MERGER AND

ACQUISITION

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 Mergers and Acquisitions
"Merger" "Acquisition"
The phrase mergers and acquisitions (abbreviated M&A) refers to the aspect of corporate
strategy, corporate finance and management dealing with the buying, selling and combining of
different companies that can aid, finance, or help a growing company in a given industry grow
rapidly without having to create another business entity.
A merger is a tool used by companies for the purpose of expanding their operations often aiming
at an increase of their long term profitability. There are 15 different types of actions that a
company can take when deciding to move forward using M&A. Usually mergers occur in a
consensual (occurring by mutual consent) setting where executives from the target company help
those from the purchaser in a due diligence process to ensure that the deal is beneficial to both
parties. Acquisitions can also happen through a hostile takeover by purchasing the majority of
outstanding shares of a company in the open market against the wishes of the target's board. In
the United States, business laws vary from state to state whereby some companies have limited
protection against hostile takeovers. One form of protection against a hostile takeover is the
shareholder rights plan, otherwise known as the "poison pill".

Historically, mergers have often failed (Straub, 2007) to add significantly to the value of the
acquiring firm's shares (King, et al., 2004). Corporate mergers may be aimed at reducing market
competition, cutting costs (for example, laying off employees, operating at a more
technologically efficient scale, etc.), reducing taxes, removing management, "empire building"
by the acquiring managers, or other purposes which may or may not be consistent with public
policy or public welfare. Thus they can be heavily regulated, for example, in the U.S. requiring
approval by both the Federal Trade Commission and the Department of Justice.

The U.S. began their regulation on mergers in 1890 with the implementation of the Sherman Act.
It was meant to prevent any attempt to monopolize or to conspire to restrict trade. However,
based on the loose interpretation of the standard "Rule of Reason", it was up to the judges in the
U.S. Supreme Court whether to rule leniently (as with U.S. Steel in 1920) or strictly (as with
Alcoa in 1945).

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Acquisition
An acquisition, also known as a takeover, is the buying of one company (the ‘target’) by another.
An acquisition may be friendly or hostile. In the former case, the companies cooperate in
negotiations; in the latter case, the takeover target is unwilling to be bought or the target's board
has no prior knowledge of the offer. Acquisition usually refers to a purchase of a smaller firm by
a larger one. Sometimes, however, a smaller firm will acquire management control of a larger or
longer established company and keep its name for the combined entity. This is known as a
reverse takeover.
The buyer buys the shares, and therefore control, of the target company being purchased.
Ownership control of the company in turn conveys effective control over the assets of the
company, but since the company is acquired intact as a going business, this form of transaction
carries with it all of the liabilities accrued by that business over its past and all of the risks that
company faces in its commercial environment.
The buyer buys the assets of the target company. The cash the target receives from the sell-off is
paid back to its shareholders by dividend or through liquidation. This type of transaction leaves
the target company as an empty shell, if the buyer buys out the entire assets. A buyer often
structures the transaction as an asset purchase to "cherry-pick" the assets that it wants and leave
out the assets and liabilities that it does not. This can be particularly important where foreseeable
liabilities may include future, unquantified damage awards such as those that could arise from
litigation over defective products, employee benefits or terminations, or environmental damage.
A disadvantage of this structure is the tax that many jurisdictions, particularly outside the United
States, impose on transfers of the individual assets, whereas stock transactions can frequently be
structured as like-kind exchanges or other arrangements that are tax-free or tax-neutral, both to
the buyer and to the seller's shareholders.
The terms "demerger", "spin-off" and "spin-out" are sometimes used to indicate a situation where
one company splits into two, generating a second company separately listed on a stock exchange.

Merger
In business or economics a merger is a combination of two companies into one larger company.
Such actions are commonly voluntary and involve stock swap or cash payment to the target.
Stock swap is often used as it allows the shareholders of the two companies to share the risk
involved in the deal. A merger can resemble a takeover but result in a new company name (often
combining the names of the original companies) and in new branding; in some cases, terming the
combination a "merger" rather than an acquisition is done purely for political or marketing
reasons.

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Classifications of mergers
Horizontal mergers take place where the two merging companies produce similar product in
the same industry. Horizontal mergers are those mergers where the company’s manufacturing
similar kinds of commodities or running similar type of businesses merge with each other. The
principal objective behind this type of mergers is to achieve economies of scale in the production
procedure through carrying off duplication of installations, services and functions, widening the
line of products, decrease in working capital and fixed assets investment, getting rid of
competition, minimizing the advertising expenses, enhancing the market capability and to get
more dominance on the market.

Nevertheless, the horizontal mergers do not have the capacity to ensure the market about the
product and steady or uninterrupted raw material supply. Horizontal mergers can sometimes
result in monopoly and absorption of economic power in the hands of a small number of
commercial entities.

According to strategic management and microeconomics, the expression horizontal merger

delineates a form of proprietorship and control. It is a plan, which is utilized by a corporation or
commercial enterprise for marketing a form of commodity or service in a large number of
markets. In the context of marketing, horizontal merger is more prevalent in comparison to
horizontal merger in the context of production or manufacturing.
Horizontal Integration
Sometimes, horizontal merger is also called as horizontal integration. It is totally opposite in
nature to vertical merger or vertical integration.

Horizontal Monopoly
A monopoly formed by horizontal merger is known as a horizontal monopoly. Normally, a
monopoly is formed by both vertical and horizontal mergers. Horizontal merger is that condition
where a company is involved in taking over or acquiring another company in similar form of
trade. In this way, a competitor is done away with and a wider market and higher economies of
scale are accomplished.

In the process of horizontal merger, the downstream purchasers and upstream suppliers are also
controlled and as a result of this, production expenses can be decreased.

Horizontal Expansion
An expression which is intimately connected to horizontal merger is horizontal expansion. This
refers to the expansion or growth of a company in a sector that is presently functioning. The aim
behind a horizontal expansion is to grow its market share for a specific commodity or service.

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Examples of Horizontal Mergers

Following are the important examples of horizontal mergers:

The formation of Brook Bond Lipton India Ltd. through the merger of Lipton India and Brook
Bond
The merger of Bank of Mathura with ICICI (Industrial Credit and Investment Corporation of
India) Bank
The merger of BSES (Bombay Suburban Electric Supply) Ltd. with Orissa Power Supply
Company

Vertical mergers occur when two firms, each working at different stages in the production of
the same good, combine.

Congeneric mergers occur where two merging firms are in the same general industry, but
they have no mutual buyer/customer or supplier relationship, such as a merger between a bank
and a leasing company. Example: Prudential's acquisition of Bache & Company.

Conglomerate mergers take place when the two firms operate in different industries.
A unique type of merger called a reverse merger is used as a way of going public without the
expense and time required by an IPO.
The contract vehicle for achieving a merger is a "merger sub".
The occurrence of a merger often raises concerns in antitrust circles. Devices such as the
Herfindahl index can analyze the impact of a merger on a market and what, if any, action could
prevent it. Regulatory bodies such as the European Commission, the United States Department
of Justice and the U.S. Federal Trade Commission may investigate anti-trust cases for
monopolies dangers, and have the power to block mergers.

Accretive mergers are those in which an acquiring company's earnings per share (EPS)
increase. An alternative way of calculating this is if a company with a high price to earnings ratio
(P/E) acquires one with a low P/E.

Dilutive mergers are the opposite of above, whereby a company's EPS decreases. The
company will be one with a low P/E acquiring one with a high P/E.
The completion of a merger does not ensure the success of the resulting organization; indeed,
many mergers (in some industries, the majority) result in a net loss of value due to problems.
Correcting problems caused by incompatibility—whether of technology, equipment, or corporate
culture— diverts resources away from new investment, and these problems may be exacerbated
by inadequate research or by concealment of losses or liabilities by one of the partners.

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Overlapping subsidiaries or redundant staff may be allowed to continue, creating inefficiency,
and conversely the new management may cut too many operations or personnel, losing expertise
and disrupting employee culture. These problems are similar to those encountered in takeovers.
For the merger not to be considered a failure, it must increase shareholder value faster than if the
companies were separate, or prevent the deterioration of shareholder value more than if the
companies were separate.

Distinction between Mergers and Acquisitions

Although they are often uttered in the same breath and used as though they were synonymous,
the terms merger and acquisition mean slightly different things.
1) When one company takes over another and clearly established itself as the new owner,
the purchase is called an acquisition. From a legal point of view, the target company
ceases to exist, the buyer "swallows" the business and the buyer's stock continues to be
traded.

2) In the pure sense of the term, a merger happens when two firms, often of about the same
size, agree to go forward as a single new company rather than remain separately owned
and operated. This kind of action is more precisely referred to as a "merger of equals".
Both companies' stocks are surrendered and new company stock is issued in its place. For
example, both Daimler-Benz and Chrysler ceased to exist when the two firms merged,
and a new company, DaimlerChrysler, was created.

3) In practice, however, actual mergers of equals don't happen very often. Usually, one
company will buy another and, as part of the deal's terms, simply allow the acquired firm
to proclaim that the action is a merger of equals, even if it is technically an acquisition.
Being bought out often carries negative connotations, therefore, by describing the deal
euphemistically as a merger, deal makers and top managers try to make the takeover
more palatable.

4) A purchase deal will also be called a merger when both CEOs agree that joining together
is in the best interest of both of their companies. But when the deal is unfriendly - that is,
when the target company does not want to be purchased - it is always regarded as an
acquisition.

5) Whether a purchase is considered a merger or an acquisition really depends on whether

the purchase is friendly or hostile and how it is announced. In other words, the real
difference lies in how the purchase is communicated to and received by the target
company's board of directors, employees and shareholders. It is quite normal though for

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 M&A deal communications to take place in a so called 'confidentiality bubble' whereby
information flows are restricted due to confidentiality agreements (Harwood, 2005).

When companies are merging & acquisition they valuate the business.
Business valuation
The five most common ways to valuate a business are
1. Asset valuation,
2. Historical earnings valuation,
3. Future maintainable earnings valuation,
4. Relative valuation (comparable company & comparable transactions),
5. Discounted cash flow (DCF) valuation.

Professionals who valuate businesses generally do not use just one of these methods but a
combination of some of them, as well as possibly others that are not mentioned above, in order to
obtain a more accurate value. These values are determined for the most part by looking at a
company's balance sheet and/or income statement and withdrawing the appropriate information.
The information in the balance sheet or income statement is obtained by one of three accounting
measures: a Notice to Reader, a Review Engagement or an Audit.

Accurate business valuation is one of the most important aspects of M&A (Merger and
Acquisitions) as valuations like these will have a major impact on the price that a business will
be sold for. Most often this information is expressed in a Letter of Opinion of Value (LOV) when
the business is being valuated for interest's sake. There are other, more detailed ways of
expressing the value of a business. These reports generally get more detailed and expensive as
the size of a company increases; however, this is not always the case as there are many
complicated industries which require more attention to detail, regardless of size.

FINANCING M&A
Mergers are generally differentiated from acquisitions partly by the way in which they are
financed and partly by the relative size of the companies. Various methods of financing an M&A
deal exist:

Cash
Payment by cash. Such transactions are usually termed acquisitions rather than mergers because
the shareholders of the target company are removed from the picture and the target comes under
the (indirect) control of the bidder's shareholders alone. A cash deal would make more sense

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during a downward trend in the interest rates. Another advantage of using cash for an acquisition
is that there tends to lesser chances of EPS dilution for the acquiring company. But a caveat in
using cash is that it places constraints on the cash flow of the company.

Financing
Financing capital may be borrowed from a bank, or raised by an issue of bonds. Alternatively,
the acquirer's stock may be offered as consideration. Acquisitions financed through debt are
known as leveraged buyouts if they take the target private, and the debt will often be moved
down onto the balance sheet of the acquired company.

Hybrids
An acquisition can involve a combination of cash and debt, or a combination of cash and stock of
the purchasing entity.

Factoring
Factoring can provide the necessary extra to make a merger or sale work. Hybrid can work as ad
e-denit

Specialist M&A Advisory firms

Although at present the majority of M&A advice is provided by full-service investment banks,
recent years have seen a rise in the prominence of specialist M&A advisers, who only provide
M&A advice (and not financing). To perform these services in the US, an advisor must be a
licensed broker dealer, and subject to SEC (FINRA) regulation. More information on M&A
advisory firms is provided at corporate advisory.

Motives behind M&A (Mergers and Acquisitions)

The dominant rationale used to explain M&A activity is that acquiring firms seek improved
financial performance. The following motives are considered to improve financial performance:
Synergies: This refers to the fact that the combined company can often reduce its fixed costs by
removing duplicate departments or operations, lowering the costs of the company relative to the
same revenue stream, thus increasing profit margins. Increased revenue/Increased Market Share:
This assumes that the buyer will be absorbing a major competitor and thus increase its market
power (by capturing increased market share) to set prices.

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Cross selling: For example, a bank buying a stock broker could then sell its banking products
to the stock broker's customers, while the broker can sign up the bank's customers for brokerage
accounts. Or, a manufacturer can acquire and sell complementary products.
Economies of Scale: For example, managerial economies such as the increased opportunity of
managerial specialization. Another example are purchasing economies due to increased order
size and associated bulk-buying discounts.

Taxes: A profitable company can buy a loss maker to use the target's loss as their advantage by
reducing their tax liability. In the United States and many other countries, rules are in place to
limit the ability of profitable companies to "shop" for loss making companies, limiting the tax
motive of an acquiring company.

Geographical or other diversification: This is designed to smooth the earnings results of a

company, which over the long term smoothens the stock price of a company, giving conservative
investors more confidence in investing in the company. However, this does not always deliver
value to shareholders.
Resource transfer: Resources are unevenly distributed across firms (Barney, 1991) and the
interaction of target and acquiring firm resources can create value through either overcoming
information asymmetry or by combining scarce resources.

Vertical integration: Vertical Integration occurs when an upstream and downstream firm
merges (or one acquires the other). There are several reasons for this to occur. One reason is to
internalize an externality problem. A common example is of such an externality is double
marginalization. Double marginalization occurs when both the upstream and downstream firms
have monopoly power; each firm reduces output from the competitive level to the monopoly
level, creating two deadweight losses. By merging the vertically integrated firm can collect one
deadweight loss by setting the upstream firm's output to the competitive level. This increases
profits and consumer surplus. A merger that creates a vertically integrated firm can be profitable.

However, on average and across the most commonly studied variables, acquiring firms’ financial
performance does not positively change as a function of their acquisition activity. Therefore,
additional motives for merger and acquisition that may not add shareholder value include:

Diversification: While this may hedge a company against a downturn in an individual industry
it fails to deliver value, since it is possible for individual shareholders to achieve the same hedge
by diversifying their portfolios at a much lower cost than those associated with a merger.
Manager's hubris: manager's overconfidence about expected synergies from M&A which results
in overpayment for the target company.

Empire building: Managers have larger companies to manage and hence more power.

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Manager's compensation: In the past, certain executive management teams had their payout
based on the total amount of profit of the company, instead of the profit per share, which would
give the team a perverse incentive to buy companies to increase the total profit while decreasing
the profit per share (which hurts the owners of the company, the shareholders); although some
empirical studies show that compensation is linked to profitability rather than mere profits of the
company.

EFFECTS ON MANAGEMENT
A study published in the July/August 2008 issue of the Journal of Business Strategy suggests that
mergers and acquisitions destroy leadership continuity in target companies’ top management
teams for at least a decade following a deal. The study found that target companies lose 21
percent of their executives each year for at least 10 years following an acquisition – more than
double the turnover experienced in non-merged firms.

THE GREAT MERGER MOVEMENT OF MERGER & ACQUISITION

The Great Merger Movement was a predominantly U.S. business phenomenon that happened
from 1895 to 1905. During this time, small firms with little market share consolidated with
similar firms to form large, powerful institutions that dominated their markets. It is estimated that
more than 1,800 of these firms disappeared into consolidations, many of which acquired
substantial shares of the markets in which they operated. The vehicle used were so-called trusts.
To truly understand how large this movement was—in 1900 the value of firms acquired in
mergers was 20% of GDP. In 1990 the value was only 3% and from 1998–2000 is was around
10–11% of GDP. Organizations that commanded the greatest share of the market in 1905 saw
that command disintegrate by 1929 as smaller competitors joined forces with each other.
However, there were companies that merged during this time such as DuPont, Nabisco, US Steel,
and General Electric that have been able to keep their dominance in their respected sectors today
due to growing technological advances of their products, patents, and brand recognition by their
customers. These companies that merged were consistently mass producers of homogeneous
goods that could exploit the efficiencies of large volume production. Companies which had
specific fine products, like fine writing paper, earned their profits on high margin rather than
volume and took no part in Great Merger Movement.

SHORT-RUN FACTORS
One of the major short run factors that sparked in The Great Merger Movement was the
desire to keep prices high. That is, with many firms in a market, supply of the product remains
high. During the panic of 1893, the demand declined. When demand for the good falls, as
illustrated by the classic supply and demand model, prices are driven down. To avoid this decline
in prices, firms found it profitable to collude and manipulate supply to counter any changes in

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demand for the good. This type of cooperation led to widespread horizontal integration amongst
firms of the era. Focusing on mass production allowed firms to reduce unit costs to a much lower
rate. These firms usually were capital-intensive and had high fixed costs. Because new machines
were mostly financed through bonds, interest payments on bonds were high followed by the
panic of 1893, yet no firm was willing to accept quantity reduction during this period.
LONG-RUN FACTORS
In the long run, due to the desire to keep costs low, it was advantageous for firms to
merge and reduce their transportation costs thus producing and transporting from one location
rather than various sites of different companies as in the past. This resulted in shipment directly
to market from this one location. In addition, technological changes prior to the merger
movement within companies increased the efficient size of plants with capital intensive assembly
lines allowing for economies of scale. Thus improved technology and transportation were
forerunners to the Great Merger Movement. In part due to competitors as mentioned above, and
in part due to the government, however, many of these initially successful mergers were
eventually dismantled. The U.S. government passed the Sherman Act in 1890, setting rules
against price fixing and monopolies. Starting in the 1890s with such cases as U.S. versus
Addyston Pipe and Steel Co., the courts attacked large companies for strategizing with others or
within their own companies to maximize profits. Price fixing with competitors created a greater
incentive for companies to unite and merge less than one name so that they were not competitors
anymore and technically not price fixing.

CROSS-BORDER M&A MERGERS AND ACQUISITIONS

In a study conducted in 2000 by Lehman Brothers, it was found that, on average, large
M&A deals cause the domestic currency of the target corporation to appreciate by 1% relative to
the acquirer's. For every $1-billion deal, the currency of the target corporation increased in value
by 0.5%. More specifically, the report found that in the period immediately after the deal is
announced, there is generally a strong upward movement in the target corporation's domestic
currency (relative to the acquirer's currency). Fifty days after the announcement, the target
currency is then, on average, 1% stronger.

The rise of globalization has exponentially increased the market for cross border M&A. In 1996
alone there were over 2000 cross border transactions worth a total of approximately $256 billion.
This rapid increase has taken many M&A firms by surprise because the majority of them never
had to consider acquiring the capabilities or skills required to effectively handle this kind of
transaction. In the past, the market's lack of significance and a more strictly national mindset
prevented the vast majority of small and mid-sized companies from considering cross border
intermediation as an option which left M&A firms inexperienced in this field. This same reason
also prevented the development of any extensive academic works on the subject.

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Due to the complicated nature of cross border M&A, the vast majority of cross border actions
have unsuccessful results. Cross border intermediation has many more levels of complexity to it
than regular intermediation seeing as corporate governance, the power of the average employee,
company regulations, political factors customer expectations, and countries' culture are all
crucial factors that could spoil the transaction. However, with the weak dollar in the U.S. and
soft economies in a number of countries around the world, we are seeing more cross-border
bargain hunting as top companies seek to expand their global footprint and become more agile at
creating high-performing businesses and cultures across national boundaries.

Even mergers of companies with headquarters in the same country are very much of this type
(cross-border Mergers). After all, when Boeing acquires McDonnell Douglas, the two American
companies must integrate operations in dozens of countries around the world. This is just as true
for other supposedly "single country" mergers, such as the $27 billion dollar merger of Swiss
drug makers Sandoz and Ciba-Geigy.

A number of western government officials are expressing concern over the commercial
information for corporate acquisitions being sourced by sovereign governments & state
enterprises.

An ad hoc group of SWF Investment Directors and Managers have now established a database
called SWF Investments and this database provides shared acquisition information to the SWFs.

The SWF website is restricted and it states: "SWF Investments are a resource which has been
established by a number of sovereign wealth funds and state enterprises to produce acquisition
and investment databases and forecasting tools for potential acquisition targets. Subscription to
SWF Investments is by invitation only, and is restricted to government organizations or state
enterprises."

The database seems to be initially concentrating on London Stock Exchange listed companies;
however it is believed that the database will in a matter of weeks be extended to include all the
companies listed on the stock exchanges of most of the developed countries.

Western government are now in a difficult position, as public opinion and the trades unions
prefer the protection and domestic ownership of national companies, however the reality of the
present economic situation suggests that an injection of capital into many of the target company
may in fact save those companies from bankruptcy.

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Major M&A (MERGER AND ACQUISITION) in the 1990s:

Top 10 M&A deals worldwide by value (in mil. USD) from 1990 to 1999:
Rank Year Purchaser Purchased Transaction value
(In mil. USD)
1. 1999 Vodafone Air Touch PLC Mannesmann 183,000
2. 1999 Pfizer Warner-Lambert 90,000
3. 1998 Exxon Mobil
77,200
4. 1999 Citicorp Travelers Group
73,000
5. 1999 SBC Communications Ameritech Corporation 63,000
6. 1999 Vodafone Group Air Touch Communications
60,000
7. 1998 Bell Atlantic GTE 53,360
8. 1998 BP Amoco 53,000
9. 1999 Qwest Communications US WEST 48,000
10. 1997 World com MCI Communications 42,000

Major M&A (MERGER AND ACQUISITION) from 2000 to present:

Top 9 M&A deals worldwide by value (in mil. USD) since 2000:
Rank Year Purchaser Purchase Transaction value
(in mil. USD)
1. 2000 Fusion: America Online Inc. (AOL) Time Warner
164,747
2. 2000 Glaxo Welcome Plc. SmithKline Beecham Plc.
75,961
3. 2004 Royal Dutch Petroleum Co. Shell Transport & Trading Co
74,559

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4. 2006 AT&T Inc. BellSouth Corporation
72,671
5. 2001 Comcast Corporation AT&T Broadband & Internet Svcs. 72,041
6. 2004 Sanofi - Synthelabo SA Aventis SA
60,243
7. 2000 Spin-off: Nortel Networks Corporation
59,974
8. 2002 Pfizer Inc. Pharmacia Corporation
59,515
9. 2004 JP Morgan Chase & Co Bank One Corp
58,761

MERGERS AND ACQUISITIONS LAWS

Business firms opt for mergers and acquisitions mostly for consolidating a fragmented market
and also for increasing their operational efficiency, which give them a competitive edge. Nations
across the globe have promulgated Mergers and Acquisitions Laws to monitor the functioning of
the business units therein. An estimate made in 2007 put the number of global competition laws
at 106. They possess merger control provisions.

While most mergers and acquisitions increase the operational efficiency of business firms some
can also lead to a building up of monopoly power. The anti-competitive effects are achieved
either through coordinated effects or unilateral effects. Sometimes mergers and acquisitions tend
to create a collusive market structure.

However, free and fair competition is seen to maximize the consumers' interests both in terms of
quantity and price.

MERGERS AND ACQUISITIONS LAWS: THE GLOBAL

PERSPECTIVE
As per global experience around 85% of acquisitions and mergers are devoid of any competitive
concerns. They get approval within a period of 30 to 60 days.

The remaining percentages of firms usually have a substantially long gestation period for getting
the legal approval. These cases are relatively complex and need a close examination of the
various aspects by the regulatory bodies.

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As per the guidelines from “The International Competition Network” simple merger and
acquisitions cases should receive approval within a period of 6 weeks. The comparable time
frame for complex cases is 6 months.

It may be noted that the 'Competition Network' mentioned above is actually an association of
international competition authorities.

MERGERS AND ACQUISITIONS LAWS: THE INDIAN

PERSPECTIVE
Indian competition law grants a maximum time period of 210 days for the determination of the
combination, which comprises acquisitions, mergers, amalgamations and the like. One needs to
take note of the fact that this stated time frame is clearly distinct from the minimum compulsory
wait period for applicants.

As per the law, the compulsory period of waiting for applicants can either be 210 days starting
from the day of notice filing or receipt of the Commission's order, whichever occurs earlier.

The threshold limits for firms entering business combinations are substantially high under the
Indian law. The threshold limits are set either in terms of the asset value or or in terms the firm's
turnover. Indian threshold limits are greater than those for the EU. They are twice as high when
compared with UK.

The Indian law also provides for the modern day phenomenon of merger and acquisitions, which
are cross border in nature. As per the law domestic nexus is a pre-requisite for notification on
this type of combinations.

It can be noted that Competition Act, 2002 has undergone a recent amendment. This has replaced
the voluntary notification regime with a mandatory regime. Of the total number of 106 countries,
which possess competition laws only 9 are thought to be credited with a voluntary notification
regime. Voluntary notification regimes are generally associated with business uncertainties.

Post-combination, if firms are seen to be involved in anti-competitive practices de-merger shows

the way out.

MORE ON INDIAN MERGERS AND ACQUISITIONS

LAWS

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Indian Income Tax Act has provision for tax concessions for mergers/demergers between two
Indian companies. These mergers/demergers need to satisfy the conditions pertaining to section
2(19AA) and section 2(1B) of the Indian Income Tax Act as per the applicable situation.

In case of an Indian merger when transfer of shares occur for a company they are entitled to a
specific exemption from the capital gains tax under the “Indian I-T tax Act”. These companies
can either be of Indian origin or foreign ones.

A different set of rules is however applicable for the 'foreign company mergers'. It is a situation
where an Indian company owns the new company formed out of the merger of two foreign
companies.

It can be noted that for foreign company mergers the share allotment in the merged foreign
company in place of shares surrendered by the amalgamating foreign company would be termed
as a transfer, which would be taxable under the Indian tax law.

Also as per conditions set under section 5(1), the 'Indian I-T Act' states that, global income
accruing to an Indian company would also be included under the head of 'scope of income' for
the Indian company.

CERTIFIED MERGERS AND ACQUISITIONS:

There are a number of certified mergers and acquisitions advisory programs available at the
present time. With the help of these programs, a lot of commercial entities are getting involved in
merger and acquisition activities. These programs are offered by numerous merger and
acquisition consultants and agencies. Some of them are also conducting educational programs
and seminars for the purpose of educating financial professionals about the nuances of certified
mergers and acquisitions and growing the knowledge base of the merger and acquisition
professionals.

One of the most important certified merger and acquisition advisory programs is the Certified
Valuation Manager Program offered by the American Academy of Financial Management
(AAFM). The American Academy of Financial Management is also hosting a number of
Certified Valuation Manager Training Conferences throughout the year.

The certified mergers and acquisitions agencies help commercial enterprises or business
corporations in acquiring or taking over other companies and also in significant issues related to
mergers and acquisitions. These agencies also help business entities regarding management

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buyouts (MBOs), finding acquisition lookup, sources of equity and debt financing, as well as
valuation of businesses.

In this modern-day world, the power of globalization, market liberalization and technological
advancement has contributed towards the formation of a increasingly competitive and active
commercial world, where mergers and acquisitions are more and more utilized for achieving
optimization of firm value and competitive benefits.

In the United States, the Alliance of Merger & Acquisition Advisors (AM&AA) is a principal
global institution, which offers specialized services related to the academic and resource
requirements in the profession of merger and acquisition advisory services. It has more than 500
members and has attained the position of a market leader in the educational domain of mergers
and acquisitions. The members are merger and acquisition professionals offering transactional
support and mediator services. The majority of the members have qualifications like MBA, CPA,
or JD. The merger and acquisition training program offered by the Alliance of Merger &
Acquisition Advisors is known as CM&AA certification.

The certified mergers and acquisition advisory services can be broadly categorized into the
following types:
1. Business Valuation Services
2. Funding Services (Acquisition financing, recapitalizations, financial reconstruction)
3. Asset Disposal Services
4. Acquisition Lookup
5. Management Buyouts (MBOs)
6. Certified Equipment and Machinery Estimation

The Sarbanes-Oxley Act plays a major role in the mergers and acquisitions that take place in the
United States. It was introduced in the year 2002 and is also called as the Public Company
Accounting Reform and Investor Protection Act of 2002. One of the principal objectives behind
the promulgation of this act is to maintain transparency in the mergers and acquisitions
transactions and protect the investors.

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Course Content of a Certified Merger and Acquisition Advisory
Program:
The course content of a Certified Merger and Acquisition Advisory Program deals with
various regulatory and legal features of mergers and acquisitions and usually includes the
following:
1. Forms of transactions/deals
2. The procedure of merger and acquisition
3. Principal matters that should be taken into account
4. Negotiation of contract
5. Warranties and representations
6. Consideration or compensations
7. Regulatory matters- acquisition performed by a public company
8. Enquiries and searches
9. Due diligence
10. Due diligence- post acquisition
11. Title to international properties
12. Cross-border deals
13. Coordinating/organizing cross-border transactions
14. Taking over distressed firms
15. Analyzing the parties to merger or acquisition
16. Valuation of the probable acquisition
17. Designing the funding for acquisition
18. Regulatory and legal matters associated with acquisition of a public company
19. Code for mergers and acquisitions
20. Comprehending the ideas of merger and acquisition code
21. Formation of a takeover deal
22. Blueprinting the documentation
23. The areas of difficulty that should be on the lookout
24. Workshops on mergers and acquisitions and case studies.

ADVANTAGES OF ACQUISITION
Acquisition provides the following advantages to the
companies which are merged:
1) Economies of scope the notion of economies of scope resemble that of economies of
scale. Economies of scale principally denote effectiveness related to alterations in the
supply side, for example, growing or reducing production scale of an individual form of
commodity. On the other hand, economies of scope denote effectiveness principally
related to alterations in the demand side, for example growing or reducing the range of

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 marketing and supply of various forms of products. Economies of scope are one of the
principal causes for marketing plans like product lining, product bundling, as well as
family branding.
2) Economies of scale Economies of scale refer to the cost benefits received by a company
as the result of a horizontal merger. The merged company is able to have bigger
production volume in comparison to the companies operating separately. Therefore, the
merged company can derive the benefits of economies of scale. The maximum use of
plant facilities can be done by the merged company, which will lead to a decrease in the
average expenses of the production.

3) Growth or expansion: Expansion of business, firm, capital and increase in sale in

acquisition. The business in increase and company gets more profit. By gaining more
profit the business can research for new product and make the organization more
profitable.
4) Risk diversification: Risk is divided into on both the companies which are merged. The
risk of loss is divided. If business face loss then the amount of loss is divided in all
companies which are merged.
5) Greater market capability and lesser competition: If one acquired the company who is
direct competitor that company, then the business face less competition in the market.
The both companies are now one companies and that why the marker cannot get
6) Financial synergy (Improved creditworthiness, enhancement of borrowing power, and
decrease in the cost of capital, growth of value per share and price earnings ratio, capital
raising, smaller flotation expenses): Financial condition of business is good or better,
after acquisition the company find more sources. The get more finance from internal and
external sources.
7) Increased fixed cost and static marginal cost: Fixed cost is increased due to expansion of
business, now the company’s production is increase to that extent where the fixed cost is
increased. The fixed cost fixed at all the level of production but after acquisition the
business.
8) A larger firm may be able to operate more efficiently than two smaller firms, thereby
reducing costs. Acquisition may generate economies of scale. This means that the
average production cost will fall as production volume increases. A acqusition may allow
a firm to decrease costs by more closely coordinating production and distribution.
Finally, economies may be achieved when firms have complementary resources—for
example, when one firm has excess production capacity and another has insufficient
capacity.
9) Tax gains in mergers may arise because of unused tax losses, unused debt capacity,
surplus funds, and the write-up of depreciable assets. The tax losses of target corporations
can be used to offset the acquiring corporation's future income. These tax losses can be

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 used to offset income for a maximum of 15 years or until the tax loss is exhausted. Only
tax losses for the previous three years can be used to offset future income.

10) A company that has earned profits may find value in the tax losses of a target
corporation that can be used to offset the income it plans to earn. A merger may not,
however, be structured solely for tax purposes. In addition, the acquirer must continue to
operate the pre-acquisition business of the company in a net loss position. The tax
benefits may be less than their "face value," not only because of the time value of money,
but also because the tax loss carry-forwards might expire without being fully utilized.

11) Tax advantages can also arise in an acquisition when a target firm carries assets
on its books with basis, for tax purposes, below their market value. These assets could be
more valuable, for tax purposes, if they were owned by another corporation that could
increase their tax basis following the acquisition. The acquirer would then depreciate the
assets based on the higher market values, in turn, gaining additional depreciation benefits.

12) Interest payments on debt are a tax-deductible expense, whereas dividend

payments from equity ownership are not. The existence of a tax advantage for debt is an
incentive to have greater use of debt, as opposed to equity, as the means of financing
merger and acquisition transactions. Also, a firm that borrows much less than it could
may be an acquisition target because of its unused debt capacity. While the use of
financial leverage produces tax benefits, debt also increases the likelihood of financial
distress in the event that the acquiring firm cannot meet its interest payments on the
acquisition debt.

13) A firm with surplus funds may wish to acquire another firm. The reason is that
distributing the money as a dividend or using it to repurchase shares will increase income
taxes for shareholders. With an acquisition, no income taxes are paid by shareholders.

14) Acquiring firms may be able to more efficiently utilize working capital and fixed
assets in the target firm, thereby reducing capital requirements and enhancing
profitability. This is particularly true if the target firm has redundant assets that may be
divested.

15) The cost of debt can often be reduced when two firms merge. The combined firm
will generally have reduced variability in its cash flows. Therefore, there may be
circumstances under which one or the other of the firms would have defaulted on its debt,
but the combined firm will not. This makes the debt safer, and the cost of borrowing may
decline as a result. This is termed the coinsurance effect.

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 16) Diversification is often cited as a benefit in mergers. Diversification by itself,
however, does not create any value because stockholders can accomplish the same thing
as the merger by buying stock in both firms.

17) Obtaining quality staff or additional skills, knowledge of your industry or sector
and other business intelligence. For instance, a business with good management and
process systems will be useful to a buyer who wants to improve their own. Ideally, the
business you choose should have systems that complement your own and that will adapt
to running a larger business.

18) Accessing funds or valuable assets for new development. Better production or
distribution facilities are often less expensive to buy than to build. Look for target
businesses that are only marginally profitable and have large unused capacity which can
be bought at a small premium to net asset value.

19) Business underperforming. For example, if you are struggling with regional or
national growth it may well be less expensive to buy an existing business than to expand
internally.

20) Accessing a wider customer base and increasing your market share. Your target
business may have distribution channels and systems you can use for your own offers.

21) Diversification of the products, services and long-term prospects of your business.
A target business may be able to offer you products or services which you can sell
through your own distribution channels.

22) Reducing costs and overheads through shared marketing budgets, increased
purchasing power and lower costs.

23) Reducing competition. Buying up new intellectual property, products or services

may be cheaper than developing the business.

24) Organic growth, i.e. the existing business plan for growth, needs to be
accelerated. Businesses in the same sector or location can combine resources to reduce
costs, eliminate duplicated facilities or departments and increase revenue.

SWOT (strengths, weaknesses, opportunities and threats) analysis to assess your business.
Analysing your results carefully will show you how to build on strengths, resolve weaknesses,

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exploit opportunities and avoid threats. A SWOT analysis on the Assess external factors,
especially the impact of the economic climate on the price of a deal.

WHAT CAN GO WRONG WITH A MERGER OR ACQUISITION?

The extent and quality of the planning and research you do before a merger or acquisition deal
will largely determine the outcome. Sometimes situations will arise outside your control and you
may find it useful to consider and prepare for these risks.

An acquisition could become expensive if you end up in a bidding war where other parties are
equally determined to buy the target business.

A merger could become expensive if you cannot agree terms such as who will run the combined
business or how long the other owner will remain involved in the business.

Both mergers and acquisitions can damage business performance because of time spent on the
deal and a mood of uncertainty.

Face pitfalls following a deal such as:

1) The target business does not do as well as expected.
2) The costs you expected to save do not materialize.
3) Key people leave.
4) The business cultures are not compatible.
Management accountants and solicitors, with experience in similar deals to help forecast
potential pitfalls and to address any that arise. Read about making mergers work in our guide on
joint ventures and partnering.

Different legal issues can arise at different stages of the acquisition process and require separate
and sequential treatment. Diligence is the process of uncovering all liabilities associated with the
purchase. It is also the process of verifying that claims made by the vendors are correct.
Directors of companies are answerable to their shareholders for ensuring that this process is
properly carried out.

For legal purposes, make sure:

1. Obtain proof that the target business owns key assets such as property, equipment,
intellectual property, copyright and patents
2. Obtain details of past, current or pending legal cases
3. look at the detail in the business' current and possible future contractual obligations with
its employees (including pension obligations), customers and suppliers
4. CONSIDER the impact of a change in the business' ownership on existing contracts

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ALWAYS USE A LAWYER TO CONDUCT LEGAL DUE DILIGENCE
DEAL STAGE
Considering general terms of a potential deal you will probably seek certain confirmations and
commitments from the seller of the target business. These will provide a level of insurance and
comfort about the deal and are indications of the seller's own confidence in their business.

A written statement from the seller that confirms a key fact about the business is known as a
warranty. You may require warranties on the business' assets, the order book, debtors and
creditors, employees, legal claims and the business' audited accounts. A commitment from the
seller to reimburse you in full in certain situations is known as an indemnity. You might seek
indemnities for unreported tax liabilities, for example.

CROSS-BORDER MERGERS
The Companies (Cross-Border Mergers) Regulations 2007 came into force on 15 December
2007 and govern mergers between UK and overseas companies. The regulations introduced a
framework which removed legislative barriers and made it easier for UK companies to engage in
mergers with other companies from within the European Economic Area. Read information on
the regulations governing cross-border mergers on the Department for Business, Enterprise and
Regulatory Reform (BERR) website- Opens in a new window. If you are contemplating a cross-
border merger, make sure you take appropriate professional advice from the start.

THE DEAL ITSELF

After you have registered interest in doing a deal with another business you will probably follow
a process that includes the following steps:
1. Appointing professional advisers - legal and financial.
2. Carrying out due diligence.
3. Valuing the business.
4. Negotiating financing of the acquisition/merger.
5. Making an initial offer subject to contract.
6. Agreeing the main terms of the deal including a payment schedule, warranties and
indemnities from the other business.
7. Updating due diligence based on access to the target business.
8. Finalizing the terms of the deal - including restructuring of the shareholding, if
appropriate.
9. Announcing the deal and communicating it to staff.

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In the case of an Acquisition, will need to integrate key aspects of the two businesses,
specifically:
1. Management
2. Staff
3. Technology
4. Communications
5. Processes, policies and procedures
6. Payroll
7. Training
8. Personnel policies
9. Invoicing and purchasing systems

The role of professionals:

It is important for you to seek professional advice when considering a deal. You may use
bankers, accountants, lawyers, surveyors and value’s for different matters. Advisers with
experience in deals will help you make the right choice, pay a reasonable price and avoid pitfalls
during and after a deal.

Advisers can provide valuable guidance in areas such as valuing the business, financing the deal,
terms and contracts, reviewing legal aspects and specialist valuation of specific areas of the
business.

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