MERGERS , ACQUISITIONS, RESTRUCTURING AND AMALGMATIONS

1. MERGERS , ACQUISITIONS, RESTRUCTURING AND AMALGMATIONS

2. Mergers and Acquisitions Merger A transaction where two firms agree to integrate their operations on a relatively coequal basis because they have resources and capabilities that together may create a stronger competitive advantage Acquisition A transaction where one firm buys another firm with the intent of more effectively using a core competence by making the acquired firm a subsidiary within its portfolio of businesses Takeover An acquisition where the target firm did not solicit the bid of the acquiring firm

3. Increased market power Integration difficulties Overcome entry barriers Inadequate evaluation of target Cost of new product development Large or extraordinary debt Increased speed to market Acquisitions Inability to achieve synergy Lower risk compared to developing new products Too much diversification Increased diversification Managers overly focused on acquisitions Avoid excessive competition Too large Reasons for Acquisitions Problems in Achieving Success

4. 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 Lower Cost and Risk of New Product Development Buying established businesses reduces risk of start-up ventures Reasons for Acquisitions

5. 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 Reshaping Competitive Scope Firms may use acquisitions to restrict its dependence on a single or a few products or markets Reasons for Acquisitions

6. Integration Difficulties Differing financial and control systems can make integration of firms difficult Inadequate Evaluation of Target “Winners Curse” bid causes acquirer to overpay for firm Large or Extraordinary Debt Costly debt can create onerous burden on cash outflows Problems with Acquisitions

7. Inability to Achieve Synergy Justifying acquisitions can increase estimate of expected benefits Overly Diversified Acquirer doesn’t have expertise required to manage unrelated businesses Managers Overly Focused on Acquisitions Managers may fail to objectively assess the value of outcomes achieved through the firm’s acquisition strategy Too Large Large bureaucracy reduces innovation and flexibility Problems with Acquisitions

8. + Complementary Assets or Resources Buying firms with assets that meet current needs to build competitiveness + Friendly Acquisitions Friendly deals make integration go more smoothly + Careful Selection Process Deliberate evaluation and negotiations is more likely to lead to easy integration and building synergies + Maintain Financial Slack Provide enough additional financial resources so that profitable projects would not be foregone Attributes of Effective Acquisitions

9. + Low-to-Moderate Debt Merged firm maintains financial flexibility + Flexibility Has experience at managing change and is flexible and adaptable + Emphasize Innovation Continue to invest in R&D as part of the firm’s overall strategy Attributes of Effective Acquisitions

10. Downsizing Wholesale reduction of employees Downscoping Selectively divesting or closing non-core businesses Reducing scope of operations Leads to greater focus Restructuring Activities Example:Procter & Gamble’s cutting of its worldwide workforce by 15,000 jobs Example:Disney’s selling of Fairchild Publications

11. Restructuring Activities Leveraged Buyout (LBO) A party buys a firm’s entire assets in order to take the firm private. Example:Forsmann Little’s buyout of Dr. Pepper

12. Short-Term Outcomes Long-Term Outcomes Alternatives Downsizing Downscoping Leveraged Buyout Restructuring and Outcomes

13. Loss of Human Capital Reduced Labor Costs Lower Performance Restructuring and Outcomes Short-Term Outcomes Long-Term Outcomes Alternatives Downsizing

14. Reduced Debt Costs Downscoping Higher Performance Emphasis on Strategic Controls Restructuring and Outcomes Short-Term Outcomes Long-Term Outcomes Alternatives Loss of Human Capital Reduced Labor Costs Downsizing Lower Performance

15. Higher Performance Emphasis on Strategic Controls Leveraged Buyout High Debt Costs Higher Risk Restructuring and Outcomes Short-Term Outcomes Long-Term Outcomes Alternatives Loss of Human Capital Reduced Labor Costs Downsizing Reduced Debt Costs Lower Performance Downscoping

16. Amalgamation & Mergers AMALGAMATION "blending together of two or more undertakings into one undertaking, the shareholders of each blending company, becoming, substantially, the shareholders of the blended undertakings. There may be amalgamations, either by transfer of two or more undertakings to a new company, or to the transfer of one or more companies to an existing company”. X Y Z Example + = X Y X + = Amalgamation, Mergers & Takeovers

17. Procedure for Amalgamation / Merger Amalgamation & Mergers "MERGER" its an arrangement, whereby the assets 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 as its shareholders all, or substantially all, the shareholders of the two companies. Check MoA (change accordingly).Draft Scheme of Arrangement ( Amalgamation / Merger).Consider it in Board Meeting.Apply to Court direction to call General Meeting.Sent copy of application made to High Court to Central Gov.Send notices of General Meeting to with scheme Notice Period shall not be less than 21 days Notice can be way of Advertisement alsoAt General Meeting approve scheme, increase authorized share capital and to issue further shares, as required Amalgamation, Mergers & Takeovers

18. Procedure for Amalgamation / Merger Forward promptly notice and proceedings of meeting to SE’sReport the result of the meeting to CourtMove Court for approval of the scheme by filing petition in 7 days in Form 40Advertise the date of hearing fixed by the courtOn receipt of Order from High Court, file it with RoC.Proceed on effecting the scheme amalgamation / merger as approved by High Court Amalgamation, Mergers & Takeovers

19. Amalgamation & Mergers Section 391 – 394 of the Companies Act, 1956 deals with Compromises, Arrangements and Reconstructions and other related issues through schemes of arrangement approved by the High Courts. A resolution to approve the scheme of arrangement has to be passed by the shareholders in the general meetings. The shareholders have to vote on the resolutions on the schemes of arrangement on the basis of the disclosures in the notice/explanatory statement. Section 393 of the Companies Act, 1956 specifies the broad parameters of the disclosures which should be given to the shareholders / creditors, for approving a scheme of arrangement. Amalgamation, Mergers & Takeovers

20. Section 391 Amendment in the Companies Act, 1956 in year 2002 gave powers to National Company Law Tribunal to review and to allow any compromise or arrangement, which is proposed between a company and its creditors or any class of them or between a company and its members or any class of them. However, because of non formation of National Company Law Tribunal, these powers still lie with High Courts and the parties concerned can make applications to high courts. If the Creditors, Members present at a General meeting representing three fourth of total number agree to any compromise or arrangement, it becomes binding on the rest of the members or creditors provided the tribunal sanctions the compromise or arrangement. The order made by Tribunal will come in to effect only after the filing of certified copy with the Registrar of Companies. Amalgamation, Mergers & Takeovers

21. Section391 • Court’s power under the section are very wide and has discretion to allow any sort of arrangement between the company and members. • Scope and ambit of the Jurisdiction of the Court: • The sanctioning court has to see to it that all the requisite statutory procedure for supporting any scheme has been complied with along with requisite meetings. • That the scheme put up for sanction of the court is backed up by the requisite majority vote. • That the concerned meetings of the creditors or members or any class of them had the relevant material to enable the voters to arrive at an informed decision for approving the scheme. • That the proposed scheme is not found to be violative of any provision of law and is not contrary to public policy. Amalgamation, Mergers & Takeovers

22. Section 392 Under this section, the court has power to supervise the carrying out of the compromise or an arrangement; and may, at the time of making such order or at any time thereafter, give such directions in regard to any matter or make such modifications in the compromise or arrangement as it may consider necessary for the proper working of the arrangement. If the court is of the view that a compromise /arrangement sanctioned under section 391 cannot be worked satisfactorily with or without modifications, it may on it own motion or on the basis of an application made by an interested party may order winding up of the company under section 433 of the Act. Amalgamation, Mergers & Takeovers

23. Section 393 This section prescribes the procedure required for convening the meeting of the members or creditors called under section 391. The notice for the meeting should be sent along with a statement setting forth the terms of the compromise and or arrangement and explaining its effect and in particular, the statement must state all material interest of the directors, managing directors of the company, whether in their capacity as such or as members or creditors of the company or otherwise. Where the compromise or arrangement affects the rights of debenture holders of the company, the statement shall give the information and explanation in respects to the trustees of any deed for securing the issue of the debentures as it is required to give in respect of directors. Any default in complying with the requirements under this section may lead to a fine of Rs. 50, 000 against the concerned official of the company, who is found guilty. Amalgamation, Mergers & Takeovers

24. Section394 • Where the court is of the view that the proposed arrangement/scheme is of such nature that • • the scheme is for the reconstruction of any company or for amalgamation of any two or more companies; and • • that under the scheme the whole or any part of the undertaking property or liabilities of any concerned company is to be transferred to another company; • the court may make provision for all or any of the following matters. • The transfer to Transferee Company of the property or liabilities of transferor company. • The allotment or appropriation by the transferee company of any shares, debentures or other like interest in that company which, under the arrangement, are to be allotted or appropriated by that company to. • The continuation of any legal proceeding against the transferee company by the transferor company. • The dissolution, without winding up, of any transferor company. • The provisions for any dissenting persons. Who are opposing such scheme or any other matter, which the court deems fit. Amalgamation, Mergers & Takeovers

25. Acquisitions & Takeovers Major Laws Involved SEBI (substantial Acquisition of shares &Takeovers) Regulations 1997. The Securities and Exchange Board of India Act,1992 . Security Contract Regulation Act ,1956 . The Depositories Act,1956. SEBI Disclosure and Investor Protection Guidelines 2000. Securities and Exchange Board of India (Prohibition of Insider Trading Regulation ),1992. Securities and Exchange Board of India (Merchant Bankers) Rules/Regulation 1992. SEBI (Delisting of Securities )Guidelines,2003. Foreign Exchange Management Act,1999. Companies Act,1956. Amalgamation, Mergers & Takeovers

26. Acquisitions & Takeovers PROCEDURE (SAST,1997) Reg-7:Disclosuure to company and to stock exchange by any person who acquire more than 5%,10% or 14% shares Reg-10: NO acquirer shall acquire 15% or more shares unless such acquirer makes a public announcement to acquire shares of such company as per SAST,1997. Amalgamation, Mergers & Takeovers

27. Acquisitions & Takeovers PROCEDURE (SAST,1997)…….continued Reg-11: If (15%-75%) shares acquired as per Law then no acquirer can acquire additional shares which entitle him to exercise 5% or more in any financial year, unless public announcement is made. Acquisition :- * Direct Acquisition in a listed company to which the Regulation apply. * Indirect acquisition by virtue of acquisition of companies, whether listed or unlisted, whether in India or aboard. Amalgamation, Mergers & Takeovers

28. Acquisitions & Takeovers PROCEDURE (SAST,1997)…….continued Reg-13:Before making public announcement merchant banker is to be appointed Reg-14:Timing of Public Announcement Offer not later than 4 working days after agreement for acquisition of shares. Reg-15: Public Announcement of offer to be made in newspaper, Hindi, regional and mostly traded area. Public Announcement shall be submitted to: SEBI through merchant Banker Amalgamation, Mergers & Takeovers

29. Acquisitions & Takeovers PROCEDURE (SAST,1997)…….continued Reg-18:Within 14 days from the date of Public Announcement draft letter of offer to be filed with SEBI through Merchant Banker. The letter of Offer to be dispatched to share-holders not earlier than 21days. Reg-19: Public announcement shall specify a date for the purpose of determining the name of the shareholder to whom Letter of Offer will be sent shall not be later than 30th day. Amalgamation, Mergers & Takeovers

30. Acquisitions & Takeovers PROCEDURE (SAST,1997)…….continued Reg-21: Minimum number of shares to be acquired by Public offer-20%. If the public shareholding goes below 10%, delisting of securities guidelines will apply. Reg-28: ESCROW- The acquirer by way of security performance of his obligation, deposit in ESCROW account sum as under For consideration (C) payable under the public offer upto and includingC=<100 cr - 25% C>100 cr - 25% upto Rs.100 cr &10% thereafter. Amalgamation, Mergers & Takeovers

31. Acquisitions & Takeovers PROCEDURE (SAST,1997)…….continued Reg-29: PAYMENT OF CONSIDERATION 7days from closure of offer open special account with Banker to an issue and deposit sum as would together with 90% of lying in ESCROW make up entire sum due and payable to shareholders. Amalgamation, Mergers & Takeovers

32. The Basic Formsof Acquisitions • There are three basic legal procedures that one firm can use to acquire another firm: • Merger or Consolidation • Acquisition of Stock • Acquisition of Assets

33. Merger Acquisition Acquisition of Stock Proxy Contest Acquisition of Assets Going Private (LBO) Varieties of Takeovers Takeovers

34. The Tax Forms of Acquisitions • If it is a taxable acquisition, selling shareholders need to figure their cost basis and pay taxes on any capital gains. • If it is not a taxable event, shareholders are deemed to have exchanged their old shares for new ones of equivalent value.

35. Accounting for Acquisitions • The Purchase Method • The source of much “goodwill” • Pooling of Interests • Pooling of interest is generally used when the acquiring firm issues voting stock in exchange for at least 90 percent of the outstanding voting stock of the acquired firm. • Purchase accounting is generally used under other financing arrangements.

36. Determining the Synergyfrom an Acquisition • Most acquisitions fail to create value for the acquirer. • The main reason why they do not lies in failures to integrate two companies after a merger. • Intellectual capital often walks out the door when acquisitions aren't handled carefully. • Traditionally, acquisitions deliver value when they allow for scale economies or market power, better products and services in the market, or learning from the new firms.

37. Source of Synergyfrom Acquisitions DCFt= DRevt – DCostst – DTaxest– DCapital Requirementst • Revenue Enhancement • Revenue Enhancement • Including replacement of ineffective managers. • Tax Gains • Net Operating Losses • Unused Debt Capacity • Incremental new investment required in working capital and fixed assets

38. Calculating the Value of the Firm after an Acquisition • Qualitative issues • Avoiding Mistakes • Do not Ignore Market Values • Estimate only Incremental Cash Flows • Use the Correct Discount Rate • Don’t Forget Transactions Costs

39. Two "Bad" Reasonsfor Mergers • Earnings Growth • Only an accounting illusion. • Diversification • Shareholders who wish to diversify can accomplish this at much lower cost with one phone call to their broker than can management with a takeover.

40. Going Private and LBOs • If the existing management buys the firm from the shareholders and takes it private. • If it is financed with a lot of debt, it is a leveraged buyout (LBO). • The extra debt provides a tax deduction for the new owners, while at the same time turning the pervious managers into owners. • This reduces the agency costs of equity

41. Other Devices and the Jargonof Corporate Takeovers • Golden parachutes are compensation to outgoing target firm management. • Crown jewels are the major assets of the target. If the target firm management is desperate enough, they will sell off the crown jewels. • Poison pills are measures of true desperation to make the firm unattractive to bidders. They reduce shareholder wealth. • One example of a poison pill is giving the shareholders in a target firm the right to buy shares in the merged firm at a bargain price, contingent on another firm acquiring control.

42. Some Evidence on Acquisitions:The Long Run • In the long run, the shareholders of acquiring firms experience below average returns. • Cash-financed mergers are different than stock-financed mergers. • Acquirers can be friendly or hostile. The shares of hostile cash acquirers outperformed those of friendly cash acquirers. One explanation is that unfriendly cash bidders are more likely to replace poor management.

43. Taxation Aspects of International Mergers & Acquisitions

44. Did you read tomorrow’s newspaper?

45. M&A Trends Cross-border M&A and Private Equity deals (Sep-Oct 2005) Key Deals of Sep-Nov 2005 Vodafone – Bharti US $ 1,500 mn Oracle – I-flex US $ 593 mn HPCL – KRPL US $ 500 mn Huber – Micro Inks US $ 220 mn Bharat Forge – Imatra Klista AB US $ 56 mn MBT – US’ Axes US $ 54 mn Nicholas Piramal – Avecia Pharma US $ 17 mn Source: Grant Thornton India (Volume V 2005)

46. M&A Amalgamations Acquisitions Merger De-merger Asset Purchase Stock Purchase Slump Sale Itemized Sale Modes of M&A in India