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Prathamesh Potdar 75
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Vivek Varier 114
MERGERS & ACQUISITIONS
MERGERS-Merger refers to a situation when two or
more existing firms combine together and form a new
entity. Either a new company may be incorporated for
this purpose or one existing company (generally a bigger
one) survives and another existing company (which is
smaller) is merged into it. Laws in India use the term
amalgamation for merger.
ACQUISITIONS- It is the buying of one company (the
‘target’) by another. An acquisition may be friendly or
hostile. In the former case, the companies cooperate in
negotiations; in the latter case, the takeover target is
unwilling to be bought or the target's board has no prior
knowledge of the offer
TYPES OF MERGERS
Horizontal merger: It is a merger of two or more
companies that compete in the same industry.
Vertical merger: It is a merger which takes place upon
the combination of two companies which are operating
in the same industry but at different stages of production
or distribution system.
Reverse mergers: Reverse mergers involve mergers of
profir making companies with companies having
accumulated losses.
Conglomerate merger: These mergers involve firms
engaged in unrelated type of business activities i.e. the
business of two companies are not related to each other
horizontally nor vertically
MERGER PROCEDURE
Types -
Capitalization Method
Discounted Cash Flow Method
MARKET APPROACH
Comparable Company Method
Based on the principle of substitution
Acquisition Analysis
Corporate Finance
MISCONCEPTIONS IN VALUATION
Valuation models give an exact estimate of value
a)Assets and liabilities of the amalgamating a)Assets and liabilities of purchased company
companies are carried forward to the books of are recorded in the books of purchasing
amalgamated company at the book value. company at their current fair market values.
b)Pre-amalgamation reserves are allowed to b)The identity and separation of the pre-
appear in the books of the amalgamated amalgamation reserve is not maintained in
company at its original book value. the books of purchasing company.
2) Goodwill
a)No goodwill is created since assets and 1)Good will arises in the book of purchasing
liabilities of the amalgamating entity is company since purchase consideration is
carried over to the books of amalgamated based on the bargained value of the net
company at their existing book value. assets acquired; any excess of purchase
consideration over the fair value of net assets
acquired is recognised as good will.
a) Asssets and liabilities of the amalgamating a) Assets and liabilities of the purchased
companies are carried over in the books of company are recorded at their fair value in
amalgamated company at their book values. the books of the purchasing company.
4) Amortization
a) Since no good will arises here, there is no a)As per AS-14 good will has to be amortized
question of amortization of the same. over a period of 5 years unless a longer
period can be justified.
COMPARISON
Pooling of Interest method Purchase method
5) Disclosure Requirement
a) Value of the reserves taken over from the a)Good will created have to be disclosed in
transferor company included in total value of order to prevent projection of any fake
reserves. Nature and objective of statutory good will.
reserves have to be disclosed.
1.Restructuring
2.Improvement in Efficiency
3.Cost Reduction
4.M&A
5.New Technology
Shortage of Skills.
Lack of Leadership.
MANAGEMENT PROBLEMS
Lack of Management Resource.
Management Style and Skills.
Lack of Vision.
Communication
IT/SOFTWARE/BPO 90 29.4
PHARMACEUTICALS 62 20.3
AUTOMOTIVE 27 8.8
OTHERS 62 20.3
EC Directive
If bidder company is not registered in the country where its making bid for target
company, then such bids need to comply with 2 sets of compliancess. & 2 regulators
will have juridiction over different elements of bids.
PRE-BID DEFENSES AND FRUSTRATING
ACTION: OPTING IN OR OUT
If bidder acquire 90-95% shares of firm, but rest 5% are resisting. Hence left
rest members to fix there own threshold and time period.
Restriction on share transfer needs to disclosed
MULTI-JURISDICTIONAL OFFER
To complicate matters further, the deadline for
implementation of the Takeovers Directive fell during
the acceptance period and the implementation
arrangements differed in each of the jurisdictions.
ANTI-COMPETITION ISSUES:
Competition/anti-trust filings were required in the EU,
the US, Canada and elsewhere. One area of particular
interest was the potential impact of including
Dofasco, Inc (Dofasco), a Canadian steel company, within the
merged group.
Mittal proposed to compensate Arcelor for the difference between the price it had paid and the
proceeds of the sale to ThyssenKrupp.
However, as part of its bid defence, Arcelor transferred Dofasco to Strategic Steel Stichting, a
Dutch foundation (stichting) created for the purpose, to prevent any sale of Dofasco for five
years (unless the stichting board decides to dissolve the stichting sooner).
Dutch stichtings have been used in bid defences before, including in Gucci Group NV’s 1999
defence against LVMH Moët Hennessy Louis Vuitton SA’s unsolicited (and ultimately
unsuccessful) takeover bid.
In response, Mittal entered into a “pocket consent decree” with the US Department of Justice,
one of only a handful of such decrees in the past decade, under which it was agreed that any
antitrust issue could be resolved through the disposal of an alternative asset if Mittal was
unable to sell Dofasco as a result of the stichting.
WHITE KNIGHT DEFENSE AND
SHAREHOLDER REVOLT
The most powerful weapon in Arcelor’s arsenal was fired on 26 May 2006,
when the company announced that it had agreed to acquire the mining and
steel assets of Alexey Mordashov, including 89.6% of OAO Severstal
(Severstal), a Russian steel company .
Instead of being structured as a competing bid, the deal was structured as a
contribution of assets by Mr Mordashov in return for shares in Arcelor. This
meant that the consideration shares could be issued under existing
delegations to the Arcelor board of directors, and without the need to seek
approval from Arcelor shareholders.
The arrangements triggered a shareholder revolt, with between 20 to 30% of Arcelor’s shareholders
signing a letter to Arcelor demanding the right to choose between the Severstal and Mittal
proposals.
An intense period of negotiations with Mittal followed, culminating in the announcement of the
agreed memorandum of understanding between Arcelor and Mittal and the Arcelor board’s
recommendation of Mittal’s offer on 25 June 2006.
On 26 July 2006, Mittal was able to announce that 92% of Arcelor’s shares had been tendered in
response to its offer. It is intended that Mittal will formally merge into Arcelor later in 2007. On 30
June 2006, Arcelor shareholders holding about 58% of the outstanding share capital voted against
the proposed Severstal merger at a rescheduled meeting. It is perhaps in this regard that the practical
legacy of the deal in Europe will be most notable.
COMMENTS ON DEAL BY LEADING
LAW FIRMS:
“It was a ground-breaking transaction, particularly in terms of
shareholder democracy in Europe, with target shareholders organising
and acting in the face of entrenchment measures,” says John
Brinitzer, a partner at Cleary Gottlieb Steen & Hamilton, who advised
on the deal.