Introduction

Chapter
1
INTRODUCTION
In a rapidly changing world, companies are facing unprecedented turmoil in global market.
Severe competition, rapid technological changes and rising stock market volatility have increased the
burden on managers to deliver superior performance and value for their shareholders.
Corporate restructuring has facilitated thousands of organizations. The main objective behind
corporate restructuring is growth. The growth strategies followed by companies can be broadly
classified into organic and inorganic. Organic strategies refer to internal growth strategies that focus
on growth by the process of asset replication, exploitation of technology, better customer relationship,
innovation of new technology and products to fill gaps in the marketplace. It is a gradual growth process
spread over a few years. Inorganic growth strategies refer to external growth by takeovers, mergers
and acquisitions. It is fast and allows immediate utilization of acquired assets. It is argued that M&As
are indispensable strategic tools for expanding product portfolios, entering new markets, acquiring new
technologies and building new generation organization with power and resources to compete on a
global basis.
Thus, the inorganic strategies are regarded by companies as fast track strategies for growth and
unlocking of value to shareholders. Since 1991, Indian industries have been increasingly exposed to
both domestic and international competition. This has forced Indian corporate sector to restructure,
reengineer to be competitive and deliver value to stakeholders. Relocation and redistribution of
economic power in the hands of BRIC (Brazil, Russia, India and China) drives home the point that India
is firmly entrenched in the evolving multipolar global businesses. M&As activity has been predominant
in sectors like steel, aluminium, cement, auto, banking and finance, computer software, pharmaceuticals,
consumer durables, food products, agro-chemicals and textiles.
Corporate Restructuring: Corporate restructuring can be constructed as almost any change
in capital structure, in operations, or in ownership that is outside the ordinary course of business.
Corporate restructuring can be divided into two categories: operational and functional.
Operational restructuring refers to outright or partial purchase or sale of companies or product
lines or downsizing by closing unprofitable, and non-strategic facilities.
2 Contemporary Issues in Mergers and Acquisitions
Financial restructuring refers to the actions taken by the firm to change its total debt and equity
structure.
Types of Corporate Restructuring

Expansion - Mergers and acquisitions
- Tender offers
- Joint ventures
Sell- offs - Spin-offs (Split-offs and Split-ups)

- Divestitures
- Equity carve-outs
Corporate control - Premium buybacks

- Anti takeover amendments
- Proxy contests
Change in ownership structure - Exchange offers

- Share repurchases
- Going private
Source: Copeland and Weston (1988)
Types of Corporate Restructuring are as Follows:

Expansion: Expansion is a form of restructuring, which results in an increase in the size of the
firm. It can take place in the form of a merger, acquisition, tender offer, asset acquisition or joint
venture.
Merger: A merger refers to the absorption of one firm by another, i.e., the acquiring firm retains
its name and its identity, and it acquires all of the assets and liabilities of the acquired firm. The acquired
firm ceases to exist as a separate business entity. The merger of Tata Oils Mills Company Limited with
Hindustan Lever Limited is an example of absorption. As opposed to this, in a consolidation, a new firm
is created; both the acquiring and the acquired firm terminate their legal existence and become part
of a new firm. Here, the distinction between the acquirer and the target firm is not crucial. HCL Ltd.,
was formed after consolidation of Hindustan Computers Limited, Hindustan Instruments Limited,
Indian Software Company Limited and Indian Reprographics Limited.
Tender Offer: A tender offer is a public offer to buy shares of a target firm directly from its
shareholders. Tender offers are usually unfriendly. They are used in an effort to circumvent the target
firm’s management, which is usually actively resisting acquisition. Takeover by Tata Tea of
Consolidated Coffee Ltd., is an example of tender offer where more than 50% of shareholders of
Consolidated Coffee Ltd., sold their shareholdings to Tata Tea at the offered price which was more
than their investment price.
Joint Ventures: In a Joint Venture two companies enter into an agreement to provide certain
resources towards the achievement of a particular common business goal. It involves intersection of
only a small fraction of the activities of the companies involved and usually for a limited duration. The
Introduction 3
venture partners according to the pre-arranged formula, share the returns obtained from the venture.
Usually the multinational companies use this strategy to enter into foreign market. For example, Tata
Motors entered into a joint venture with a South African company, Imperial Group, to market its pick-
up vehicles in the region.
Sell-offs: Sell-offs is a form of restructuring, which results in a reduction in the size of the firm.
It can take place in the form of a spin-off, split-off, divestiture or an equity carve-out.
Spin-offs: A spin-off is a transaction in which a company distributes on a pro rata basis all of
the shares it owns in a subsidiary to its own shareholders. Hence, the stockholders proportional
ownership of shares is the same in the new legal subsidiary as well as the parent firm. The new entity
has its own management and is run independently from the parent company. A spin-off does not result
in an infusion of cash to the parent company. For example, Air-India has formed a separate company
named Air-India Engineering Services Ltd., by spinning-off its engineering division. Spin-off can be
of two types: (1) Split-offs (2) Split-ups.
(1) Split-offs: In a split-off, a new company is created to takeover the operations of an existing
division or unit. A portion of the existing shareholders receives stock in a subsidiary (new
company) in exchange for parent company stock. The logic of split-off is that the equity base
of the parent company is reduced reflecting the downsizing of the firm. Hence, the
shareholding of the new entity does not reflect the shareholding of the parent firm. A split
off does not result in any cash inflow to the parent company.
(2) Split-ups: In a split-up the entire firm is broken up in series of spin-offs, so that the parent
company no longer exists and only the new offsprings survive. A split-up involves the creation
of a new class of stock for each of the parent’s operating subsidiaries, paying current
shareholders a dividend of each new class of stock, and then dissolving the parent company.
Stockholders in the new companies may be different as shareholders in the parent company
may exchange their stock for stock in one or more of the spin-offs.
Divestitures: A divestiture is a sale of a portion of the firm to an outside party generally resulting
in an infusion of cash to the parent. A firm may choose to sell an undervalued operation that it
determines to be non-strategic or unrelated to the core business and to use the proceeds of the sale
to fund investments in potentially higher return opportunities. It is a form of expansion on the part of
buying company. For example, the Indian Govt. sold 10% shares in ONGC through a public issue.
Equity Carve-outs: An equity carve-out involves the sale of a portion of the firm through an
equity offering to outsiders. New shares of equity are sold to outsiders who give them ownership of
a portion of the previously existing firm. A new legal entity is created. The equityholders in the new
entity need not be the same as the equityholders in the original seller.
Corporate Control: Corporate control refers to the third group of corporate restructuring
activities, which involves obtaining control over the management of firm. Control is the process by
which managers influence other members of an organization to implement the organizational
strategies. It can take place in the forms of premium buyback, antitakeover amendments and proxy
contest.
Premium Buybacks: Premium buybacks represent the repurchase of a substantial stock-
holder’s ownership interest at a premium above the market price (called green-mail). Often in
connection with such buybacks, a standstill agreement is written. This represents a voluntary contract
in which the stockholder who is bought out agrees not to make further attempts to takeover the
company in the future. When a standstill agreement is made without a buyback, the substantial stock-
holder simply agrees not to increase his or her ownership which presumably would put him or her in
an effective control position.
Antitakeover Amendments: Antitakeover amendments are changes in the corporate bylaws
to make an acquisition of the company more difficult or more expensive. These include: (1)
supermajority voting provisions requiring a high percentage (for example, 80 per cent) of stockholders
to approve a merger, (2) staggered terms for directors which can delay change of control for a number
of years, and (3) golden parachutes which award large termination payments to existing management
if control of the firm is changed and management is terminated. All these are explained in detail in
chapter “Takeover Defenses.”
Proxy Contest: In a proxy contest, an outsid group seeks to obtain representation on the firm’s
board of directors. The outsiders are referred to as “dissidents” or “dissenting” who seek to reduce
the control position of the “incumbents” or existing board of directors. Since the management of a firm
often has effective control of the board of directors, proxy contests are usually regarded as directed
against the existing management.
Changes in Ownership Structure: Changes in the ownership structure represent results in
a change in the restructure of ownership in the firm. A firm’s ownership structure affects, and is
affected by other variables, and these variables also influence market value. These variables include
the levels of principal-agent conflicts and information asymmetry and their effects on other variables
such as the firm’s operating strategy, dividend policy, and capital structure. It can take place in the form
of exchange offer, share repurchase and going private.
Exchange Offers: One form of changes in the ownership structure is through exchange offers,
which may be the exchange of debt or preferred stock for common stock, or conversely, of common
stock for the more senior claims, Exchanging debt for common stock increases leverage; exchanging
common stock for debt decreases leverage.
Share Repurchase: A second form is share repurchase, which simply means that the company
buyback some fraction of its outstanding shares of common stock. Tender offers may be made for
share repurchase. The percentage of shares purchased may be small or substantial, if the latter, the
effect may be to change the control structure in the firm.
Going Private: In a going-private transaction, the entire equity interest in a previously public
corporation is purchased by a small group of investors. Going-private transactions typically include
members of the incumbent management group who obtain a substantial proportion of the equity
Introduction 5
ownership of the newly private company. When the transaction is initiated by the incumbent
management, it is referred to as a management buyout (MBO). Usually, a small group of outside
investors provides funds and, typically, secures representation on the private company’s board of
directors. These outside investors also arrange other financing from third-party investors. When
financing from third parties involves substantial borrowing by the private company, such transactions
are referred to as leveraged buy-outs (LBOs).
Introduction to Concepts
Merger: Merger is a marriage between two companies of roughly same size. Merger has been
defined as an arrangement whereby the assets of two or more companies become vested in, or under
the control of one company (which may or may not be one of the original two companies), which has,
as its shareholders, all or substantially all the shareholders of the two companies. It may also include
fusion of two or more companies into another.
In a merger, either one of the two existing companies merges its identity into another existing
company, for example, the merger of Global Trust Bank Limited (GTB) with Oriental Bank of
Commerce (OBC). It is an example of absorption. After the merger, the identity of the GTB is lost.
But, the OBC retains its identity. The shareholders of companies whose identities have been merged
(referred here as merging companies) get substantial shareholding in the merged company based on
the share exchange ratio incorporated in the scheme of merger as approved by majority of shareholders
of both merged and merging companies.
Or, one or more of existing companies may form a new company and merge their identities into
the new company by transferring their businesses and undertakings including all other assets and
liabilities to the new company, i.e., merged company, it is a case of consolidation. The merger of Bank
of Punjab and Centurion Bank resulting in formation of Centurion Bank of Punjab is a type of
consolidation.
The situation of merger may be in any of the following manner:
There are two companies A and B which decide to merge
(1) A Company merges into B company.
Combined merged company emerges as B Ltd.
(2) B Company merges into A Company.
Combined merged company emerges as A Ltd.
(3) A Company and B Company both merge to form a new Company C.
Combinded Merged Company emerges as C Ltd.
In finance literature, merger and consolidation are technically differentiated. However, as per
the Companies Act, 1956, consolidation and merger are both treated as amalgamation. According to
Accounting Standard-14, amalgamation is in nature of merger as well amalgamation in nature of
purchase. Both these amalgamations are within the purview of Section 390-396 A of the Companies
Act, 1956.
According the Sudarsanam (1995), a merger takes place when two corporations combine and
share their resources in order to achieve mutual objectives. Both companies bring their own
shareholders, employees, customers and the community at large. The interests of these different
stakeholders do not always correspond, leading to a situation where one group may win at the expense
of another. The shareholders of the joint companies often continue as cohesive owners of the new firm.
Gaughan (1991) argues that the term statutory merger is used to describe a merger where the
purchasing firm takes on the assets and liabilities of the merged company. There are also subsidiary
mergers, which is a merger between two companies where the target company becomes a subsidiary
of the acquiring company.
Types of Mergers
Mergers can be classified based upon the objective profile of such arrangements as Horizontal,
Vertical, Circular and Conglomerate mergers.
Horizontal Merger: A horizontal merger is the combinations of two competing firms belongs
to the same industry and are at the same stage of business cycle. These mergers are aimed at
achieving economies of scale in production by eliminating duplication of facilities and operations and
broadening the product-line, reducing investment in working capital, eliminating competition through
product concentration, reducing advertising costs, increasing market segments and exercising better
control over the market. It is also an indirect route to achieving technical economies of large-scale.
Merger of Tata Industrial Finance Ltd., with Tata Finance Ltd., and TOMCO with HLL are the
examples of horizontal merger.
Horizontal mergers are regulated by the government for their potential negative effect on
competition. The number of firms in an industry is decreased by horizontal mergers and this may
make it easier for the industry members to collude for monopoly profits. Horizontal mergers are also
believed by many as potentially creating monopoly power on the part of the combined firm enabling
it to engage in anti-competitive practices. Hence, in many countries, restrictive business practices
legislation or, in other words, competition law, looks at enforcing strict regulations on the merging
or integration of competitors. Horizontal mergers of even small enterprises may create conditions
triggering concentration of economic power and oligopoly.
Vertical Merger: Vertical mergers occur between firms in different stages of production
operation. In the oil industry, for example, distinctions are made between exploration and production,
refining, and marketing to the ultimate consumer. In the pharmaceutical industry one could distinguish
between research and the development of new drugs, the production of drugs, and the marketing of
drug products through retail drug stores.
There are many reasons why firms might want to be vertically integrated between different
stages. There are technological economies such as the avoidance of reheating and transportation costs
Introduction 7
in the case of an integrated iron and steel producer. Transactions within a firm may eliminate the costs
of searching for prices, contracting, payment collecting, and advertising and may also reduce the costs
of communicating and of coordinating production. Planning for inventory and production may be
improved due to more efficient information flow within a single firm. When assets of a firm are
specialized to another firm, the latter may act opportunistically to expropriate the quasi-rents accruing
to the specialized assets. Expropriation can be accomplished by demanding supply of good or service
produced from the specialized assets at a price below its average cost. To avoid the costs of haggling
which arise from the expropriation attempt, the assets are owned by a single vertically integrated firm.
Divergent interests of parties to a transaction will be reconciled by common ownership. Merger of
Reliance Petrochemicals Ltd., with Reliance Industries Ltd., is backward integration.
Circular Merger: In circular combination, companies producing distinct products in the same
industry seek amalgamation to share common distribution and research facilities in order to obtain
economies by eliminating costs of duplication and promoting market enlargement. The acquiring
company obtains benefits in the form of economies of resource sharing and diversification. The merger
?
of BBLIL with HLL is a good example of circular merger.
Conglomerate Merger: Conglomerate merger are the one where companies belong to
different or unrelated lines of business. The basic motive of these mergers is to reduce risk through
diversification. It also enhances the overall stability of the acquirer and improves the balances in the
company’s total portfolio of diverse products and production processes. It also encourages firms to
grow by diversifying into other markets. Diversification is a vital strategy for the firm when present
market does not have much additional opportunities for growth.
Conglomerate mergers can be distinguished into three types: Product extension mergers,
geographic market extension mergers and pure conglomerate mergers.
Product extension mergers are mergers between firms in related business activities and may also
be called concentric mergers. These mergers broaden the product-lines of the firms.
Geographic market extension mergers involve a merger between two firms operating in two
different geographic areas.
Pure conglomerate mergers involve merger between two firms with unrelated business
activities. They do not come under product extension or market extension mergers.
Within the broader category of conglomerate mergers, two types of conglomerate firms can be
distinguished.
Financial Conglomerates: Financial conglomerates provide flow of funds to each segment of
their operations, exercise control and are the final financial risk takers. They undertake strategic
planning but do not participate in operating decisions.
Managerial Conglomerates: Managerial conglomerates transmit the attributes of financial
conglomerates still further. They not only assume financial responsibility and control, but also play
a role in operating decisions and provide staff expertise and staff services to the operating entities.
By providing managerial guidance and interactions on decisions, managerial conglomerates increase

the potential for improving performance. The Torrent Group has identified power as one of the
growing field and acquired Ahmedabad Electric Company and Surat Electric Company in order to
diversify the risk of its existing line of Pharmaceuticals business.
Causes of Merger
Synergy: Synergy implies a situation where the combined firm is more valuable than the sum
of the individual combining firms. It defined as ‘two plus two equal to five’. Synergy refers to benefits
other than those related to economies of scale. These are also termed as operating synergy. In mergers
and acquisitions, synergy is the additional benefit that can be derived from combining resources of two
companies.
V (AB) > V (A) +V (B)
These gains are most likely in horizontal mergers in which there are more chances of eliminating
duplication facilities. Apart from operating synergy, mergers also create financial and managerial
synergy. Merger sometimes eliminates financial constraints of merged company, when the merged
company acquires another company with good cash standing in exchange of share or in other words,
mergers offer an effective way to ensure smooth cash-flow. Managerial synergy is also attained when
top management of one company uses their relevant experience after merger to resolve the problems
of other company. HLL acquired TOMCO with a purpose of achieving leadership in soaps and
detergent business. For this merger, HLL sent its team to TOMCO one year prior to the merger to
study the management practices of TOMCO.
Strategic Change: Mergers are used to rapidly adapt to changes in external environment mainly
in terms of regulatory framework and technological innovation. The advent of deregulation broke down
barriers in financial services. Commercial banks are moving well beyond accepting deposits and
lending into investment banking, insurance and mutual funds. Technological change contributes to new
products, industries and markets. The use of IT technology is likely to encourage mergers which are
less expensive and faster way to acquire new technologies and proprietary know-how to fill the gaps
in current product offerings or to enter entirely new businesses.
Global Competitive Strength: Indian corporates are small in size and have less in capacity.
In order to compete with Multi National Corporations (MNCs), Indian industries have to increase its
capacity, induct new technology and develop export markets. Globalization and deregulation lower the
cost of labour and open the markets to a great number of producing firms. In order to save itself, Indian
companies have felt the need of becoming global. Mergers and acquisitions are the best strategy to
grow fast in world generic market and to acquire global competitive strength.
Diversification: Diversification implies growth through the combination of firms in unrelated
businesses. Such mergers are called conglomerate mergers. Big is beautiful and everyone want to get
bigger and grow faster by broadening their business portfolios. Companies milked their core businesses
to get cash needed to acquire glamorous businesses in more attractive industries. Thus, many firms
Introduction 9
exploded into huge conglomerates, sometimes containing hundreds of unrelated products and
businesses.
These types of mergers reduce the risk through substantial reduction of cycality of operation.
It reduces the instability of earnings. If the two firms have cash-flows that are unrelated, their combined
cash-flow may be less volatile than their cash-flow viewed separately. M&As are thus motivated by
the objective to diversify its activities to avoid ‘putting all its eggs in one basket’ and obtain advantages
of joining the resources for enhanced debt financing and better serviceability to shareholders. Studies
shows that unrelated acquisitions are four times more likely to be divested than those related to the
acquirer’s core business.
Market Penetration: Market penetration means developing new and large markets for a
company’s existing products. Market penetration strategy is generally pursued within markets that are
becoming more international and global. Cross-border mergers are a means of becoming or remaining
major players in such markets. This strategy is mainly adopted by MNCs. To gain access to new
markets, they prefer to merge with a local established company which knows behaviour of market and
has established customer base. Whirlpool Corporation’s entry into India by acquiring Kelvinator India
is one such example of Indian market. Improved market share, either by easy market entry or through
market penetration is thus one of the most favoured motives for mergers. Profitability can be improved
by increasing market share, may be by offering enhanced range of products. There seems to be a high
degree of correlation between increased market share and increased profitability. This motive of
merger is closely aligned to the economies of scale as increasing market share usually leads to higher
level of production thereby lowering unit costs.
Tax Liability: In a number of countries, a company is allowed to carry forward its accumulated
losses to set-off against its future earnings for calculating its tax liability. A loss-making or sick
company may not be in a position to earn sufficient profits in future to take advantage of the carry
forward provision. If it combines with a profitable company, the combined company can utilize the
carry forward loss and save taxes. In India, a profitable company is allowed to merge with a sick
company to set-off against its profits the accumulated loss and unutilized depreciation of that company.
A number of companies in India have merged to take advantage of this provision. Ahmedabad Cotton
Mills Limited (ACML) is absorbed by Arvind Mills in 1979. ACML was closed in August 1977 on
account of labour problem. At the time of merger in April 1979, ACML had an accumulated loss of
Rs. 3.34 crore. Arvind Mills saved about Rs. 2 crore in tax liability for the next two years after the
merger because it could set-off ACML’s accumulated loss against its profits.
Sustainable Growth: Growth is essential for sustaining the viability, dynamism and value
enhancing capability of a company. Growth may even lead to higher profits and increase in shareholder
value. A company can achieve its growth objective by:
• Expanding its existing markets, and
• Entering new markets.
Company can acquire production facilities as well as other resources from outside through
mergers. It is easier to acquire growth through merger rather than adopt a building strategy. If a
company wants to increase capacity to produce a product, it is many times easier to buy a firm that
manufacturer that product rather than start from scratch. Internal growth is time-consuming requiring
operating facilities — manufacturing, research, marketing, etc. Internal development of facilities for
growth also requires time. Thus, lack or inadequacy of resources and time needed for internal
development constrains the company’s space of growth. The company can acquire production
facilities as well as other resources from outside through mergers and acquisitions.
Revival of Sick Units: BIFR found revival of ailing companies through the means of their
merger with healthy company as the most successful route for revival of their financial health. In the
“Review Report for 1998-99” BIFR stated that most of the mergers sanctioned by it have been
successful. Most mergers in corporate India are for revival of sick companies by merging with the
healthy ones, have been within the same group. The purposes of such mergers are firstly, to revive
a group’s sick company by merging it with group’s healthy company. Second, obtain concessions from
financial institutions and government agencies and obtain benefits of tax concessions u/s 72A of
Income Tax Act, 1961. Thirdly, it also helps to preserve group reputation and lastly save the
employment. Some of the group companies which have amalgamated through the BIFR include
Mahindra Nissan Allwyn with Mahindra and Mahindra, Hyderabad Allwyn with Voltas, etc.
Merger Defense: Due to globalization and increasing competition worldwide, management of
Indian companies are cautious of threats of hostile takeovers. A merger or acquisition can be used by
a company as defensive manoeuvre to resist takeover by another company. If a firm feels that it could
be acquired by another firm, it may consider getting involved in a merger game. ‘To eat or to be eaten,
that is the question.’
In doing so, it is able to expand its size, hence making its acquisition very expensive. Also, by
increasing market capitalisation of the merged companies, threat of takeover can be tackled. For
instance, merger of Jindal Ferro Alloys with Jindal Strips helped Jindal Ferro Alloys to improve its share
price from Rs. 65 to Rs. 170 and market capitalisation of Rs. 160 crore to Rs. 550 crore with the help
of swap ratio of forty-five Jindal Strips for every hundred Jindal Ferro Alloy shares.
Surplus Cash: A cash-rich company may face a different situation. It may not have enough
internal opportunities to invest its surplus cash. It may either distribute its surplus cash to its
shareholders or use it to acquire some other company. The shareholders may not really benefit much
if surplus cash is returned to them since they would have to pay tax at ordinary income tax rate. Their
wealth may increase through an increase in the market value of shares if surplus cash is used to acquire
another company. Merger of TOMCO with HLL in 1993 helped HLL to generate cash profit of Rs.
264 crore with surplus funds of over Rs. 200 crore. Those surplus funds were used by HLL in acquiring
Brooke Bond India Ltd.,
Increased Market Power: A merger can increase the market share of the merged firm. The
increased concentration or market share improves the profitability of the firm due to economies of
scale. The bargaining power of the firm vis-à-vis labour, suppliers is also enhanced. The merged firm
Introduction 11
can also exploit technological breakthroughs against obsolescence and price-war. Thus, by limiting
competition, the merged firm can earn super-normal profit and strategically employ the surplus funds
to further consolidate its position and improve its market power. The acquisition of TOMCO by HLL
is an example of limiting competition. HLL at the time of merger was expected to control one-third
of three million-tonnes soaps and detergents markets and thus, substantially reduce the threat of
competition.
Merger or acquisition is not the only route to obtain market power. A firm can increase its market
share through internal growth or joint ventures or strategic alliances. Also, it is not necessary that the
increased market power of the merged firm will lead to efficiency and optimum allocation of resources.
Stagnation: Stagnation, may defined as an unsatisfactory growth rate which is likely to occur
as an industry reaches its stage of maturity, Alarik (1982). The goal is thus to achieve renewed growth.
Merging is often used as a defensive strategy in times of stagnation and bad profitability. Increased
competition forces many executives to abandon autonomy and to join forces with others to be able to
defend themselves. Greater resources and increased market share give the companies a stronger
market position and increased external efficiency. This can be better understood with the help of the
well known Boston Consulting Group (BCG) matrix which is shown in figure 1.1.
Theoretical Material
High
Market Growth Rate
Low
High Relative Market Share Low
Figure 1.1: BCG Model

Source: Kotler (1999)
According to Kotler (1999), this model plots market growth rate, as a measure of market
attractiveness, against relative market share, which measures the company’s market strength. Kotler
explains that the stars in the upper left square are high on both growth rate and market share. They
need heavy investment to finance their rapid growth, and as soon as the growth rate slows down, the
stars will turn into cash cows. These are found in the lower left square and are associated with low
growth and high market share. The products or services of cash cow are established and do not need
much investment to hold their market share. The symbolism of the name is obvious — the cash cow
is milked as much as possible. The cows, with their high market share and low investment need, provide
the company with funds with which it pay its bills and invest in other products. Question marks are in
the upper right square and represent the products or services which need heavy investment in order
to possibly become stars, or merely to keep their present market share. The market growth rate is high,
whereas the market share is rather low. Companies need to consider whether it is worth it trying to
push the question mark into a star or if it is preferable to stop investing and let it phase out. Finally, in
the lower right square the dogs are found. These are characterised by low growth rates and small
market shares. The dogs often generate enough to maintain themselves, but do not contribute to any
other products and are often considered to be a burden rather than an asset. Managers are advised
to either invest heavily in dogs in order for them to become stars or simply to divest them to avoid the
dogs from draining the company’s money.
Using the BCG matrix, it is clear that a company generally has a range of products which all
belong to different stages of maturity. As some products become mature, i.e., reach the cash cow or
the dog stage, some kind of renewal is necessary to secure the future profits. A merger is a mythical
means to such a renewal.
Takeover
Takeover is a general term used to define acquisitions only and usually both the terms are used
interchangeably. But, an element of willingness on the part of seller, distinguish an acquisition from
takeover. If the management of target company or seller company is willing to sell, it is known as
acquisition. On the other hand, if willingness is absent, it is known as takeover.
A takeover may be defined as a series of transactions whereby a person, individual, group of
individuals or a company acquires control over the assets of a company, either directly by becoming
owner of those assets or indirectly by obtaining the control of management of the company. Takeover
is acquisition, by one company of controlling interest of the other, usually by buying all or majority of
shares. The regulatory framework for controlling takeover activities of a company consists of
Companies Act, 1956, Listing Agreement and SEBI Takeover Codes.
Sometime takeover may used to affect savings in overheads and other working expenses on the
strength of combined resources to diversify through acquiring companies with new product lines as
well as new market areas, as one of the entry strategies to reduce some of the risks inherent in stepping
out of the acquirer’s historical core competence.
Other reasons are:
• to improve productivity and profitability by joint efforts of technical and other personnel on
the strength of improved efficiency in administration, management, production, finance and
marketing of goods and services as a consequence of unified control;
• to create shareholder value and wealth by optimum utilization of the resources of both
companies;
Introduction 13
• to eliminate competition;
• to keep hostile takeover at bay;
• to achieve economy of numbers by mass production at economical costs;
• to secure advantage of vertical combination by having under one command and under one
roof, all the stages or processes in the manufacture of the end product, which had earlier been
available in two companies at different locations, thereby saving loading, unloading,
transportation costs and other expenses and also by affecting saving of time and energy
unnecessarily spent on excise formalities at different places and stages, to increase market
share, etc.
Kinds of Takeover
Takeovers may be broadly classified into three kinds:
(i) Friendly Takeover: Friendly takeover is with the consent of taken over company. In
friendly takeover, there is an agreement between the management of two companies through
negotiations and the takeover bid may be with the consent of majority or all shareholders of
the target company. This kind of takeover is done through negotiations between two groups.
Therefore, it is also called negotiated takeover.
(ii) Hostile Takeover: When an acquirer company does not offer the target company the
proposal to acquire its undertaking but silently and unilaterally pursues efforts to gain control
against the wishes of existing management, such acts of acquirer are known as ‘hostile
takeover.’ Such takeovers are hostile on the management and are thus called hostile
takeover. There are various ways in which an acquirer company may pursue the matter to
acquire the controlling interest in a target company. Such acts of acquirer are known as ‘raids
or takeover raids’ in the corporate world. These raids, when organised in systematic ways
are called ‘takeover bids’. Both the raids and bids lead to merger or takeover. A takeover
is hostile when it is in the form of ‘raid’.
(iii) Bail Out Takeover: Takeover of a financially sick company by a profit earning company
to bail out the former is known as bail out takeover. There are several advantages for a profit
making company to takeover a sick company. The price would be very attractive as creditors,
mostly banks and financial institutions having a charge on the industrial assets, would like to
recover to the extent possible. Banks and lending financial institutions would evaluate various
options and if there is no other go except to sell the property, they will invite bids. Such a sale
could take place in the form by transfer of shares. While identifying a party (acquirer) lenders
do evaluate the bids received, the purchase price, the track record of the acquirer and the
overall financial position of the acquirer. Thus, a bail out takeover takes place with the
approval of the financial institutions and banks.
Modes of Takeover
The acquirer company can follow either of the two techniques for takeover of another company
viz.: (1) takeover bid; (2) tender offer.
Takeover Bid
A takeover bid gives impression of the intention reflected in the action of acquiring shares of a
company to gain control of its affairs. A bid has been distinguished under the Code as mandatory bid
and partial bid.
Mandatory Bid: SEBI Takeover Regulations, 1997 contain provisions for making public
announcement, i.e., mandatory bid vide Regulations 10 and 12 in the following cases, viz.:
(1) For acquisition of 15% or more of the shares or voting rights but not exceeding 55%.
(ii) For acquiring additional shares or voting rights or if such person already holds not less than
55% but not more than 75% of the shares or voting rights in a company.
(iii) For acquiring shares or voting rights along with persons acting to in concert to exercise more
than 75% of the voting rights in a company.
(iv) For acquiring control and management of the company.
Partial Bid: Partial bid is understood when a bid is made for acquiring part of the shares of a
class of capital where the offeror intends to obtain effective control of the offeree through voting
power. Such bid is made for equity shares carrying voting rights.
Partial bid is also understood when the offeror bids for the whole of the issued shares of one class
of capital in a company other than equity share capital carrying voting rights. Generally this bid might
cover all the issued non-voting shares in a company.
Regulation 12 of SEBI Takeover Regulations, 1997 qualifies partial bid in the form of acquiring
control over the target company irrespective of whether or not there has been any acquisition of shares
or voting rights in a company. For such acquisition, it is necessary to make public announcement in
accordance with the Regulations.
Competitive Bid: Competitive bid can be made by any person within 21 days of public
announcement of the offer made by the acquirer. Such bid shall be made through public announcement
in pursuance of the provisions of Regulation 25 of the SEBI Takeover Regulations, 1997. Such
competitive bid shall be for the equal number of shares or more for which first offer was made. No
competitive bid can be made for acquisition of shares of a financially weak company where lead
financial institution has accepted the bid of the acquirer on public announcement in terms of Regulation
35 of SEBI Takeover Regulations, 1997.
Introduction 15
Tender Offer
A tender offer is a formal offer to purchase a given number of a company’s shares at a specific
price. The acquiring company ask the shareholders of the target company to “tender” their shares in
exchange for a specific price. The price is generally quoted at a premium in order to induce the
shareholders to tender their shares. Tender offer can be used in two situations. First, the acquiring
company may directly approach the target company for its takeover. If the target company does not
agree, then the acquiring company may directly approach the shareholders by means of a tender offer.
Second, the tender offer may be used without any negotiations, and it may be tantamount to a hostile
takeover. The shareholders are generally approached through announcement in the financial press or
through direct communication individually. They may or may not react to a tender offer. Their reaction
exclusively depends upon their attitude and sentiment and the difference between the market price and
the offered price. The tender offer may or may not be acceptable to the management of the target
company. In the USA the tender offers have been used for a number of years. In India one may see
only few instances of tender offer in the recent years.
In September 1989, Tata Tea Ltd., (TTL), the largest integrated tea company in India, made an
open offer for controlling interest to the shareholders of the Consolidated Coffee Ltd., (CCL). TTL’s
Chairman, Darbari Seth, offered one share in TTL and Rs. 100 in cash (which is equivalent of Rs. 140)
for a CCL share that was then quoting at Rs. 88 on the Madras Stock Exchange. TTL’s decision is
not only novel in the Indian corporate sector, but also a trendsetter. TTL had notified in the Financial
Press about its intention to buy out some tea estates and solicited offers from the shareholders
concerned. The management of the target company generally do not approve the tender offers. The
major reason is the fear of being replaced. The acquiring company’s plans may not be compatible with
the best interests of the shareholders of the target company.
The management of the target company can try to convince its shareholders that they should not
tender their shares since the offer value is not enough in the light of the real value of shares, i.e., the
offer is too low comparative to its real value.The management may use techniques to dissuade its
shareholders from accepting tender offer. For example, it may lure them by announcing higher
dividends. If this helps to raise the share price due to psychological impact or information content, then
the shareholders may not consider the offer price tempting enough. The company may issue bonus
shares and/or rights shares and make it difficult for the acquirer to acquire controlling shares.
The target company may also launch a counter-publicity programme by informing that the tender
is not in the interest of the shareholders. If the shareholders are convinced, then the tender offer may
fail. The target company can follow delay tactics and try to get help from the regulatory authorities
such as the Securities and Exchange Board of India (SEBI), or the Stock Exchanges of India.
After enforcement of the SEBI (Substantial Acquisition of Shares and Takeovers) Regulations,
1997, i.e., w.e.f., 20-2-1997, public annoucement is necessary as mandatory bid for tender offer to
acquire the shares or control in the target company if such tender offer is more than the limits of
shareholdings outlined in Regulations 10, 11 and 12 of SEBI Takeover Regulations, 1997.
Accounting Standard (AS) 14: Accounting for Amalgamations

Accounting Standard (AS) 14, ‘Accounting for Amalgamations’, is issued by the Council of the
Institute of Chartered Accountants of India. The standard deals with accounting for amalgamation and
the treatment of any resultant reserve or goodwill. But, it does not deal with cases of acquisitions which
arise when there is a purchase by one company (referred to as the acquiring company) of the whole
or part of the shares, or the whole or part of the assets, of another company (referred to as the acquired
company) in consideration for payment in cash or by issue of shares or other securities in the acquiring
company or partly in one form and partly in the other. The distinguishing feature of an acquisition is
that the acquired company is not dissolved and its separate entity continues to exist.
The following terms are used in the standard
(a) Amalgamation means an amalgamation pursuant to the provisions of the Companies Act,
1956 or any other statute which may be applicable to companies.
(b) Transferor company means the company which is amalgamated into another company.
(c) Transferee company means the company into which a transferor company is amalgamated.
(d) Reserve means the portion of earnings, receipts or other surplus of an enterprise (whether
capital or revenue) appropriated by the management for a general or a specific purpose other
than a provision for depreciation or diminution in the value of assets or for a known liability.
(e) Consideration for the amalgamation means the aggregate of the shares and other securities
issued and the payment made in the form of cash or other assets by the transferee company
to the shareholders of the transferor company. In determining the value of the consideration,
an assessment is made of the fair value of its elements. A variety of techniques is applied
in arriving at fair value. For example, when the consideration includes securities, the value
fixed by the statutory authorities may be taken to be the fair value. In case of other assets,
the fair value may be determined by reference to the market value of the assets given up.
Where the market value of the assets given up cannot be reliably assessed, such assets may
be valued at their respective net book values.
(f) Fair value is the amount for which an asset could be exchanged between a knowledgeable,
willing buyer and a knowledgeable willing seller in an arm’s length transaction.
(g) Pooling of interests is a method of accounting for amalgamations. The object of which is to
account for the amalgamation as if the separate businesses of the amalgamating companies
were intended to be continued by the transferee company. Accordingly, only minimal
changes are made in aggregating the individual financial statements of the amalgamating
companies.
Types of Amalgamations
Generally, amalgamations are of two types; amalgamation in the nature of merger and
amalgamation in the nature of purchase.
Introduction 17
Amalgamation in the Nature of Merger: Amalgamations where there is a genuine pooling

not merely of the assets and liabilities of the amalgamating companies but also of the shareholders’
interests and of the businesses of these companies. Such amalgamations are amalgamations which are
in the nature of ‘merger’ and the accounting treatment of such amalgamations should ensure that the
resultant figures of assets, liabilities, capital and reserves more or less represent the sum of the relevant
figures of the amalgamating companies. For this type of amalgamation the following conditions must
be satisfied.
(i) All the assets and liabilities of the transferor company become after amalgamation, the assets
and liabilities of the transferee company.
(ii) Shareholders holding not less than 90% of the face value of the equity shares of the transferor
company (other than the equity shares already held therein, immediately before the
amalgamation, by the transferee company or its subsidiaries or their nominees) become
equity shareholders of the transferee company by virtue of the amalgamation.
(iii) The consideration for the amalgamation receivable by those equity shareholders of the
transferor company who agree to become equity shareholders of the transferee company
is discharged by the transferee company wholly by the issue of equity shares in the transferee
company, except that cash may be paid in respect of any fractional shares.
(iv) The business of the transferor company is intended to be carried on, after the amalgamation,
by the transferee company.
(v) No adjustment is intended to be made to the book values of the assets and liabilities of the
transferor company when they are incorporated in the financial statements of the transferee
company except to ensure uniformity of accounting policies.
Amalgamation in the Nature of Purchase: Amalgamations which are in effect a mode by
which one company acquires another company and, as a consequence, the shareholders of the
company which is acquired normally do not continue to have a proportionate share in the equity of the
combined company, or the business of the company which is acquired is not intended to be continued.
Such amalgamations are amalgamations in the nature of ‘purchase’. Or, in other words, amalgamation
in the nature of purchase is an amalgamation which does not satisfy any one or more of the conditions
of amalgamation in the nature of merger.
Methods of Accounting for Amalgamations

There are two main methods of accounting for amalgamations:
(a) The pooling of interests method; and
(b) The purchase method.
The Pooling of Interests Method: The use of the pooling of interests method is confined to
circumstances which meet the criteria for an amalgamation in the nature of merger. Under the pooling
of interests method, the assets, liabilities and reserves of the transferor company are recorded by the
transferee company at their existing carrying amounts.
If, at the time of the amalgamation, the transferor and the transferee companies have conflicting
accounting policies, a uniform set of accounting policies is adopted following the amalgamation. The
effects on the financial statements of any changes in accounting policies are reported in accordance
with Accounting Standard (AS) 5, ‘Prior Period and Extraordinary Items and Changes in Accounting
Policies’.
The Purchase Method: This method is used in accounting for amalgamations in the nature of
purchase. The object of the purchase method is to account for the amalgamation by applying the same
principles as are applied in the normal purchase of assets.
Under the purchase method, the transferee company accounts for the amalgamation either by
incorporating the assets and liabilities at their existing carrying amounts or by allocating the
consideration to individual identifiable assets and liabilities of the transferor company on the basis of
their fair values at the date of amalgamation.
Treatment of Reserves on Amalgamation

If the amalgamation is an ‘amalgamation in the nature of merger’, the identity of the reserves
is preserved and they appear in the financial statements of the transferee company in the same form
in which they appeared in the financial statements of the transferor company. Thus, for example, the
General Reserve of the transferor company becomes the General Reserve of the transferee company.
If the amalgamation is an ‘amalgamation in the nature of purchase’, the identity of the reserves,
is not preserved. The amount of the consideration is deducted from the value of the net assets of the
transferor company acquired by the transferee company. If the result of the computation is negative,
the difference is debited to goodwill. If the result of the computation is positive, the difference is
credited to Capital Reserve.
But, there are certain reserves which may have been created by the transferor company
pursuant to the requirements of, or to avail of the benefits under, the Income-tax Act, 1961; for
example, Development Allowance Reserve. The Act requires that the identity of the reserves should
be preserved for a specified period. Likewise, certain other reserves may have been created in the
financial statements of the transferor company in terms of the requirements of other statutes. Such
reserves retain their identity in the financial statements of the transferee company in the same form
in which they appeared in the financial statements of the transferor company, so long as their identity
is required to be maintained to comply with the relevant statute. In such a case the statutory reserves
are recorded in the financial statements of the transferee company by a corresponding debit to a
suitable head (e.g., ‘Amalgamation Adjustment Account’) which is disclosed as a part of ‘miscellaneous
expenditure’ or other similar category in the balance sheet. When the identity of the statutory reserves
is no longer required to be maintained, both the reserves and the aforesaid account are reversed.
Introduction 19
Treatment of Goodwill Arising on Amalgamation

Goodwill arising on amalgamation represents a payment made in anticipation of future income
and it is appropriate to treat it as an asset to be amortised to income on a systematic basis over its useful
life. Due to the nature of goodwill, it is frequently difficult to estimate its useful life with reasonable
certainty. Such estimation is, therefore, made on a prudent basis. Accordingly, it is considered
appropriate to amortise goodwill over a period not exceeding five years unless a somewhat longer
period can be justified.
Balance of Profit and Loss Account

In the case of an ‘amalgamation in the nature of merger’, the balance of the Profit and Loss
Account appearing in the financial statements of the transferor company is aggregated with the
corresponding balance appearing in the financial statements of the transferee company. Alternatively,
it is transferred to the General Reserve, if any.
In the case of an ‘amalgamation in the nature of purchase’, the balance of the Profit and Loss
Account appearing in the financial statements of the transferor company, whether debit or credit, loses
its identity.
Treatment of Reserves Specified in a Scheme of Amalgamation

The scheme of amalgamation sanctioned under the provisions of the Companies Act, 1956 or
any other statute may prescribe the treatment to be given to the reserves of the transferor company
after its amalgamation. Where the treatment is so prescribed, the same is followed. Where the scheme
of amalgamation sanctioned under the statue prescribes a different treatment to be given to the
reserves of the transferor company after amalgamations as compared to the requirements of this
statement that would have been followed had no treatment been prescribed by the scheme, the
following disclosures should be made in the first financial statements following the amalgamation:
• A description of the accounting treatment given to the reserves and the reasons for following
the treatment different from that prescribed in this statement.
• Deviation in the accounting treatment given to the reserves as prescribed by the scheme of
amalgamation sanctioned under the statute as compared to the requirements of this
statement that would have been followed had no treatment been prescribed by the scheme.
• The financial effect, if any, arising due to such deviations.
Disclosure
For all amalgamations, the following disclosures are considered appropriate in the first financial
statements following the amalgamation:
(a) Names and general nature of business of the amalgamating companies;
(b) Effective date of amalgamation for accounting purposes;
(c) The method of accounting used to reflect the amalgamation; and

(d) Particulars of the scheme sanctioned under a statute.
For amalgamations accounted for under the pooling of interests method, the following additional
disclosures are considered appropriate in the first financial statements following the amalgamation:
(a) Description and number of shares issued, together with the percentage of each company’s
equity shares exchanged to effect the amalgamation;
(b) The amount of any difference between the consideration and the value of net identifiable
assets acquired, and the treatment thereof.
For amalgamations accounted for under the purchase method, the following additional disclosures
should be made in the first financial statements following the amalgamation:
(a) Consideration for the amalgamation and a description of the consideration paid or contingently
payable; and
(b) The amount of any difference between the consideration and the value of net identifiable
assets acquired, and the treatment thereof including the period of amortisation of any goodwill
arising on amalgamation.
Amalgamation after the Balance Sheet Date

When an amalgamation is effected after the balance sheet date but before the issuance of the
financial statements of either party to the amalgamation, disclosure is made in accordance with AS
4, ‘Contingencies and Events Occurring After the Balance Sheet Date’, but the amalgamation is not
incorporated in the financial statements. In certain circumstances, the amalgamation may also provide
additional information affecting the financial statements themselves, for instance, by allowing the going
concern assumption to be maintained.
Demerger
Demerger has been defined as spilt or division. It can also be defined as “the separation of a large
company into two or more smaller organizations”. The expression ‘demerger’ is defined in Section
2(19AA) of the Income Tax Act, 1961. It is a process of reorganizing a corporate structure whereby
the capital stock of a division or subsidiary of a corporation or of a new affiliated company is transferred
to the stockholders of the parent corporation without an exchange of any part of the stock of the latter.
Companies often have to downsize or ‘contract’ their operations in certain circumstances, such
as when a division of the company is performing poorly or simply, because it no longer fits into the
company’s plans or to give effect to rationalization or specialization in the manufacturing process.
Apart from core competencies being main reason for demerging companies, in some cases,
restructuring in the form of demerger was undertaken for splitting up the family owned large business
empires into smaller companies. The historical demerger of DCM group, where it spilt into four
Introduction 21
companies namely, DCM Ltd., DCM Shriram Industries Ltd., Shriram Industrial Enterprise Ltd., and
DCM Shriram Consolidated Ltd., is one example of family units splitting through demerger. Such
demergers are accordingly, more in the nature of family settlements and are affected through Court
order.
Demergers also occur due to reasons almost same as merger, i.e., the desire to perform better,
strengthen efficiency, business interest and longevity and to curb losses, wastage and competition.
Undertakings demerge to delineate business and fix responsibility, liability and management, so as to
ensure improved results from each of the demerged unit. Demerger are akin to the survival of the fittest
ideology, i.e., if one unit is making profit and other unit is making loss, thus, eroding its profits, alienate
the loss-making unit.
There is no definition of the phrase, ‘Demerger’ in the Companies Act, 1956. However, under
the Companies Act, this term is presumed to be covered by the expression “arrangement” in Section
390 to include “a reorganization of share capital of the company by the consolidation of the shares of
different classes, or by the division of shares into shares of different classes or by both these methods”.
According to Section 2(19AA) of Income Tax Act, 1961, ‘Demerger’ in relation to companies is,
transfer, pursuant to a scheme of arrangement under Sections 391 to 394 of the Companies Act, 1956,
by a demerged company of its one or more undertakings to any resulting company in such a manner
that –
(1) All the property of the undertaking, being transferred by the demerged company, immediately
before the demerger, becomes the property of the resulting company by virtue of demerger.
(2) All the liabilities relatable to the undertaking, being transferred by the demerged company,
immediately before the demerger, become the liabilities of the resulting company by virtue
of demerger.
(3) The property and the liabilities of the undertaking or undertakings being transferred by the
demerged company are transferred at values appearing in its books of account immediately
before the demerger.
(4) The resulting company issues, in consideration of the demerger, its shares to the shareholder
of the demerged company on a proportionate basis.
(5) The shareholders holding not less than three fourths in value of the shares in the demergd
company (other than shares already held therein immediately before the demerger or by a
nominee for, the resulting company or, its subsidiary) become shareholders of the resulting
company or companies by virtue of demerger, otherwise than as a result of the acquisition
of the property or assets of the demerged company or by any undertaking thereof by the
resulting company;
(6) The transfer of the undertaking is on a going concern basis.
(7) The demerger is in accordance with the conditions, if any, notified under Sub-Section (5) of
Section 72Aof the Income Tax Act, 1961 by the Central Government in this behalf.
In other words, the demerger is a scheme of arrangement under the Companies Act which
requires approval by majority of shareholders holding shares representing three-fourths in value in
meeting convened for this purpose and sanction by High Court. It involves transfer of one or more
undertakings. The transfer of undertakings is by the demerged company, which otherwise known as
transferor company. The company to which the undertaking is transferred is known as resulting
company which is otherwise known as transferee company.
According to Sub-Section (19AAA) of Section 2 of the Income Tax Act, 1961, demerged
company means the company, whose undertaking is transferred, pursuant to demerger, to a resulting
company. Sub-Section (41A) of Section 2 of the Income Tax Act defines the resulting company, which
means one or more companies to which the undertaking of the demerged company is transferred in
a demerger and, the resulting company in consideration of such transfer of undertaking, issues shares
to the shareholders of the demerged company and includes any authority or body or local authority or
public sector company or a company established, constituted or formed as a result of demerger.
The definition of ‘resulting company’ has brought out three important requirements while
establishing its relationship with demerging company. They are —
(1) Consideration for transfer of undertaking would be by issue of shares only by resulting
company.
(2) Such consideration would be paid to the shareholders of demerged company.
(3) Resulting company can also be a subsidiary company of a demerged company.
Modes of Demerger
Demerger may be affected partially or completely. When a part/division/department of a
company is separated and transferred to one or more companies formed with the same shareholders
allotted shares in new company in the same proportion as held by them in the demerged company,
partial demerger occurs.
Complete demerger occurs when the whole of the business/undertaking of the existing company
is transferred to one or more new company/ies formed for this purpose and the demerged company
is dissolved by passing special resolution for voluntary winding up and the shareholders of the dissolved
company are issued and allotted shares in the new company/ies as per the sanctioned share exchange
ratio.
In case of partial demerger, the existing company also continues to maintain its separate legal
identity and the new company being a separate legal identity, carries on the separated or spun off
business and undertaking of the existing company.
In case of complete demerger, the existing company is voluntarily wound up and its entire
business, undertaking, etc., are transferred to one or more new companies.
Introduction 23
There are broadly three methods of achieving demerger. The simplest method is demerger by
agreement. An alternative demerger method is through scheme of arrangement. This requires Court
order. The third approach is demerger by voluntary winding up.
Demerger by Agreement
A demerger may be effected by agreement whereunder the demerged company spins-off its
specific undertaking to a resulting company, formed with another name in such a manner that —
(1) All the property of the undertaking, being transferred by the demerged company, immediately
before the demerger, becomes the property of the resulting company by virtue of demerger;
(2) All the liabilities relatable to the said undertaking, being transferred by the demerged
company, immediately before the demerger, becomes the liabilities of the resulting company
by virtue of the demerger,
(3) The resulting company issues, in consideration of the demerger, its shares to the shareholder
of the demerged company on a proportionate basis.
Demerger Under the Scheme of Arrangement

A company on the basis of powers in its memorandum of association can carry out a demerger
by a division or split of its undertaking, in the same manner as it can accomplish an amalgamation,
through a scheme of arrangement as per the procedure laid down in chapter V of the Companies Act,
1956 relating to compromise, arrangement and reconstruction.
Demerger and Voluntary Winding Up

A company, which has split into several companies after division can be wound up voluntarily
pursuant to Section 484 to 498 of the Companies Act,1956.
Section 494 of the Companies Act provides that where a company is proposed to be or is in the
course of being wound up voluntary; and the whole or any part of its business or property is proposed
to be transferred or sold to another company; the liquidator of the transferor company may, with the
sanction of a special resolution of that company conferring on the liquidator either a general authority
or an authority in respect of any particular arrangement, receive, by way of compensation or part
compensation for the transfer or sale, shares, policies, or other like interests in the transferee company,
for distribution among the members of the transferor company; or enter into any other arrangement,
whereby the members of the transferor company, may, in lieu of receiving cash, shares, policies or
other like interests or in addition thereto, participate in the profits of or receive any other benefits from
the transferee company.
Recently Reliance Industries has been segregated into five undertakings – coal based energy
undertaking, gas based energy undertaking, financial services undertaking, telecommunication
undertaking and finally the remaining undertaking, that is, businesses retained by RIL, namely
petrochemical and oil and gas.
The rationale for the demerger was to enable distinct focus of investors to invest in some key
businesses and to lend greater focus to the operation of each of its diverse businesses.
Dabur India Ltd.’s Demerger

Dabur India Ltd., the fourth largest player in the domestic FMCG market embarked on a
demerger of its estimated Rs. 214 crore pharmaceutical business from the FMCG business.
The main objective of the demerger was to provide greater focus and growth to each business.
According to Sunil Duggal, CEO, Dabur India Ltd., “Going forward its (demerger) will improve the
fortune of both these entities because both companies will develop specific product-line, with better
capacities in each segment. The sum will be greater than the parts.”
But, the company showed its good performance immediately after its demerger. The FMCG
business witnessed a growth of 33.5% in the net profit from Rs. 33.56 crore to Rs. 44.80 crore during
the first half of the financial year 2003-2004. The same was in the pharmaceutical business. Dabur
Pharma registered a growth of 24% in revenues in the second quarter of 2003-2004.
According to consultancy agency, Dabur Pharma and FMCG business need to be separated to
provide greater focus and growth to each business under separate business heads. The decision to
demerge pharmaceutical business was a part of group strategy to concentrate on the oncology (anti-
cancer) business, where it wanted to have strong global footprints. Dabur Pharma Ltd., had already
obtained marketing approval for oncology products in many key export market of Asia, Africa and
South America, with aim to increase its global footprints and to set up further marketing network
throughout the world over next few years.
In May 2003, the Board of Directors of Dabur India Ltd., had decided to demerge and
subsequently filed a petition with Delhi High Court seeking the approval. The Court approved the
demerger in October 2003. Earlier, the company received the approval from shareholders and board.
The shareholders’ approval was overwhelming as 98% of shareholders voted in favour of merger.
Under the scheme, a swap ratio of 1:2 was decided, i.e., one share in Dabur Pharma Ltd., for
every two shares held in Dabur India Ltd. This is over and above the existing shareholding in Dabur
India Ltd. The company also proposed to transfer assets of Rs. 214 crore pertaining to the Pharma
business, out of the total asset base of Rs. 521 crore, to Dabur Pharma Ltd., as a part of demerger.
Post-demerger, it had been decided that Dabur’s pharma business would continued under the ambit
of Dabur India, but functions as a separate business unit internally under a different head and functional
heads. It also maintained separate books of accounts. The pharma business was run by the Pharma
Management Committee headed by Dr. Anand Burman, Vice-Chairman, Dabur India.
According to P.D. Narang the group director “the demerger is a win-win situation for all
stakeholders of Dabur as well create more value for all shareholders”.
Main reason for demerger was that the FMCG part of company was not strong because of long
period of recession. The company was planning to spend more on rural marketing and sectoral demand.
Introduction 25
Even the stock market analysts believed that the move augurs well for the company. According to top
officials of the company, “the company is not looking at any short-term gains. The gains really will come
only in next few years”.
Reverse Merger
Generally, in case of an ordinary merger, a profit making company with track record takeover
another company which may or may not make a profit to obtain the benefits of economies of scale of
production, marketing network, etc., or in other words, the objective is to expand or diversify the
business.
But, in case of reverse merger, a healthy company merges into a financially weak company and
the former company is dissolved. The healthy unit loses its name and surviving sick company retains
its name. This situation arises when the sick company’s survival becomes more important for strategic
reasons and to conserve the interest of community.
In the context of the Companies Act, 1956 there is no difference between a merger and reverse
merger. It is like any amalgamation. A reverse merger is carried out through the High Court route.
However, where one of merging companies is a sick industrial company in terms of Sick Industrial
Company Act, 1985, such merger has necessarily to be through the Board for Industrial and Financial
Reconstruction (BIFR). Section 72A was introduced in the Income Tax Act, 1961 to save the
government from social costs in terms of loss of production and employment. It also relieves the
government from the uneconomical burden of taking over and running sick industrial units.
The main reason for this type of reverse merger is the tax savings under the Income Tax Act,
1961. Section 72A of the Income Tax Act ensures the tax relief to the profitable company if they
acquire sick or less profitable company, since the profitable and healthy company can take advantage
of carry forward losses of the other company. It is also resorted to for other reasons such as to save
tax on stamp duty, to save on public issue expenses, to obtain quotation on stock exchanges, etc. The
financial institution which acts as operating agency for the sick companies suggests this remedy
between two companies in the promoter group, thus, attempting to control the growing sickness in a
process of quick and enduring solution. In other words, it can be said that reverse merger are
rehabilitation-oriented schemes adopted to achieve quick corporate turnaround.
Reasons of Reverse Merger

Section 72A of Income Tax Act, 1961 is meant to facilitate rejuvenation of sick industrial
undertaking by merging with healthier industrial companies possessing incentives of tax savings, to
benefit the general public through continued productivity, increased avenues for employment and
revenue generation.
Section 18 of the Sick Industrial Companies Act,1985 provides for the preparation and sanction
of the schemes of rehabilitation of sick industrial companies, which are registered with the Board for
Industrial and Financial Reconstruction (BIFR).
One of the schemes, which are mentioned in Clause (c) to Sub-Section (1), of Section 18 reads
as:
‘‘The amalgamation of —
(i) the sick industrial company with any other company, or
(ii) any other company with sick industrial company”.
The concept is that while ordinarily a sick and economically weak company seeks the support
and strength of a healthy and fit company by amalgamating itself with such a company, in a reverse
merger, a healthy, strong and economically viable company amalgamates itself with a sick and
economically weak company, thereby giving up its own identity to the sick company.
Section 18(2) contains the provisions relating to alteration in memorandum or Article of
Association of sick industrial company for the purpose of altering the capital structure or for such
purposes as may be necessary to give effect to the reconstruction or amalgamation. Section 18(3) (a)
contains the procedure of examination of the scheme by BIFR which is prepared by the operating
agency. The copies of the scheme after modification, if required, made by BIFR, sent to the sick
industry company and to operating agency. In addition to this BIFR shall also publish the draft of the
scheme in brief in such daily newspaper as the BIFR may consider necessary for suggestions and
objections if any, within the specified time.
The first case of reverse merger formulated by BIFR envisaged the merger of healthy company–
Sagar Real Estate Developers Ltd., with sick textile company SLM Maneklal Industries Ltd., as
rehabilitation cum revival package for the sick company. This was followed by merger of healthy
Kirlosker Oil Engine Ltd., with ailing Prashant Khosla Pneumatics Ltd. Then, there were many other
reverse mergers which inclined of reverse merger.
? Merger of Godraj Soaps Ltd., with Gujrat Godraj Innovative Chemical Ltd.,
In reverse merger context, the merger of Godraj Soaps Ltd., (GSL) with Gujrat Godraj Innovative
Chemical Ltd., (GGICL) is important.
GGICL was incorporated with a heavy capital outlay of Rs. 70 crore for manufacturing of
chemical known as Alpha Olefin. In first few years, it faces losses which kept on increasing.
In1994, its losses reached at a staggering point of Rs. 96 crore.
At that time, the company felt that a capital reduction cum reverse merger would put the company
back in its proper position. The scheme was proposed for the consideration of the shareholders of both
GSL and GGICL in 1994. The scheme was approved by the shareholders, creditors and Court of law
and involved the reduction of share capital of GGICL from Rs.10 to Re.1 and later GSL merged with
GGICL. One share in GGICL was to be allotted to every shareholder in GSL.
Introduction 27
Some of the advantages arriving out of the amalgamation were:

1. Amalgamation would help in the pooling of resources of both the companies and the
amalgamated company would have stronger resilience to withstand with competition.
2. The combined operations would offer possibilities of business synergy owing to economies
of scale, integrated operations and reduction of costs.
3. A merger would enable the manufacturing and marketing of wider range of products and
cyclical fluctuations, if any, would get neutralized.
? 4. Some of the finished goods of GGICL constituted the raw materials of GSL. The
amalgamation would therefore, be a forward integration for GGICL.
5. The corporate restructuring resulting from amalgamation would integrate all activities leading
to increased professionalism, a streamlined management, sizable reduction in management
cost and avoidance of duplication in the management set up.
The innovative merger was completed with full blessings of all leading financial institutions like
IDBI, ICICI, IFCI, LIC, UTI, etc. All financial institutions agreed to waive penal interest, liquidate
damages besides funding of interest, reschedule outside loans and also lower interest rate on term loan.
Reverse merger are popularly known as cases of fail ‘wagging the dog’.
Reasons of Failures
It is traditional to assume that acquisitions fail. Considerable evidence has emerged that
acquisitions have little better than an even chance of success. Although definitions of 'success' may
vary, any activity that fails to enhance shareholder interests is unlikely to be regarded favourably by
the capital market. In 1987, Harvard professor Michael Porter observed that between 50% and 60%
? of acquisitions were failures. There have been several other studies since then, and the results have
continued to support his conclusions. In 1995, for example, Mercer Management Consulting noted that
between 1984 and 1994, 60% of the firms in the "Business Week 500" that had made a major acquisition
were less profitable than their industry. In 2004, McKinsey calculated that only 23% of acquisitions
have a positive return on investment. Academic research in strategy and business economics have
taken these conclusions further, suggesting that acquisitions destroy value for the acquiring firm's
shareholders, although they create value for the shareholders of the target firm, something that was
confirmed by a recent study carried out by the Boston Consulting Group (2007). Of course, results vary
depending on the type of acquisition, the similarity of the two protagonists' industry, the international
or domestic nature of the operation, etc., but the overall trend remains the same.
What is a merger failed?
A failed merger can be understood in two ways: Qualitatively, whatever the companies had in
mind that caused them to merge in the first place doesn't workout that way in the end. Quantitatively,
shareholders suffer because operating results deteriorate instead of improve.
It is clear from the findings of the earlier scientific studies and reports of consultants that M&As
fail quite often and consequently, failed to create value or wealth for shareholders of the acquirer
company. A definite answer as to why mergers fail to generate value for acquiring shareholders cannot
be provided because mergers fail for a host of reasons.
Lack of Research
Acquisition requires gathering a lot of data and information relating to important features of target
like finance, management, capability, physical assets as well as intangible assets. It requires extensive
research in all these areas. A carelessly carried out research about the acquisition, causes the
destruction of acquirer's wealth and in merger failure.
Role of Media
Another possible contributing factor that makes these prospects tempting is statements made by
journalists and experts in different forms of media. A merger or an acquisition that, e.g., analysts in
an acknowledged financial paper judge as being successful, is likely to be glorified. No doubt, this seems
appealing to many companies, who may see a similar action as a way to be equally successful. It is
generally agreed that it is at this point that most firms fail.
Hogarty in Alarik righty said, “it would seem that mergers are a risky form of investment. Thus,
while most active acquirers do not obtain an attractive return, a few do. The relatively few successful
acquirers obtain very large returns, and the prospect of these large returns tempts other firms to engage
in merger activity…”
The Hubris Behaviour

There are times when a merger or an acquisition may be effected for the purpose of “seeking
glory,” rather than viewing it as a corporate strategy to fulfil the needs of the company. Regardless
of the organizational goal, the top level executives are more interested in satisfying their “executive
ego.”
Size no doubt is an important element for success in business. Therefore, there is a strong
tendency among managers whose compensation is significantly influenced by size to build big empires.
Size maximizing firms may engage in activities, which have negative net present value. Therefore,
when evaluating an acquisition it is necessary to keep the attention focused on how it will create value
for shareholders and not on how it will increase the size of the company.
Researchers argue that the bidders' management overvalues the target because they overestimate
their ability to create value once they take control of the target assets. The hubris hypothesis shows
that the combined value of the target and bidding firms fall slightly, the value of the bidding firm should
decrease; and the value of the target should increase. The empirical study of Roll supports the hubris
hypothesis.
Introduction 29
Poor Organization Fit

Another reason for failure of merger is that acquirers often fail to plan and execute properly the
integration of their targets. Frequently many firms neglecting the organizational and internal cultural
factors, inadequate knowledge about the target's business should be corrected in the process of due
diligence. But, all too often is overlooked. Yet many companies have sound acquisition records. Their
targets are carefully selected, they are rarely get involved in competitive auctions, they often have the
sense to walk away from deals when they realize the gravity of the likely integration problems and they
seem able quickly and successfully to integrate acquisitions once deals are completed. Mismatch of
organization fit leads to failure of mergers.
Mismatch in Size
A mismatch in the size between acquirer and target is one of the reasons found for poor
acquisition performance. Alliance between two strong companies is a safer bet than between two
weak partners. Frequently, many strong companies actually seek small partners in order to gain control
while weak companies look for stronger companies to bail them out. Many acquisitions fail either
because of 'acquisition indigestion' through buying too big targets or by not giving the smaller
?
acquisitions the time and attention it required. Moreover, when the size of the acquirer is very large
when compared to the target firm, the percentage gains to acquirer will be very low when compared
to the higher percentage gains to target firms.
Experience shows that the weak link becomes a drag and causes friction between partners. A
strong company taking over a sick company in the hope of rehabilitation may itself end up in liquidation.
Diversification
Very few firms have the ability to successfully manage the diversified businesses. Unrelated
diversification has been associated with lower financial performance, lower capital productivity and
a higher degree of variance in performance for a variety of reasons including a lack of industry or
geographic knowledge, a lack of focus as well as perceived inability to gain meaningful synergies.
Unrelated acquisitions, which may appear to be very promising, may turnout to be big disappointment
in reality.
Previous Acquisition Experience

While previous acquisition experience is not necessarily a requirement for future acquisition
success, many unsuccessful acquirers usually have little previous acquisition experience. Previous
experience will help the acquirers to learn from the previous acquisition mistakes and help them to make
successful acquisitions in future. Those serial acquirers, who possess the in-house skills necessary to
promote acquisition success, as well as, trained and competent implementation team, are more likely
to make successful acquisitions.
Conglomerate Mergers
Conglomerate mergers proliferated in 1960s and 1970s. Many conglomerates proved unwieldy
and inefficient and were wound up in 1980s and 1990s.
If merging companies have entirely different products, markets systems and cultures, the merger
is doomed to failure. Added to that as core competencies are weakened and the focus gets blurred
the effect on bourses can be dangerous. Purely financially motivated mergers such as tax driven
mergers on the advice of accountant can be hit by adverse business consequences. Conglomerates
that had built unfocused business portfolios were forced to sell non-core business that could not
withstand competitive pressures. The Tatas for example, sold their soaps business to Hindustan Lever,
i.e., merger of Tata Oil Mill Company with Hindustan Lever Limited.
Poor Strategic Fit

A merger will yield the desired result only if there is strategic fit between the merging companies.
Mergers with strategic fit can improve sprofitability through reduction in overheads, effective
utilization of facilities, the ability to raise funds at a lower cost, and deployment of surplus cash for
expanding business with higher returns. But many a time lack of strategic fit between two merging
companies especially lack of synergies results in merger failure. Strategic fit can also include the
business philosophies of the two entities (return on investment vs. market share), the timeframe for
achieving these goals (short-term vs. long-term) and the way in which assets are utilized. For example,
P&G -Gillette merger in consumer goods industry is a unique case of acquisition by an innovative
company to expand its product-line by acquiring another innovative company, which was, described
analysts as a perfect merger.
Excess Premium
One explanation for merger failure is that acquirers pay too much for their targets, either as a
result of a flawed evaluation process which overestimates the likely benefits, or as a result of getting
caught up in the 'machismo' of a competitive bidding situation.
In a competitive bidding situation, a company may tend to pay more. Often highest bidder is one
who overestimates value out of ignorance. Though he emerges as the winner, he happens to be in a
way the unfortunate winner. This is called winners curse hypothesis. Researchers found that the
abnormal return associated with acquisition announcements for small firms exceeds the abnormal
returns associated with acquisition announcements for large firms by 2.24 per cent. They point out that
the large firms offer larger acquisition premiums than small firms and enter into acquisitions with
negative dollar synergies.
When the acquirer fails to achieve the synergies required to compensate the price, the M&A fail.
More one pays for a company, the harder he will have to work to make it worthwhile for his
shareholders.
Introduction 31
Poor Cultural Fits

Cultural fit between an acquirer and a target is one of the most neglected areas of analysis prior
to the closing of a deal. However, cultural due diligence is every bit as important as careful financial
analysis. Without it, the chances are great that M&As will quickly amount to misunderstanding,
confusion and conflict. Cultural due diligence involve steps like determining the importance of culture,
assessing the culture of both target and acquirer. It is useful to know the target management behaviour
with respect to dimensions such as centralized versus decentralized decision-making, speed in
decision-making, time horizon for decisions, level of teamwork, management of conflict, risk
orientation, openness to change, etc. It is necessary to assess the cultural fit between the acquirer and
target based on cultural profile. Potential sources of clash must be managed. It is necessary to identify
the impact of cultural gap, and develop and execute strategies to use the information in the cultural
profile to assess the impact that the differences have. Cultural issues may create major problems if
not addressed properly. If one organization is very paternal and feudalistic, and the other more open
and transparent, culture can definitely become an issue when they come together. Merger of Daimler
and Chrysler is an example for poor merger performance due to cultural differences.
There have been more than a few acquisitions which did not come up to the mark due to the
conflict of corporate culture of the firms involved. For instance, in the year 1994, Quaker Oats
purchased Snapple Beverage Co. for a total cost of $1.7 billion but the Snapple business was sold off
after a period of three years for a loss of $1.4 billion. The main reason of this failure was the conflict
between the corporate cultures. Quaker had an extremely focused, mass-market working approach
and on the other hand Snapple's style was eccentric, commercial and tilted towards its distributors.
Evaluation of Target Company

The risk of failure can be reduced by conducting detailed evaluation of the target company's
business condition by the professionals in the line of business. Detailed examination of the manufacturing
facilities, product design features, rejection rates, marketing network, profile of key people and
productivity of the employees is a pre-requisite for the success of the merger. Decision to acquire the
target company should not be influenced by the state-of-the-art physical facilities which include, among
other, a good headquarters building, guesthouse on a beach and plenty of land for expansion.
In addition to physical assets examination of the financial position of the target company is quite
significant before the takeovers are concluded. Areas that require thorough examination are stocks,
salability of finished products, value and quality of receivables, details and location of fixed assets,
unsecured loans, claims under litigation, and loans from the promoters. A London Business School
study in 1987 highlighted that an important influence on the ultimate success of the acquisition is a
thorough audit of the target company before the takeover. When ITC tookover the paper board making
unit of BILT near Coimbatore, it arranged for comprehensive audit of financial affairs of the unit. Many
a times the acquirer is mislead by window-dressed accounts of the target.
Lack of Immediate Integration

The important task in the merger is to integrate the target with acquiring company in every
respect. All functions such as marketing, finance, production, design and personnel should be put in
place. In addition to the prominent persons of acquiring company the key persons (people) from the
acquired company should be retained and given sufficient prominent opportunities in the combined
organization. Positive aspects of earlier culture should be preserved while discarding those not needed.
Delay in integration leads to delay in product shipment, development and slow down in the company's
road map.
The speed of integration is extremely important because uncertainty and ambiguity for longer
? periods destabilizes the normal organizational life. It puts greater stress on employees and distracts
them from the actual work. Thus, earlier the chaos and confusion is sorted out, the better it is for the
organizations economic. The disadvantage with a slow approach to integration is that it tends to
dissipate momentum and enthusiasm. Moreover, delays can dilute the financial benefits of a deal.
Failure of Top Management to Follow-up

After signing the M&A agreement, the top management should be very active and should make
things happen. Initial few months after the takeover determine the speed with which the process of
tackling the problems can be achieved. It is very rarely that the bought out company is firing on all
cylinders and making a lot of money. Top management follow-up is essential to go with a clear road
map of actions to be taken and set the pace for implementing once the control is assumed.
Lack of Proper Communication

Lack of proper communication after the announcement of M&As will create lot of uncertainties.
Apart from getting down to business quickly companies have to necessarily talk to employees and
constantly. Regardless of how well executives communicate during a merger or an acquisition,
uncertainty will never be completely eliminated. Failure to manage communication results in inaccurate
perceptions, lost trust in management, morale and productivity problems, safety problems, poor
customer service, and defection of key people and customers. It may lead to the loss of the support
of key stakeholders at a time when that support is needed the most.
Failure to Get Figures Audited

It would be serious mistake if the takeovers were concluded without a proper audit of financial
affairs of the target company. Though the company pays for the assets of the target company, it also
assumes responsibility to pay all the liabilities. Areas to look for are stocks, salability of finished
products, receivables and their collectibles, details and location of fixed assets, unsecured loans, claims
under litigation, loans from the promoters, etc. When ITC tookover the paperboard making unit of BILT
near Coimbatore, it arranged for comprehensive audit of financial affairs of the unit. Many a times the
acquirer is mislead by window-dressed accounts of the target.
Introduction 33
Other reasons
Integration of the companies requires a high quality management. Integration is very often
poorly managed with little planning and design. As a result implementation fails. The key variable for
success is managing the company better after the acquisition than it was managed before. Even good
deals fail if they are poorly managed after the merger.
Immediate results can never be expected except those recorded in red ink. Whirlpool ran up a
loss $100 million in its Philips white goods purchase. R. P. Goenk's takeovers of Gramaphone Company
and Manu Chhabria's takeover of Gordon Woodroffe and Dunlops fall under this category.
If a merger or acquisition is planned depending on the (bullish) conditions prevailing in the stock
market, it may be risky.
Ego clash between the top management and subsequently lack of coordination may lead to
collapse of company after merger. The problem is more prominent in cases of mergers between
equals.
Premerger Strategies
Considerable evidence has emerged that acquisitions have little better than an even chance of
success. Although definitions of ‘success’ may vary, any activity that fails to enhance shareholder’s
interest is unlikely to be regarded favourably by the capital market. While it is often difficult to assess
what would have happened had a company not embarked on the takeover trail, if post-acquisition
performance is inferior to pre-acquisition performance, or if the acquisition actually leads to a fall in
shareholder wealth, it is difficult to argue that the acquisition has not been a failure.
The Mckinsey firm of management consultants studied the ‘value-creation performance’ of the
acquisition programmes of 116 large US and UK companies, using financial measures of performance.
The criterion of success used was whether the company earned at least its cost of capital on funds
invested in the acquisition process. On this basis, a remarkable 60 per cent of all acquisitions failed,
with large unrelated takeovers achieving a failure rate of 86 per cent.
There are numerous reasons why acquisitions fail. One explanation is that acquirers pay too
much for their targets, either as a result of a flawed evaluation process which overestimates the likely
benefits, or as a result of getting caught up in the ‘machismo’ of a competitive bidding situation, where
to yield is regarded as a sign of corporate weakness.
The second reason for poor acquisition performance is the mismatch in the size between acquirer
and target. Many acquisitions fail either because of ‘acquisition indigestion’ through buying too big
targets or by not giving the smaller acquisitions the time and attention it required. Moreover, when the
size of the acquirer is very large, compared to the target firm, the percentage gains to acquirer will be
very low compared to the higher percentage gains to target firms.
A third reason is that acquirers often fail to plan and execute properly the integration of their
targets, frequently neglecting the organizational and internal cultural factors. Inadequate knowledge
about the target’s business, all too often are overlooked. Yet, many companies have sound acquisition
records. Their targets are carefully selected, they are rarely get involved in competitive auctions, they
often have the sense to walk away from deals when they realize the gravity of the likely integration
problems and they seem able quickly and successfully to integrate acquisitions once deals are
completed. The researchers study about what these companies have in common and after detailed
research it has been seen that these companies have strategic approach to acquisitions.
Most successful acquirers see their acquisitions as part of a long-term strategic process,
designed to contribute towards overall corporate development. This require that acquirers to approach
acquisition only after a careful analysis of their own underlying strengths, identification of suitable
candidates which satisfy chosen criteria and most importantly provide ‘strategic fit’ with the
company’s existing activities. In other words, a structured, coherent approach while not a guarantee
of success, is more likely to avoid the potentially disastrous consequences of many apparently ill-
considered takeovers.
Figure 1.2 displays a simple strategic framework within which a thorough-going acquisition
programme might be conducted. The six steps begin with a full strategic review of the company as
it stands, and its strategic options, followed by a detailed consideration of the role of acquisitions, i.e.,
the reasons why an acquisition maybe targeted, leading to the process of selecting and bidding for the
chosen prey, culminating in the often neglected activities of post-merger integration and post-audit.
Key Elements
• Corporate objectives
Formulation of
• Self-analysis
corporate strategy
• Strategic options
Assessrle of • Acquisition approaches

acquisition • Acquisition criteria
• Analyze potential targets

Screen. Evaluate.
Select • Valuation
• Identify specific target
Make approach and Bis(s) if quoted, approach

complete deal and negotiate if unquoted
Integration Jones integration

sequence
Did we do it correctly?
Post Audit
would we do it again?
Figure 1.2: Strategic Framework

Source: Payne A.F. (1985)
Introduction 35
Objectives: Formulating strategy should begin with an expression of corporate objectives,

concentrating on maximizing shareholder wealth. Many firms now publish mission statements, but
these usually somewhat vague expressions of the image which the company would like to portray, often
largely for internal consumption in order to motivate staff. If in building the desired image, the
company’s managers fail to earn at least the cost of equity, they will themselves invite the risk of
takeover. Strategy concerns the examination of alternative routes to achieving the ultimate aim, and
then the optimal way of executing the chosen path. Achieving long-term goals usually involves
expansion of the enterprise, a route often preferred by managers for personal motives.
Internal or External Growth: There are two main ways of achieving growth: (1) by self-
development of new products, markets and processes (internal growth), and (2) by acquisition
(external growth). Although both of these routes are usually expensive in executive time and resources,
external growth has the advantage of securing quick access to new markets or productive capacity.
However, firms should not overlook intermediate strategies, such as licensing, whereby a royalty is paid
to the developer of new technology in exchange for rights to exploit it, or joint ventures, where an
existing company could be partially acquired, or a totally new one set up in partnership with another
firm.
The decision to grow internally or externally will depend partly on an analysis of the particular
strengths, weaknesses, opportunities and threats (SWOTs) of the firm. This self- analysis should make
the potential acquirers aware of any competitive advantages it enjoys over rival companies.
Competitive advantage stems from two sources: cost advantage, where products are virtually similar,
and product differentiation. Exploitation of each of these creates value for shareholders. When areas
of competitive advantage have been identified, the company can decide whether to build upon existing
strengths or to attempt to develop distinctive competence in areas of perceived weakness. This
evaluation may also result in a decision to divest certain activities where no obvious advantage is
possessed, or where it is felt that too many resources would be required to sustain this advantage.
In deciding which strategic route to follow, potential acquirers consider the results of research
at Harvard Business School by Porter (1987) who examined the acquisition record of thirty-three large
diversified US companies. The criterion for judging ‘success’, was the subsequent divestment rate of
earlier acquisitions. The main finding was that successful acquirers almost invariably diversify into
related fields, and vice versa. In other words, diversifications into activities unrelated to the core
business of the acquirers carry much greater risks of failure. Even companies with successful ‘related
diversification’ records achieved poor results when they wandered into unrelated fields. Porter
concluded that the corporate portfolio strategy of many diversifying companies ‘has failed –
diversification just doesn’t work’ because most diversifiers fail ‘to think in terms of how they really
add value’.
Acquisition Criteria: The company should next assess what specific role it hopes the
acquisition will perform. At this stage, the company should reassess the alternatives to merger, in view
of the many difficulties involved. Taking over another company is rather like moving to a larger, more
expensive house. Mergers involve considerable disruptions during the planning and bidding phase, like
costs such as legal advice and the printing and publishing of documents, possible exposure to increased
financial risk, and the upheavals of integration. Just as some marriages do not survive the strains of
house-moving, some companies often fail to recover after the stress of merger. After identifying the
specific role of the acquisition, the company can now consider whether this can be achieved in other,
perhaps more cost-effective ways.
For every merger motive there are several alternative ways of achieving the same end. For
example, if the aim is sales growth, this can be achieved by internal expansion or by a joint venture.
If the aim is to improve earnings per share, a loss-making subsidiary can be shut down or efficiency
enhancing measures can be instituted. If it is wished to utilize spare cash, this can be invested in
marketable securities and trade investments or even returned to shareholders as dividends or in the
form of share repurchases. If an improvement in management skills is sought, appropriately skilled
personnel can be bought in to replace existing managers, outside consultants can be used for advice,
or incentive and bonus schemes can be introduced. In short, if the decision to grow by acquisition is
made, the potential acquirer must be very sure that the stipulated aims are unattainable by alternative
measures.
Most firms with corporate planning departments exercise a continuous review of the key
members of the industry in which they operate and also of related, and often, unrelated areas. Some
firms are known to ‘track’ several dozen potential takeover candidates, assessing their various
strengths and weaknesses, and estimating the likely net value obtainable if they were acquired. Such
companies are cross-checked against a set of possible acquisition criteria.
When the decision to expand by acquisition is taken, the corporate planning staff should be able
to rapidly provide a short-list of candidates, expressing the SWOTs of each, especially its vulnerability
to takeover at that time. It is common for defending managements to dismiss takeover bids as
‘opportunistic’ in a pejorative way. For an acquisitive company which adopts the strategic approach,
this means ‘well-timed’, as such companies are continually seeking opportune moments to launch a
bid, especially when the stock market rating of the target appears low.
Bidding: Bidding is an exercise in applied psychology. Readiness to bid implies an assessment
that the target is either undervalue it stands or would be worth more under alternative management.
In such cases, the bid itself provides new information about prospective value, and the bidder should
expect to have to pay above the market price to secure control. However, it is often unclear before
the event how much of a bid premium, if any, is already built into the market price as the market attempts
to assess the probability of a bidder emerging and succeeding with its offer. The trick in mounting
profitable takeover bids is to promise to use assets more effectively in order to attract existing
shareholders to sell without making such wasteful claims that the market price moves up too sharply
before the acquisition is completed. Conversely, to emphasize the difficulties of reorganizing the target
could be regarded as insincere or even call into question the wisdom of the bid itself, leading to a fall
in the bidder’s own share price.
Post-merger activities: Probably the most difficult part of takeover strategy and execution is
the integration of the newly acquired company into the parent. In the case of contested bids, the
Introduction 37
acquirer will normally have only a limited amount of information to guide his or her integration plans
and should not be too shocked to encounter some nastie regarding the quality of the target’s assets and
personnel. The difficulty of integration depends also on the extent to which the acquirer wants to control
the operations of the target. If only limited control is required, as in the case of unrelated acquisitions,
the extent of integration is probably restricted to meshing the financial reporting systems of the
component companies. Conversely, if full integration of common manufacturing activities is required,
integration assumes a different order of complexity.
Various researches points out that the degree of complexity of integration depends on the type
of acquisition, e.g., whether a horizontal takeover of a very similar company, requiring a detailed plan
for integrating supply, production and distribution, or at the other extreme, a purely conglomerate
acquisition where there is little or no overlap of functions. The relationship between type of acquisition,
type of overlap of activity (split into financial manufacturing and marketing) and the resulting degree
of integrative complexity is shown in figure 1.3.
High
Horizontal acquisitions — complete absorption
Horizontal acquisition — overlapping

manufacturing Manufactruing + Marketing + Financial control
Vertical acquisition
Class of acquisition
Horizontal acquisition —
overlapping products or
markets Degree of
integrative
Manufacturing complexity
Concentric
acquisition -
Financial
Conglomerate control
acquisition Marketing
+
Financial
Financial control
control
Low
Functional activity changed
Figure1.3: Types of Acquisition and Interactive Complexity
Source: Jones C.S. (1986)

Poor planning and poorly executed integration are two of the commonest reasons for the failure
of takeovers. All too often, acquisitive companies focus senior management attention on the next
adventure rather than devoting adequate resources to absorbing the newly acquired firm carefully. Yet
it is rash to lay down optimal integration procedures in advance, because to a large degree, the
appropriate integration procedures are situation specific. The ‘right’ way to approach integration
depends on the nature of the company acquired, its internal culture and its strengths and weaknesses.
However, Drucker (1981) contend that there are Five Golden Rules to follow in the integration
process:
1. Ensure that acquired companies have a ‘common core of unity’ with the parent. In his view,
mere financial ties between companies are insufficient to obtain a bond. The companies
should have significant overlapping characteristics like shared technology or markets in order
to exploit synergies.
2. The acquirer should think through what potential skill contribution it can make to the acquired.
In other words, the takeover should be approached not solely with the attitude of ‘what is’
in it for the parent’ but, also with the view ‘what can we offer them’.
3. The acquirer must respect the products, markets and customers of the acquired company.
Disparaging the record and performance of less senior management is likely to sap morale.
4. Within a year, the acquirer should provide appropriately skilled top management for the
acquired.
5. Again, within a one-year time span, the acquirer should make several cross-company
promotions.
These are largely commonsense guidelines with a heavy emphasis on behavioural factors hut
many studies have shown that acquirers fail to follow these apparently obvious principles.
Post-audited: The acquisition should be post-audited. The post-audit team should review both
the evaluation phase to assess whether and to what extent the appraisal was under — or over
optimistic, and whether appropriate plans were formulated and executed. The emphasis, as in any post-
audit, should centre on what lessons can be learned to guide any subsequent acquisition exercise.
Review of Literature
Review of literature with respect to studies on whether mergers and acquisitions pay, reveals
that there are four approaches to the study: Event studies, Accounting studies, survey of executives
and Clinical studies.
Event study method adopts market-based returns to shareholders as a measure of value created.
It has the advantage of using a leading measure of value creation as stock prices are supposed to reflect
the expected future cash-flows. However, the method suffers from the disadvantage that may result
from inefficient and weak markets, where share prices may not reflect correctly the value of the
Introduction 39
company. Further, the share prices may also react to other macro-economic factors like — exchange
rates, interest rates, taxes, etc. Findings using event studies have been mixed. Lang, Stulz and Walkling
(1989) and Berkovitch and Narayanan (1993) report that in case of tender offers shareholders of
target company get significant positive cumulative abnormal returns. Loughran and Vijh (1997) who
study mergers, tender offers and combined returns have also found that all of them have returned
significant positive returns to target firm shareholders. Houstan, et.al. (2001) and Beitel, et al., (2002)
who have studied deals which relate to banks have also found that target firm shareholders gain and
the acquirers loose. A reason attributed to loss of value to buyer company’s shareholders is the size
effect. Asquith, et. al., (1983) have studied the size effect and concluded that where the target’s
market value is greater than 10 per cent of the market value of the buyer company, the buyer company
shareholders have gained significantly and wherever the target company’s market value is less than
10 per cent of the market value of the buyer company they do not have any significant gains because
of the fact that the size of the buyer company is too large to actually make a material impact in value
to shareholders.
Accounting studies use financial measures like Return on Equity, Return on Assets, Earnings per
share, calculated from audited financial statements. These are compared for a time series before and
after the event and also compared with peer group companies for the period in order to ascertain
whether acquirers outperformed non-acquirers. The method suffers from deficiencies that relate to
accounting measures like being a lagging measure of value, does not consider intangibles and is subject
to accounting bias. Healy, Palepu and Ruback (1997) studied 50 large mergers in the US using
accounting based measures. They have reported that merged firms showed significant abnormal
improvement in asset turnover. However, there was no improvement in operating cash-flow margins.
They also looked at market returns to shareholders and concluded that the Net present value for the
acquirer shareholders was zero as the cash-flows did not improve. The target company shareholders
gained significantly. Chatterjee and Meeks (1996) who studied mergers in UK concluded that the
acquiring companies did not show any significant increase in profitability though they reported better
accounting profits, which could be because of accounting policy changes. Sharma and Ho (2002)
compared the RoE, Profit margin and EPS of Australian companies for a period of 3 years before
merger and three years after merger and concluded that buyers showed decline in these measures
after merger. Revenscraft and Scherer (1987) conclude that, on average, acquiring firms have not
been able to maintain the premerger levels of profitability of the targets. Ali and Gupta (1999) examine
the potential motives and effects of corporate takeovers that occurred in Malaysia during the period
1980 through 1993 and find that the acquirer firms have achieved larger size at the expense of reduced
profit both for themselves and the acquired firms. Hence, summing the studies reviewed it can be said
that most of the studies have concluded that based on accounting numbers the mergers have not
resulted in significant benefits to the acquirers.
Survey of manager’s method is one where a questionnaire is administered across a sample of
chief executive officers and findings are based on views given by them. The method has the advantage
of looking at mergers from the view point of managers and can reveal new insights into motives and
achievements derived from such deals. However, the views of the officers may be biased or casual
and need not be correct or based on scientific reasons. Hence, the findings can be distorted. Bruner
initially conducted a survey of 50 executives, and found that only 37% of the respondents felt that the
deals created value for the buyers and 21% of the deals achieved strategic goals. However, when he
conducted the same survey among executives who were involved in the merger he found that 58%
of the respondents believed that their own deals created value and 51% believed that they achieved
their goals. Only 23% believed that they did not create value and 31% believed that they did not achieve
their strategic goals.
Clinical studies are basically case studies that look into a specific merger deal and examine them
with references to the goals of the deal and whether they were achieved from a strategic, financial
and organizational perspective. From the above literature study it can be seen that event studies have
shown mixed findings with bias towards gains to target company, whereas most of the accounting
based studies have shown that the buyers have not gained significantly in post-merger period. The
findings of clinical studies cannot be generalized and those of survey is mixed and highly influenced
by the sample selected for the survey.
Beginning in the mid-1990s, several consulting firms commissioned surveys concerning the
outcome of recent mergers. The surveys and related analyses were used to examine three general
questions: first, did the mergers tend to achieve the goals and objectives of the executives involved in
the deals. Second, on a more objective basis, did the deals enhance shareholder value relative to
industry benchmarks, that is, were the deals a financial success. Third, and perhaps most important
to the consultants, what were the characteristics of the more successful deals compared to those of
the less successful deals. The results of several of the consulting firm surveys of merger outcomes
are summarized in Table 1.1.
Table 1.1: Selected Results from the Business Consulting

Literature on Mergers and Post-merger Integration
Sponsor Selected Results Sample, Methods,

Comparison Group
KPMG 2001 82% consider successful in executive survey. Survey of executives for 118
30% added value. 39% no change. 31% companies doing 700 cross-border
lowered value. A focus on synergy attainment deals from 1997-1999. Compares
increased chances of success by 28% relative equity price trends relative to industry
to the average deal. trend just before and one year after
the deal.
KPMG 1999 75% considered successful in executive survey 107 companies surveyed for 1996-
17% add value, 30% no change, 53% reduce 1997 cross-border deals. Same
value. Firms that focused on choosing a strong comparison as above. Basis of
deal management team and performed in- certain percentage companies are
depth integration planning did 66% better than not always fully explained.
average. Pursuing synergies vigorously and
communicating well improved performance
by 45%. A focus on cultural issues improved
the chances of success by 26%. Early action
was a key for the successful firms
Introduction 41
Booz-Allen and 53% of deals do not meet expectiaions; 47% Methods not fully described.
Hamilton 2001 of deals fail to attain the objectives stated in the
merger announcement; 55% of same-industry
deals met expectations. Only 32% of cross
industry deals met expectations. 42% of CEOs
of disappointitng mergers are gone within 2
years vs. 16% for successful CEOs.
Business Week Mercer Mgt. 1995 results 27% increase value. Reviews 150 large. 1990-1995 deals.
Mercer 1995. 33% no change, 50% reduce value. Non- share value 3 months before vs. three
Sirower BCG 2002 acquirers outperformed acquires, and months after compared to S&P 500.
experienced acquirers outperformed tyres. Results regarding types of deals that
Sirower/BCG 2002 results: 61% reduce
shareholders value one year later, on average
work best are inconsistently reported.
Some comparisons to non-acquiring
firms.
?
buyers do 4% worse than industry peers and
9% worse than S&P 500. The study examined
302 large 1995 to 2001 deals
Mercer Consulting Over half of trans-Atlatic mergers work. 152 trans-Atlantic deals from 1994 to
2001 Managers of the successful deals credit 1999 using 2-year post-deal
acquirer and target complementarities, comparison to industry specific S&P
especially careful planning, and speedy, well- stock price index.
directed implementation.
Sponoer Selected Results Sample, Methods,

Comparison Group
McKinsey 2000, 65%-70% of deals fail to enhance shareholder 193 deals from the 1990 to 1997.
2001 value: 36% of target firms maintained revenue Industry-specific benchmarks are
growth in 1st post-merger quarter, only 11% by used. Earlier related study examined
3rd quarter, revenue growth 12% below industry 160 deals by firms in 11 sectors in
peers, 40% of mergers fail to capture cost 1995-1996.
synergies. In a related study, 42% of acquiring
firms had lower growth than industry rivals for
3 years following the merger.
Price WaterHouse Acquirer’s stock 37% lower a year after a deal Survey of excutives in 125 companies
Coopers 2000 relative to peer group stock changes. 39% of across a broad range of industries in
firms reached their cost-cutting goals, while 1999: 72% of firms were US-based.
60-70% achived their market perntration goals.
Success rates were uniformly higher if the firm
moved early and quickly with transition teams,
communications, and integration. Vast majority
(79%) of executives regretted not moving faster
in integration.
Accenture 2000, 39% fully achived their anticipated gains from Oil industry and financial industry
2001 alliances in the oil industry. In the finance focus financial study reviews 72 deals
industry, the best deals improved revenues from the 1990s.
14%-19% and shareholders value 65% above
industry shareholder value 65% above industry
share values
A. T. Kearney 1999 58% of deals reduced shareholder value. Top 115 large 1993-1996 deals, total
performing deals were done in closely related shareholder returns 3 months before
businesses and had a higher percentage of vs. two years after the deal. No explicit
assets on the firm’s core areas. 74% of non-merger comparison group
successful deals were run by managers with comparisons made to average or
deep merger experience. quartiles in the sample.
CSC Index Slightly more than 50% beat the benchmark, 71 large deals from 1989 to 1993
Genesis 1997 with a wide variance in post-deal performance compared to peer group market value
change from one year before to two
years after the deals.
MAPI 1999 54% successful, 24% little change, 11% Survey of 8 senior executives, criteria
failures. for success unclear.
Source: Pail A. Pautler, Bureau of Economics, Federal Trade Commission, January 21, 2003.
Studies Conducted in India

Kaveri's Study (1986): Kaveri's study was mainly related to revival of corporate sickness. She
conducted an in-depth analysis of nine specific cases of mergers that took place during the years 1975-
84 (in which seven mergers took place within the group and two outside the group). It attempted to
measure the effectiveness of mergers by comparing actual performance of mergers vis-à-vis various
expectations laid down in respect of mergers. The expectations are as follows:
• Revival of sickness is possible through mergers.
• Mergers provide sick companies to expand/diversify modernise business activities.
• With mergers, sick companies contribute to aggregate strength of healthy companies.
• Merger produces positive effect on the share values of merged companies.
• During the post-merger period, bank borrowings should decline when the merged company
becomes financially stronger.
• Mergers are advantageous to healthy companies also.
• Performance of sick companies during post-merger period must be better than projected
erformance if there had not been a merger.
The results of the findings concluded that during the post-merger period, sick companies were
able to raise sales but whether rise was significant or not was debatable. Healthy companies continued
to be healthy after merger but degree of improvement in health varied from case-to-case. Revival
measures of improvement in technology, diversification, expansion, changing market strategy, etc.,
were found satisfactory though varied in most of the cases. In five out of nine cases, actual
performance was no way nearer to projected performance. It could be possible that revival measures
initiated after merger might not have been completed by then. Some more time might be required to
gain full benefits of mergers. Sick companies did contribute to the total strength (measured in terms
of total sales) of healthy companies, though the contribution varied from case-to-case depending upon
Introduction 43
the size of merger. Bigger the size of merger, greater would be the contribution of sick company to
total sales of healthy company after merger. The fluctuating share prices in most cases followed an
upward trend after merger, i.e., merger proposal was welcomed by shareholders of healthy
companies. However, it would be a worthwhile exercise to understand the behaviour of share prices
during the entire process of merger which generally takes two-three years to complete. Bank
borrowings declined during the post-merger period due to better performance of merging and merged
companies in eight out of nine cases. Hence, banker's interest was safeguarded in these cases.
Singh and Kumar's Study (1994): Singh and Kumar's study was also related to revival of sick
units through the medium of mergers. For the study purpose, they had taken three sick units namely;
Kothari General Food Corporation Ltd., Challapalli Sugars Ltd., and Sewa Paper Ltd., Kothari General
Food Corporation Ltd., merged with Brooke Bond India Ltd., Challapalli Sugars Ltd., merged with
KCP Ltd., and Sewa Paper Ltd., merged with Ballarpur Industries Ltd. They concluded that
rehabilitation of sick company by merging with the healthy company is the most effective way of their
rehabilitation and BIFR seemed to have fulfilled its assured objective of revival of sick companies.
Another conclusion drawn was that tax implications were singularly the most inviting feature for
healthy company to merge with sick company.
Yadav, Jain and Jain's Study (1994): Yadav, Jain and Jain's study measure the profitability
of mergers by looking at the merger synergy, i.e., comparing sum of premerger values of various
attributes like cost ratios, earnings and profit ratio, return on investment asset ratios, etc., of merged
companies with post-merger value of combined companies. For the study they had taken four Indian
companies, two of which had merged with Indian companies while the other two merged with
multinationals. The performance of these companies were analysed for a period of three years before
merger and three years after the merger. The hypothesis tested was to see if mergers with
multinationals were more successful than with Indian companies.
The cases analysed in the study indicated that growth had been achieved by all the companies
involved in the merger whether Indian or multinational but it was more in case of latter.
Mandal's Study (1995): Mandal's study was related with relationship between types of
mergers and the merger gain emerged from different types of merger. The study also quantified tax
benefits arising out of corporate mergers to the acquiring company and the extent of such benefits
towards the revival of a sick company. The study used 19 merger cases to investigate into the merger
motives, means of payment, exchange ratio, success and failure of mergers and quantum of tax
benefits. The results of findings concluded that exchange of equity was found in 90.01% cases, in 5%
cases equity shareholders of targets were discharged by preference shares and in 4.99% cases by
debentures. Findings also indicated that merger was an easy route for corporate growth by way of
acquisition of sick company. In relation to revival of sick industry with healthy unit, the findings
indicated that revival of financial health of losing target was possible through merger although it was
not an easy route. This supported the effectiveness of tax incentive scheme u/s 72A of Income Tax
Act and justified the BIFR approach to merger of a sick company with a profitable one. But this was
not a general rule.
Beena's Study (2000): Beena's study was related to the nature of merger in terms of their
management during the 1990-95 on a sample of 45 merger case. The results showed that 31 cases were
horizontal mergers and remaining divided equally among vertical and conglomerate merger. Further,
it was found that merger was not a route to growth, but was predominantly financed through resources
acquired from a buoyant market share. The study argued that though the merger movements in early
1990s might have contributed to an increase in asset concentration at firm level (asset growth was not
in more than 20% of sample cases), it had not contributed to an increase in concentration in terms of
relative shares of business groups.
Besides relative profitability, another significant issue analysed was, whether mergers were a
means by which profit-making firms absorbed loss-making ones, either in order to expand at lower cost
or to get tax benefits available from such mergers. The results showed that only 22% of the total
acquiring firms which were earning profits were involved in mergers with loss-making firms in order
to reap tax benefits or expand at low cost.
On a sub-sample of 39 out of 45 sample cases, impact of profitability was assessed in terms of
various variables. The results showed mixed evidence on profitability. However, the trend on average
gearing ratio showed a decline significant in 69% of cases and return on shareholders' equity showed
an improvement in 69% of acquiring firms. These trends suggested that desire to improve financial
position of the firm through a viable capital structure could be one of motives of merger.
Finally, an analysis of effects of mergers on shareholders' gains was carried out on a sub-sample
of 20 acquiring firms out of sample of 45 firms in terms of share price data. The results suggested that
on an average, a majority of acquiring firms went through a period of share prices rises prior to merger,
then experienced a fall in their share prices on the announcement of merger and this continued for two-
three years after merger. This confirmed the earlier evidence that majority of merger cases were
characterised by pre-merger buoyancy in share prices of acquiring firms. Once mergers occurred,
their prices showed a bearish trend because of intervening phase of process of revamp and
restructuring and consequentially share prices declined in post-merger period.
Mergers and Acquisitions in India

Mergers and acquisitions in India can be divided into two phases. First phase is related to the pre-
liberalization era, and the second phase to post-liberalization era, which started in 1991.
The Pre-liberalization Era: Despite being tied up within the shackles of tight regulatory
system, wherein prior government approval for M&A was required in the pre-liberalized regime,
?
mergers and acquisitions were not uncommon in the decade of 80s. Prominent industrial groups in the
country have been active in takeover bids. For example, the Goenka Group from Calcutta successfully
tookover Ceat Tyres, Herdilia Chemicals, Polychem, etc. The Oberoi Group has taken over Pleasant
Hotels of the Rane Group. Mahindra and Mahindra have taken over Allwyn Nissan; the Jindal Group
has acquired Shalimar Paints.
Introduction 45
History was created by Tata Tea in September, 1988 when it made a public offer to takeover
Consolidated Coffee Ltd., and acquired 50% of the company’s equity from resident shareholders in
December, 1989. NRIs during 1988 also made the raids on corporate undertakings in India. Swaraj
Paul and Sethia Groups attempted raids on Escorts Ltd., and DCM Ltd., respectively but did not
succeed. The Hindujas raided and tookover Ashok Leyland and Ennore Foundries and secured
strategic interests in IDL Chemicals and Astra 1DL. The Chhabria Group acquired stake in Shaw
Wallace, Dunlop India and Falcon Tyres.
During 1980-89, 80 amalgamations and 52 takeovers were approved by the government. Table 1.2
gives the distribution of amalgamations and takeovers during 1980-89 under the MRTP Act, 1969. In pre-
liberalization period most of the mergers centred on takeovers of sick industrial undertaking because of
staggering industrial sickness and fiscal and other incentives offered to revive the financial health of such
sick industrial undertakings. Mergers between two profit-making companies which occurred simply for
economic reasons were not common. Most of the mergers of sick companies were with healthy ones
within the same group. Shinde (1995) observed that “M&As were not new to Indian situation.” There
have been several cases of M&As in the past (referring to the pre-1991 restrictive regime), but their
intensity was low due to several legal restrictions of the controlled regime. Section 72A of Income Tax
Act, 1961 was introduced to encourage merger of sick units with healthy units. But, M&As activity
remained subdued till the comprehensive liberalization process started during 1990s.
Table 1.2: Number of Amalgamations and Takeovers during 1980-89

Year Numer of Analgamations No. of Takeovers
1980 12 2
1981 7 1
1982 7 1
1983 14 1
1984 9 3
1985 13 4
1986 6 10
1987 1 5
1988 5 13
1989 8 12
Total 80 52
Source: Ranjit
The Post-liberalization Era: Liberalization in the 90s and the recession in the economy have
created new challenges for the Indian corporate sector. The policy of decontrol and liberalization
together with globalization of the economy has exposed the corporate sector to rigorous domestic and
global competition. Therefore, restructuring of corporate India has now become a major theme.
Companies are engaged in various efforts to consolidate themselves in areas of their core competence
and divest those businesses where they do not have any competitive advantage. Consequently, as an
option, mergers and acquisitions are emerging as the key corporate activities. The changes in
government regulations made M&As an even more viable business strategy.
Since mid-1990s, the concept of mergers and acquisitions has caught like fire. They have
become very popular from all angles — policy considerations, businessmen’s outlook and even
consumer’s point of view. Even though, such transactions create monopoly, consumer activist do
not oppose them. Courts have also favoured merger as is evident from the following remarks of
Supreme Court of India in the Hindustan Lever Ltd., (HLL)— Tata Oil Mill Company Ltd.,
(TOMCO) merger case.
“In era of hyper competitive capitalism and technological change, industrialists have realized that
mergers and acquisitions are perhaps the best route to reach a size comparable to global companies
so as to effectively compete with them. The harsh reality of globalization has dawned that companies
which cannot compete globally must sell out as an inevitable alternative.”
The post-liberalization forces are not only giving the old game a new dimension but, are also
throwing up new routes for effecting takeovers. The motto these days seems to be “benefits from
consolidation” whether it is in case of pharmaceutical, cement, banking or financial services,
telecommunications, information technology, food products or petroleum. Conglomerates are being
formed to combine businesses and where synergies are not achieved, demergers have also become
the order of the day. With the increasing competition and the economy moving towards globalization,
the corporate restructuring activities are expected to occur at a much larger scale than at any time in
the past and are expected to play an important role in achieving competitive edge for India in
international market. It can be seen from the figure 1.4 that after liberalization the number of mergers
has increased sharply. Today, Indian companies are far more ambitious about expanding their
operations globally than they were in the 1980s or 1990s.
The number of acquisitions has risen and the average deal size has increased from US$7.7m
in 2002 to US$58m in 2006.
200 184 176 176 182

180
160 145 139 147 148
N o of M erg er s
140 126
120
100
. 80
60 37 44
40 28 32 22
20 17 19
10
20
0
r
91
93
03
05
07
5
97
99
01
ea
9
19
19
19
19
20
20
20
20
19
Y
Years
Figure 1.4: Mergers in India After Liberalization
Source: Prowess, CMIE
Introduction 47
A growing economy, robust financial performance and exceptionally buoyant stock market have
all supported a remarkable expansion of mergers activity. The year 2007 proved to be a phenomenal
one for India Inc. abroad. In all, there were 223 deals worth Rs. 1367 billion registering a massive
growth of 300 per cent over the previous year (140 deals worth $8 billion). This underlines Indian
companies’ readiness, enthusiasm and companies confidence to go global.
Table 1.3: Top Deals – Overseas Targets
Deal Value (US$ mm) Acquirer Target Stake Acquired (%)
12,100 Tata Steel Corus Plc, UK 100

3,331 Hindalco Industries Novelis, USA 100
1794 Suzlon Energy REpower Systems
Ag, Germany 100
1603 Essar Global Algoma Steel Inc, Canada 100
1177 United Spirits Whyte & Mackay, UK 100
Source: Business Line March 7, 2008
Table 1.4: Top Deals – Indian Targets
Deal Value (US$ mm) Acquirer Target Stake Acquired (%)

10900 Vodafone Hutchison Essar 67
1820 Holcim Ambuja Cement 34
1372 Vedanta Group Sesa Goa 71
1016 Reliance Industries Indian Petrochemicals 100
Crop.
1000 Temasek Holdings ICD, Bharti Infratel Ltd.,
9 Macquarie,
AIF Capital,
Citi group, India Equity
Partner, GoldmanSach
?
Source: Business Line March 7, 2008
Table 1.3 shows the top deals where overseas companies are target for Indian companies. Table
1.4 shows the top deals where Indian companies are target for overseas companies.
M&A is a sporadic event and there is very little scope for companies to learn from their past
experience. It is a topic of great debate in today’s business world. Some proponents argue that mergers
increase efficiency, whereas opponents argue that they decrease consumer welfare by monopoly
power. “Merge or die”, this rather remarkable phrase is the title of several articles (e.g., Evett 1999;
Goyenechea 1999; Newman 1992) written on the subject of mergers and acquisitions during the last
few years. To some extent, it mirrors the importance for today’s companies to retain or gain
competitiveness through strategic moves such as mergers or acquisitions. Thus, in times of prosperity,
when firms have excess capital to invest, the frequency of mergers is higher than in times of recession.
Gaughan (1991) argues that today’s merger and acquisition wave has its origin in the ongoing
globalization. Borders between markets have become more or less erased. Development of
technology offers tremendous possibilities for communication, which facilitates cooperation across
national borders. A result of the diminishing of borders is that bigger markets breed a greater degree
of competition. In order to remain competitive, many companies see cooperation with other firms as
the only alternative.
Many researchers, in spite of the trend of mergers and acquisitions researchers have shown that
few turnout to be profitable. Findings shows that the risk of failure is far greater than the chance of
success. There are no research done that actually can prove that mergers help companies to be more
efficient and stronger compared to their competitors. On the contrary, Alarik argues, most of the
mergers and acquisitions are not as successful as believed when the agreement is signed. Studies show
that merged firms are not more profitable than others and at times they even perform worse than their
non-merged counterparts.
“… It would seem that mergers are a risky form of investment. Thus, while most active acquirers
do not obtain an attractive return, a few do. The relatively few successful acquirers obtain very large
returns, and the prospect of these large returns tempts other firms to engage in merger activity…”
Eager to reap the same harvests as their fellow competitors, companies hastily look for possible
partners, make a quick deal and probably lose the presumptive synergy effects on the way.
Considering the fact that many mergers and acquisitions apparently are carried out despite the
great risk of failing, the need for more research is required to see the real impact. During the last few
years, India has witnessed substantial rise in M&As activity in industrial and financial sectors of the
economy. The merger scenario has undergone rapid transformation in post-structural reforms era.
While many firms seriously examined their portfolios, the stronger and dominant firms restructure their
industries, resulting in an increase in the degree of concentration. It shows that the companies wanted
to avoid stiff competition. Thus, economic reforms growing completion accelerated the pace of
mergers and acquisitions. However, despite unfavourable economic environment that existed before
1991, opening up of the economy, merger and acquisition were not uncommon.
Conclusion: During the licensing era, several companies had indulged in unrelated diversifications
depending on the availability of licensing. Globalization, technological development and volatile stock
markets have created an unprecedented environment for organizations across the world. The industrial
policy 1991 comes with several relaxations which open the routes for competition. The post-
liberalization has seen a wave of mergers and acquisitions across the globe.
Traditionally, managers had concentrated on organic business growth. But, organic growth takes
a narrow perspective of the opportunities. The organizations could not develop in its full potential. So,
the organizations took the help of inorganic growth strategies which is the fast track for growth and
expansions. Mergers, acquisitions, tender offer and joint ventures are the different ways to expand.
With the new industrial policy 1991 Indian economy created a highly competitive environment
forcing Indian companies to restructure their operations in different ways. It includes not only
Introduction 49
expansion strategies but also sell-offs, corporate control and different ways of changes in ownership
structure.
There are various reasons of merger which are explained in detail in the chapter with different
form of merger like demerger, reverse merger with case studies.
Accounting Standard (AS) 14 explain about Accounting for Amalgamations. It is issued by the
Council of the Institute of Chartered Accountants of India. A brief detail about various research studies
on merger objects is stated in the chapter. It indicates that most of the mergers are influenced by several
motives but increase in shareholders wealth is the prime motive of any merger. But, unfortunately only
few firms achieve the prime goal of merger, i.e., maximization of shareholders wealth. There are
several reasons of failure of mergers like mismatch in size, high premium, lack of integration, poor
organizational fit, etc. The premerger strategies suggest a structured, coherent approach which could
lead to a successful merger.

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Chapter

Types of Corporate Restructuring

Sell- offs - Spin-offs (Split-offs and Split-ups)

Corporate control - Premium buybacks

Change in ownership structure - Exchange offers

Source: Copeland and Weston (1988)

Types of Corporate Restructuring are as Follows:

By providing managerial guidance and interactions on decisions, managerial conglomerates increase

High Relative Market Share Low

Figure 1.1: BCG Model

Accounting Standard (AS) 14: Accounting for Amalgamations

Amalgamation in the Nature of Merger: Amalgamations where there is a genuine pooling

Methods of Accounting for Amalgamations

Treatment of Reserves on Amalgamation

Treatment of Goodwill Arising on Amalgamation

Balance of Profit and Loss Account

Treatment of Reserves Specified in a Scheme of Amalgamation

(c) The method of accounting used to reflect the amalgamation; and

Amalgamation after the Balance Sheet Date

Demerger Under the Scheme of Arrangement

Demerger and Voluntary Winding Up

Dabur India Ltd.’s Demerger

Reasons of Reverse Merger

Some of the advantages arriving out of the amalgamation were:

The Hubris Behaviour

Poor Organization Fit

Previous Acquisition Experience

Poor Strategic Fit

Poor Cultural Fits

Evaluation of Target Company

Lack of Immediate Integration

Failure of Top Management to Follow-up

Lack of Proper Communication

Failure to Get Figures Audited

Assessrle of • Acquisition approaches

• Analyze potential targets

Make approach and Bis(s) if quoted, approach

Integration Jones integration

Figure 1.2: Strategic Framework

Objectives: Formulating strategy should begin with an expression of corporate objectives,

Horizontal acquisition — overlapping

Figure1.3: Types of Acquisition and Interactive Complexity

Source: Jones C.S. (1986)

Table 1.1: Selected Results from the Business Consulting

Sponsor Selected Results Sample, Methods,

Sponoer Selected Results Sample, Methods,

Studies Conducted in India

Mergers and Acquisitions in India

Table 1.2: Number of Amalgamations and Takeovers during 1980-89

200 184 176 176 182

Table 1.3: Top Deals – Overseas Targets

Deal Value (US$ mm) Acquirer Target Stake Acquired (%)

12,100 Tata Steel Corus Plc, UK 100

Table 1.4: Top Deals – Indian Targets

Deal Value (US$ mm) Acquirer Target Stake Acquired (%)

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