation:
Preparation of scheme of amalgamation on the lines given
below:
(i) Meetings/Information
(a)Holding of meetings of the Board of Directors of both the
transferor and the transferee companies
-to decide the appointed date and the effective date
-to approve the scheme of amalgamation and exchange
ratio
-to authorize directors/officers to make applications to the
appropriate high court for necessary action
(b) Inform the stock exchange concerned about the proposed
amalgamation immediately after the board meetings
(c) The shareholders and other members of the companies should also
be informed through a press release.
(ii) Application for Amalgamation
An application for amalgamation can be
submitted by the company, members or even
any of the creditors. It is essential that the
company should authorize the directors or other
officers to make an application to the
appropriate high court and take necessary
action as may be required from time to time.
(iii) Procedure for application to the High Court:
An application, supported by an affidavit, for an order
convening a meeting of creditors and members or any class
of them. A copy of the proposed compromise or arrangement
should be annexed to the affidavit.
On receipt of the application by the high court, a hearing
takes place and after the hearing the court may order a
meeting of the members or it may give such directions as it
may think necessary. But it is incumbent on the court to be
satisfied that the scheme if genuine, bona fide and largely in
the interest of company and its members.
-On not being satisfied with the scheme, the court
may not even order the calling of meeting of
creditors and members. The court can’t sanction a
scheme that has not been approved by the creditors
even if the court considers the scheme reasonable
and beneficial to the creditors.
(iv) Holding of Meeting
The next step is to hold separate meetings of the
shareholders and creditors of the company to seek
their approval of the scheme. The resolution
approving the scheme may be passed by voting in
person or by proxy. At least three fourths of the
members or class of members or creditors must
vote in favor of the resolution approving the scheme
of amalgamation.
 -Directions for meeting:
For the purpose of convening meetings, the court may
give directions as it may deem fit regarding the following:
(a)Determining the class or classes of creditors and/or members
whose meeting have to be held for considering the proposed
compromise or arrangement
(b)Fixing the time and place of such meetings
(c)Appointing a chairman or chairmen for the meetings to be
held as the case may be
(d)Fixing the procedure to be followed at the meetings, including
voting by proxy
(e) Notice to be given of the meeting and the advertisement of
such notice
(f) The time within which the chairman of the meeting is to report
to the court the results of the meeting and such other maters
as the court may deem necessary
 Notice of the meeting:
Notice of the meeting should be
(1)Sent to the members/creditors
(2)Sent to them individually by the chairman appointed for the
meeting or if the court so directs by the company or any
other person as the court may direct, by post, under
certificate of posting, to the last known address at least 21
clear days before the date of the meeting
(3)Accompanied by a copy of the proposed scheme of
compromise or arrangement and of the statement required
to be furnished under section 393.
 Approval of the registrar : approval of the registrar of
the appropriate high court should be obtained in
respect of the notice in accordance with the
directions issued by the court.
 Advertisement of the notice: The notice of the
meeting must be advertised in the prescribed form
in such paper as the court may direct, not less than
21 clear days before the date fixed for the meeting.
(v) Report of the Chairman to the court:
The chairman of the meeting must, within the
time fixed by the court or where no time is fixed
with 7 days of the date of the meeting, report the
result of the meeting to the court
(vi) Presenting a petition before the court
After the proposed scheme is agreed to with or
without modification , the company must within
seven days of the filing of the report by the
chairman, present a petition to the court for
confirmation of the compromise or arrangement.
(viii) Certificate
A certified copy of the order of the court
dissolving the amalgamating company or giving
approval to the scheme of merger should be
filed with the concerned Registrar of Companies
within 30 days of the date of the court’s order
(IX) Court Order:
A copy of the order of the court should be to
attached to the memorandum and articles of
association of the transferee company. As soon
as the scheme of amalgamation has become
effective, the members should be intimated
through the press. Government authorities,
banks, creditors, customers and others should
also be informed.
 Takeover Code

History
Basically speaking takeover is nothing but the acquisition of shares
of one company by another company. The laws relating to takeovers
in India where not very organized until the year 1994, calling it
unorganized would rather be an understatement because laws
relating to takeovers in India until 1994 hardly existed.
1.) Except for certain provisions of the Companies Act, 1956
( Section 372, regarding intercorporate loans by companies and
Section 395, regarding  acquisition of the shares of dissentient
shareholders) there was hardly anything solid enough to be called
as organized takeover laws.
2.) The guidelines of the Securities and Exchange board of India
(Substantial acquisition of shares and takeover) 1994 was a maiden
Indian attempt towards an organized set of laws for regulating
takeovers in India.
The need for changes in the regulation was felt just two
years after its inception. A need was certain changes in
the regulation had been felt and so a committee under
the chairmanship of Justice P.N Bhagwati was
constituted to review the regulations and suggest the
necessary changes required under the act. The
regulations were amended in 1997 and they finally were
implementation.
Since then the regulations have been known as,
Securities and  Exchange Board of India(Substantial
Acquisition of Shares and Takeover)Guidelines, 1997 or
TAKEOVER CODE. Since then many amendments have
been made to the regulations.  
The objective of the Takeover code is to regulate
in an organized manner the substantial
acquisition of shares and takeovers of a
company.
Meaning of substantial quantity of shares or voting rights:
The said Regulations have discussed this aspect of
‘substantial quantity of shares or voting rights’ separately
for two different purposes:
(I) For the purpose of disclosures to be made by acquirer

(1) 5% or more shares or voting rights:

A person who, along with ‘persons acting in concert’ (“PAC”), if any, acquires
shares or voting rights (which when taken together with his existing holding)
would entitle him to more than 5% or 10% or 14% shares or voting rights of
target company, is required to disclose the aggregate of his shareholding or
voting rights to the target company and the Stock Exchanges where the
shares of the target company are traded within 2 days of receipt of
intimation of allotment of shares or acquisition of shares.
2) More than 15% shares or voting rights:
An acquirer who holds more than 15% shares or voting rights of the target
company, shall within 21 days from the financial year ending March 31
make yearly disclosures to the company in respect of his holdings as on the
mentioned date.

The target company is, in turn, required to pass on such information to all
stock exchanges where the shares of target company are listed, within 30
days from the financial year ending March 31 as well as the record date
fixed for the purpose of dividend declaration.
 (II) For the purpose of making an open offer by the acquirer

(1) 15% shares or voting rights:

An acquirer who intends to acquire shares which along with his
existing shareholding would entitle him to more than 15% voting
rights, can acquire such additional shares only after making a public
announcement (“PA”) to acquire at least additional 20% of the voting
capital of the target company from the shareholders through an
open offer.
(2) Creeping limit of 5%:
An acquirer who is having 15% or more but less than 75% of shares
or voting rights of a target company, can consolidate his holding up
to 5% of the voting rights in any financial year ending 31st March.
However, any additional acquisition over and above 5% can be
made only after making a public announcement
(3) Consolidation of holding:
An acquirer who is having 75% shares or voting
rights of target company, can acquire further
shares or voting rights only after making a public
announcement specifying the number of shares
to be acquired through open offer from the
shareholders of a target company
 PUBLIC ANNOUNCEMENT

A Public announcement is generally an announcement

given in the newspapers  by the acquirer, primarily to
disclose his intention to acquire a minimum of 20% of the
voting capital of the target company from the existing
shareholders by means of an open offer Another very
important aspect of the Takeover Code, 1997 is the
mandatory public offer to be made at various important
stages of acquisition as prescribed by the Securities and
Exchange Board of India in the regulations. Under the
Takeover Code, 1997 a minimum threshold limit has
been set, crossing which the acquirer has to make a
compulsory public announcement.
 Regulation 14 of the Code states that a mandatory offer to the public
has to be made within four days from the date of the acquirer
agreeing to acquire the shares of the company. The threshold limit
under the regulations has been set at 15%. This means that as soon
as a person acquires or agrees to acquire 15% or more of the
shares of a company he shall make a mandatory public offer. The
basic purpose of making it compulsory for the acquirer to make a
public announcement was to allow the shareholder to have an exit
opportunity in case of acquisition or stay in the target company. This
can be done by identifying their interest by going through the
additional disclosure made in the letter of offer.
 The acquirer is required to appoint a merchant banker who is
registered with SEBI before making the public offer. As mentioned
above the public offer shall be made within four working days of the
agreement to acquire shares.
 The other disclosures in this announcement would include
 the offer price,
 the number of shares to be acquired from the public,
 the identity of the acquirer,
the purposes of acquisition,
 the future plans of the acquirer, if any, regarding the target company,
 the change in control over the target company, if any
 the procedure to be followed by acquirer in accepting the shares tendered
by the shareholders and the period within which all the formalities pertaining
to the offer would be completed.

The basic objective behind the PA being made is to ensure that the
shareholders of the target company are aware of the exit opportunity
available to them in case of a takeover / substantial acquisition of shares of
the target company. They may, on the basis of the disclosures contained
therein and in the letter of offer, either continue with the target company or
decide to exit from it.
 Procedure to be followed after the Public Announcement
In pursuance of the provisions of Reg. 18 of the said Regulations, the
Acquirer is required to file a draft Offer Document with SEBI within 14 days
of the PA through its Merchant Banker, along with filing fees of Rs.50,000/-
per offer Document (payable by Banker’s Cheque / Demand Draft). Along
with the draft offer document, the Merchant Banker also has to submit a due
diligence certificate as well as certain registration details.
 The filing of the draft offer document is a joint responsibility of both the
Acquirer as well as the Merchant Banker
 Thereafter, the acquirer through its Merchant Banker sends the offer
document as well as the blank acceptance form within 45 days from the
date of PA, to all the shareholders whose names appear in the register of
the company on a particular date.
 The offer remains open for 30 days. The shareholders are required to send
their Share certificate(s) / related documents to the Registrar or Merchant
Banker as specified in the PA and offer document.
 The acquirer is obligated to offer a minimum offer price as is required to be
paid by him to all those shareholders whose shares are accepted under the
offer, within 30 days from the closure of offer
 Exemptions
The following transactions are however exempted
from making an offer and are not required to be
reported to SEBI:
Ø      allotment to underwriter pursuant to any
underwriting agreement;
Ø      Regd. Stock brokers on behalf of clients;
Ø      Public financial institutions on their own account;
Ø     banks & FIs as pledges;
Ø      Acquisition of shares by way of transmission on
succession or by inheritance;
Ø      acquisition of shares by Govt. companies;

 
 Offer Price
The acquirer is required to ensure that all the relevant
parameters are taken into consideration while
determining the offer price and that justification for the
same is disclosed the letter of offer. The relevant
parameters are:
-negotiated price under the agreement which triggered the
open offer.
-price paid by the acquirer for acquisition, if any, including
by way of allotment in a public or rights or preferential
issue during the twenty six week period prior to the date
of public announcement, whichever is higher.
-the average of the weekly high and low of the closing
prices of the share of the target company as quoted on
the stock exchange where the shares of the company
are most frequently traded during the twenty six weeks
or the average of the daily high and low price of the
shares as quoted on the stock exchange where the
shares of the company are more frequently traded during
the two weeks preceding the date of public
announcement, whichever is higher.
-In case the shares of the target company are not
frequently traded then parameters based on the
fundamentals of the company such as return on net
worth of the company, book value per share, EPS etc.
are required to be considered and disclosed.
Acquirers are required to complete the payment of
consideration to shareholders who have accepted the
offer within 30 days from the date of closure of the offer.
In case the delay in payment is on account of non-
receipt of statutory approvals and if the same is not due
to willful default or neglect on part of the acquirer, the
acquirers would be liable to pay interest to the
shareholders for the delayed period in accordance with
Regulations. Acquirer(s) are however not to be made
accountable for postal delays.

If the delay in payment of consideration is not due to the

above reasons, it would be treated as a violation of the
Regulations.
 Cash flow method

The merger should be evaluated as a capital

budgeting decision. The target firm should be
evaluated in terms of its potential to generate
incremental future cash inflows.
Such cash flow should be incremental future
free cash flows likely to accrue due to the
acquisition of the target firm.
 Cash flow method

The following are the steps used to evaluate

merger decisions as per the capital budgeting
approach:
 Cash flow method

(i) Determination of Incremental Projected Free

Cash Flows to the firm(FCFF):
These FCFF should be attributable to the
acquisition of the business of the target firm.
After tax operating earnings
Plus: Non-cash expenses, such as depreciation
Less: Investment in long term assets
Less: Investment in net working capital
 Cash flow method

(ii) Determination of Terminal Value:

The firm is normally acquired as a going concern. It is segments,
namely, during the explicit forecast period and after the forecast
period. Terminal value, is the present value of FCFF, after the
forecast period. Its value can be determined as per:
(a)When FCFF are likely to be constant till infinity
TV = FCFFt+1 / K0
(b) When FCFF are likely to grow (g) at a constant rate:
TV = FCFF (1+g)/ (K0 - g)
(c) When FCFF are likely to decline at a constant rate:
TV = FCFF (1-g) / (K0 + g)
 Cash flow method

(iii) Determination of Appropriate Discount

Rate/Cost of Capital
In the event of the risk complexion of the target firm
matching with the acquired firm, the acquiring firm
can use its own weighted average cost of capital (k 0)
as discount rate. In case the risk complexion of the
acquired firm is different, the appropriate discount
rate is to be computed reflecting the riskiness of the
projected FCFF of the target firm.
 Cash flow method

(iv) Determination of Present Value of FCFF

The present value of FCFF during the explicit
forecast period and of terminal value is
determined by using appropriate discount rate.
 Cash flow method
(v) Determination of Cost of Acquisition
Payment to equity shareholders
Plus: Payment to preference shareholders
Plus: Payment to debenture holders
Plus: Payment of other external liabilities (creditors)
Plus: obligations assumed to be paid in future
Plus: dissolution expenses (to be paid by acquiring firm)
Less: Cash proceeds from sale of assets of target firm
Liabilities Amount Assets Amount
Equity share cap. 400 Cash 10
Retained earnings 100 Debtors 65
10.50% Debentures 200 Inventories 135
Creditors & Other lib. 160 Plant & Equ. 650
860 860
Additional information:
(i) The shareholders of target ltd. Will get 1.5 share in Hypothetical
Ltd. for every 2 shares
 VALUATION BASED ON EARNINGS

 In the earnings based valuation, the PAT (Profit after taxes) is

multiplied by the Price – Earnings ratio to find out the value.
MARKET PRICE PER SHARE = EPS * PE RATIO
 The earnings based valuation can also be made in terms of
earnings yield as follows:-
EARNINGS YIELD = EPS/MPS *100
 Earnings valuation may also be found by capitalizing the total
earnings of the firm as follows:-
VALUE = EARNINGS/ CAPITALIZATION RATE * 100
 MARKET VALUE APPROACH
 This approach is based on the actual market price of
securities settled between the buyer and seller.
 The price of a security in the free market will be its
most appropriate value.
 Market price is affected by the factors like demand
and supply and position of money market.
 Market value is a device which can be readily
applied at any time.
 EARNINGS PER SHARE
According to this approach, the value of a
prospective merger or acquisition is a function of
the impact of merger/acquisition on the earnings
per share.
As the market price per share is a function
(product) of EPS and Price- Earnings Ratio, the
future EPS will have an impact on the market
value of the firm.
 SHARE EXCHANGE RATIO
 The share exchange ratio is the number of shares
that the acquiring firm is willing to issue for each
share of the target firm.
 The exchange ratio determines the way the synergy
is distributed between the shareholders of the
merged and the merging company.
 The swap ratio also determines the control that
each group of shareholders will have over the
combined firm.
 METHODS OF CALCULATION
 BASED ON EARNINGS PER SHARE (EPS)
Share Exchange Ratio = EPS of the target firm / EPS
of the Acquiring firm
 BASED ON MARKET PRICE (MP)
Share Exchange Ratio = MP of the target firm’s share /
MP of the Acquiring firm’s share
 BASED ON BOOK VALUE (BV)
Share Exchange Ratio = BV of share of the target
firm / BV of share of the Acquiring firm