Mergers, Acquisitions and Corporate Restructuring

Unit 1. Introduction to Mergers

Corporate Restructuring is the process of making changes in the composition of a firm’s one or
more business portfolios in order to have a more profitable enterprise. Simply, reorganizing the
structure of the organization to fetch more profits from its operations or is best suited to the
present situation. The process involved in changing the organization of a business. Corporate
restructuring can involve making dramatic changes to a business by cutting out or merging
departments that often has the effect of displacing staff members.

The Corporate Restructuring takes place in two forms:

• Financial Restructuring: The Financial Restructuring may take place due to a drastic fall
in the sales because of the adverse economic conditions. Here, the firm may change the
equity pattern, cross-holding pattern, debt-servicing schedule and the equity holdings. All
this is done to sustain the profitability of the firm and sustain in the market. Generally,
the financial or legal advisors are hired to assist the firms in the negotiations.

• Organizational Restructuring: The Organizational Restructuring means changing the

structure of an organization, such as reducing the hierarchical levels, downsizing the
employees, redesigning the job positions and changing the reporting relationships. This is
done to cut the cost and pay off the outstanding debt to continue with the business
operations in some manner.

Reasons for Restructuring a Company

• Changed Nature of Business: In today’s business environment, the only constant is
change. Companies that refuse to change with the times face the risk of their product line
becoming obsolete. Because of this, businesses experiment with new products, explore
new markets, and reach out to new groups of customers on a continuous basis.
 Businesses seek to diversify into new areas to increase sales, optimize their capacity, and
conversely shed off divisions that do not add much value, to concentrate on core
competencies instead.

• Downsizing: One common reason for restructuring a company is to downsize the

workforce. The changing nature of economy may force the business to adopt new
strategies or alter their product mix, making staff redundant.

• New Work Methods: Traditional organizational systems and controls cater to standard 9
AM to 5 PM office or factory-based work. Newer methods of work, especially outsourcing,
telecommuting, and flex time require new systems, policies, and structures in place,
besides a change in culture, and such requirements may trigger organizational
restructuring.

• New Management Methods: Traditional management science recommends highly

centralized operations, and the top management adopting a command and control style.
The new behavioral approach to management considers human resources a key driver of
strategic advantage and focuses on empowering the workforce and providing considerate
leeway to line managers in conducting day-to-day operations.

• Quality Management: Competitive pressures force most companies to have a serious

look at the quality of their products and services and adopt quality interventions such as
Six Sigma and Total Quality Management. Implementing new quality standards may
require changes in the organization. Most of the new quality applications strive to imbibe
quality in the actual work process rather than maintain a separate quality control
department to accept or reject output based on quality specifications.

• Technology: Innovations in technology, work processes, materials and other factors that
influence the business, may require restructuring to keep up with the times. For instance,
enterprise resource planning that links all systems and procedures of an organizational by
leveraging the power of information technology may initially require a complete overhaul
of the systems and procedures first.

• Mergers and Acquisitions: In today’s corporate world, where survival of the fittest is the
maxim, mergers and acquisitions are commonplace and any merger or acquisition
invariably heralds a restructuring exercise.
Needs for Corporate Restructuring
• To focus on core strengths.
• To achieve economies of scale by expanding to national and international markets.
• Attainment for operational synergy and efficient allocation of managerial capabilities and
infrastructure.
• Ensuring constant supply of raw materials and access to R& D.
• Helps in reducing cost of capital.
• Helps in survival and rehabilitation of a sick company by adjusting losses of the sick unit
with profits of a healthy unit.
• Improve corporate performance to bring it at par with competitors by adopting the fast
changes bought by information technology.

Examples: When Tata Motors launched Sumo and later Indica, it was not just an expansion of its
product portfolio but was an actually an expansion of its business portfolio, but these were
launched from Tata Motors own manufacturing capacity hence it would not qualify as corporate
restructuring. Acquisition of Jaguar Land Rover from Ford by Tata Motors, through its step-down
subsidiary , Jaguar Land Rover Limited, qualifies to be called corporate restructuring.

Main forms of Corporate Restructuring

• Merger: A merger refers to an agreement in which two companies join together to form
one company. In other words, a merger is the combination of two companies into a single
legal entity. In this article, we will look at different types of mergers that companies can
undergo.

• Amalgamation: An amalgamation is a combination of two or more companies into a new

entity. Amalgamation is distinct from a merger because neither company involved
survives as a legal entity. Instead, a completely new entity is formed to house the
combined assets and liabilities of both companies.

• Acquisition: An acquisition is defined as a corporate transaction where one company

purchases a portion or all of another company’s shares or assets. Acquisitions are typically
made in order to take control and build on the target company’s weaknesses or strengths
and capture synergies.

• Divestiture: Disposition or sale of an asset by a company. A company will often divest an

asset which is not performing well, which is not vital to the company's core business, or
which is worth more to a potential buyer or as a separate entity than as part of the
company. Divestitures are essentially a way for a company to manage its portfolio of
assets. As companies grow, they may find that they are trying to focus on too many lines
of business, and they must close some operational units to focus on more profitable lines.
• Demerger: Demerger is the business strategy wherein company transfers one or more of
its business undertakings to another company. In other words, when a company splits off
its existing business activities into several components, with the intent to form a new
company that operates on its own or sell or dissolve the unit so separated.
Spin-off: It is the divestiture strategy wherein the company’s division or
undertaking is separated as an independent company. Once the undertakings are
spinoff, both the parent company and the resulting company act as a separate
corporate entity.
Split-up: A business strategy wherein a company splits-up into one or more
independent companies, such that the parent company ceases to exist. Once the
company is split into separate entities, the shares of the parent company is
exchanged for the shares in the new company and are distributed in the same
proportion as held in the original company, depending on the situation.

• Carve out: A carve-out is the partial divestiture of a business unit in which a parent
company sells minority interest of a child company to outside investors. A company
undertaking a carve-out is not selling a business unit outright but, instead, is selling an
equity stake in that business or spinning the business off on its own while retaining an
equity stake itself. A carve-out allows a company to capitalize on a business segment that
may not be part of its core operations.

• Joint venture: A joint venture (JV) is a business arrangement in which two or more parties
agree to pool their resources for the purpose of accomplishing a specific task. This task
can be a new project or any other business activity. In a joint venture (JV), each of the
participants is responsible for profits, losses, and costs associated with it. However, the
venture is its own entity, separate from the participants' other business interests.

• Reduction of capital: Capital reduction is the process of decreasing a company's

shareholder equity through share cancellations and share repurchases. The reduction of
capital is done by companies for numerous reasons, including increasing shareholder
value and producing a more efficient capital structure.

• Buy back of securities: Buy-back of shares is a method of financial engineering. It can be

described as a procedure which enables a company to go back to the holders of its shares
and offer to purchase the shares held by them. Buy-back helps a company by giving a
better use for its funds than reinvesting these funds in the same business at below
average rates or going in for unnecessary diversification or buying growth through costly
acquisitions.
 • Delisting of securities/ company: The term ”delisting" of securities means removal of
securities of a listed company from a stock exchange. As a consequence of delisting, the
securities of that company would no longer be traded at that stock exchange. In voluntary
delisting, a company decides on its own to remove its securities from a stock exchange
whereas in compulsory delisting , the securities of a company are removed from a stock
exchange as a penal measure for not making submissions/complying with various
requirements set out in the Listing agreement within the time frames prescribed.

Types of Mergers
• Horizontal Mergers: A horizontal merger is a merger between companies that directly
compete with each other. Horizontal mergers are done to increase market power (market
share), further utilize economies of scale, exploit merger synergies. For example, a
famous example of a horizontal merger was between HP (Hewlett-Packard) and Compaq
in 2011. The successful merger between these two companies created a global
technology leader valued at over US$87 billion.

• Vertical Mergers: A vertical merger is a merger between companies that operate along
the supply chain. Therefore, in contrast to a horizontal merger, a vertical merger is the
combination of companies along the production and distribution process of a business.
The rationale behind a vertical merger includes higher quality control, better flow of
information along the supply chain, and merger synergies. For example, a notable vertical
merger happened between America Online and Time Warner in 2000. The merger was
considered a vertical merger due to each company’s different operations in the supply
chain – Time Warner supplied information through CNN and Time Magazine while AOL
distributed information through the internet.
• Market-Extension Mergers: A market-extension merger is a merger between companies
that sell the same products or services but operate in different markets. The goal of a
market-extension merger is to gain access to a larger market and thus a bigger client
base/target market. For example, RBC Centura’s merger with Eagle Bancshares Inc. in
2002 was a market-extension merger that helped RBC with its growing operations in the
North American market. Eagle Bancshares owned Tucker Federal Bank, one of the biggest
banks in Atlanta, with over 250 workers and $1.1 billion in assets.

• Product-Extension Mergers: A product-extension merger is a merger between companies

that sell related products or services and operate in the same market. By employing a
product-extension merger, the merged company is able to group their products together
and gain access to more consumers. It is important to note that the products and services
of both companies are not the same, but they are related. The key is that they utilize
similar distribution channels, common or related production processions, or supply
chains. For example, the merger between Mobilink Telecom Inc. and Broadcom is a
product-extension merger. The two companies operate in the electronics industry and
the resulting merger allowed the companies to combine technologies. The merger
enabled the combination of Mobilink’s 2G and 2.5G technologies with Broadcom’s
802.11, Bluetooth, and DSP products. Therefore, the two companies are able to sell
products that complement each other.
 • Conglomerate Mergers: A conglomerate merger is a merger between companies that are
totally unrelated. There are two types of conglomerate merger: pure and mixed.
A pure conglomerate merger involves companies that are totally unrelated and
that operate in distinct markets.
A mixed conglomerate merger involves companies that are looking to expand
product lines or target markets.

The biggest risk in a conglomerate merger is the immediate shift in business operations
resulting from the merger, as the two companies operate in completely different markets
and offer unrelated products/services.
For example, the merger between Walt Disney Company and the American Broadcasting
Company (ABC) was a conglomerate merger. Walt Disney Company is an entertainment
company while American Broadcasting company is US commercial broadcast TV network.

Ways to acquire a control over a company (a target company):

• By acquiring ,i.e. purchasing a substantial percentage of the voting capital of the target
company.
• By acquiring voting rights of the target company through power of attorney or through a
proxy voting arrangement.
• By acquiring control over an investment or holding company, whether listed or unlisted,
that in turn holds controlling interest in the target company.
• By simply acquiring management control through a formal or informal understanding or
agreement with the existing person (s) in control of the target company.
Benefits of Mergers and Acquisition
• Economies of Scale: This occurs when a larger firm with increase output can reduce
average cost. Lower cost enables lower prices for consumer.
A bigger firm can get a discount for buying large quantities of raw material.
Better rate of interest for large companies.

• Synergy: It is the concept that allows two or more companies to combine together and
either generate more profits or reduce cost together. These companies believe that
combining with each other gives them more benefits than being single and doing the
same.

• Tax Benefits: Under certain conditions, tax benefit may turn out to be underlying motive
for a merger. When a firm with accumulated losses merger with a profit bearing firm, tax
benefits are utilized better because its accumulated loses can be set off against profits of
the profit-making company.

• Utilization of Surplus Funds: A firm in a mature industry may generate a lost of cash but
may not have opportunities for profitable investment. In such a situation, a merger with
another firm having cash compensation often represent a more effective utilization of
surplus funds.

• Diversification: A diversification strategy is the strategy that an organization adopts for

the development of its business. This strategy involves widening the scope of the
organization across different products and market sectors. The strategy is to enter into a
new market or industry which the organization is not currently in, whilst also creating a
new product for the new market.

Challenges to Mergers and Acquisition

• Culture clashes: A company usually has its own distinct culture that has been developing
since its inception. Acquiring a company that has a culture that conflicts with yours can
be problematic. Employees and managers from both companies, as well as their activities,
may not integrate as well as anticipated. Employees may also dislike the move, which may
breed antagonism and anxiety.

• Pressure on suppliers: Following an acquisition, the capacity of the suppliers of the

company may not be enough to provide the additional services, supplies, or materials
that will be needed. This may cripple the operations of the acquisition.
 • Duplication: Acquisitions may lead to employees duplicating each other’s duties. When
two similar businesses combine, there may be cases where two departments or people
do the same activity. This can cause excessive costs on wages. These transactions will
therefore often lead to reorganization and job cuts to maximize efficiencies in human
resources and other processes. This can reduce employee morale and lead to low
productivity.

• Conflicting objectives: The two companies involved in the acquisition may have distinct
objectives since they have been operating individually until the transaction. For instance,
the original company may want to expand into new markets, but the acquired company
may be looking to cut costs. This can bring resistance within the acquisition that can
undermine efforts being made.

• Poorly matched businesses: A business that doesn’t look for expert advice when trying
to identify the most suitable company to acquire may end up targeting a company that
brings more challenges to the equation than benefits. This can deny an otherwise
productive company the chance to grow.

• Brand damage: M&A may hurt the image of the new company or damage the existing
brand. An evaluation on whether the two different brands should be kept separate must
be done before the deal is made.

Merger Strategy – Growth

Mergers and acquisitions have become a popular business strategy for companies looking to
expand into new markets or territories, gain a competitive edge, or acquire new technologies
and skill sets. M&As are especially popular in the professional services space with the growing
wave of retiring Baby Boomers and a rapidly changing economy and marketplace.
Mergers and Acquisition is useful as a growth strategy:
• Fills critical gaps in service offerings or client lists. When the marketplace changes in
response to external events or new laws and regulations, it can create a gap in a firm’s
critical offerings. It is a prime opportunity for a strategic merger.

• Efficient way to acquire talent and intellectual property. Many industries are seeing an
acute shortage of experienced professional staff. Cybersecurity, accounting, and
engineering are just a few examples that immediately come to mind.

• Save time and long learning curves. Much like adding a new business model, a strategic
M&A may help you save considerable time an expense in your growth strategy.
 • Opportunity to leverage synergies. A strategic merger, if done as part of a thoughtful
growth strategy, can result in synergies that offer real value for both the acquired and the
acquiring. There are two basic types of M&A-related synergies: cost and revenue.

• Add a new business model. Many professional services firms are based on a billable-
hours business model, but that is certainly not the only option. Some firms generate
revenue as a fixed fee or through performance incentives. Others may employ
subscription models. Of course, the value of an effective M&A growth strategy is not just
about how you are paid. A merger may also offer a new type of service, such as brokerage,
insurance or money management.

Growth Strategies
1. Intensive Growth
• Ansoff’s Product/Market Matrix

Market penetration strategy: This strategy involves selling existing products to

existing markets. To penetrate and capture the market, a firm may cut prices,
improve distribution network, increase promotional activities etc.

Market Development strategy: This strategy involves extending existing products

to new market. This strategy aims at reaching new customer segments or
expansion into new geographic areas. Market development aims to increase sales
by capturing new market area.

Product Development strategy: This strategy involves developing new products

for existing markets or for new markets. Product development means making
some modifications in the existing product to give value to the customers for their
purchase.
2. Integrative Growth
Vertical integration is a strategy that many companies use to gain control over their
industry’s value chain. This strategy is one of the major considerations when developing
corporate level strategy. The important question in corporate strategy is, whether the
company should participate in one activity or many activities along the industry value
chain.
• Forward Integration: If the manufacturing company engages in sales or after-sales
industries it pursues forward integration strategy. This strategy is implemented
when the company wants to achieve higher economies of scale and larger market
share. Forward integration strategy became very popular with increasing internet
appearance. Many manufacturing companies have built their online stores and
started selling their products directly to consumers, bypassing retailers. Forward
integration strategy is effective when:
Few quality distributors are available in the industry.
Distributors or retailers have high profit margins.
Distributors very expensive, unreliable/unable to meet firm’s distribution
needs.
The industry is expected to grow significantly.
There are benefits of stable production and distribution.
The company has enough resources and capabilities to manage the new
business.

• Backward Integration: When the same manufacturing company starts making

intermediate goods for itself or takes over its previous suppliers, it pursues
backward integration strategy. Firms implement backward integration strategy in
order to secure stable input of resources and become more efficient. Backward
integration strategy is most beneficial when:
Firm’s current suppliers are unreliable, expensive/cannot supply required
inputs.
There are only few small suppliers but many competitors in the industry.
The industry is expanding rapidly.
The prices of inputs are unstable.
Suppliers earn high profit margins.
A company has necessary resources and capabilities to manage the new
business.
3. Diversification Growth
• Concentric diversification: Organizations carry out concentric diversification
through enlarging the production portfolio by adding new products with the aim
of fully utilizing the potential of the existing technologies and marketing system.
It occurs when the organization adds related products or markets. The goal of such
diversification is to achieve strategic fit. Strategic fit allows the organization to
achieve synergy. In essence, synergy is ability of two/more parts of organization
to achieve greater total effectiveness together than would be experienced.

• Conglomerate diversification: It is also known as heterogeneous diversification. It

relates to moving to new products or services that have no technological or
commercial relation with current products, equipment, distribution channels, but
which may appeal to new groups of customers. The major motive behind this kind
of diversification is the high return on investments in the new industry.
Furthermore, the decision to go for this kind of diversification can lead to
additional opportunities indirectly related to further developing the main business
of the organization such as access to new technologies, opportunities for strategic
partnerships, etc. In this type of diversification, synergy can result through the
application of management expertise or financial resources.

• Horizontal diversification: Horizontal integration occurs when an organization

enters a new business at the same stage of production as its current operations.
It involves acquiring or developing new products or offering new services that
could appeal to the organization´s current customer groups. In this case the
organization relies on sales and technological relations to the existing product
lines. Horizontal diversification is desirable if the present customers are loyal to
the current products and if the new products have a good quality.

• Vertical diversification: Vertical diversification occurs when an organization goes

back to previous stages of its production cycle or moves forward to subsequent
stages of the same cycle. This means that the organization goes into production
of raw materials, distribution of its products, or further processing of the present
end product. Backward integration allows the diversifying organization to exercise
more control over the quality of the supplies being purchased. Backward
integration can be undertaken to provide a more dependable source of needed
raw materials. Forward integration allows the organization to assure itself of an
outlet for its products. Forward integration also allows the organization better
control over how its products are sold and serviced.
4. Other Growth Strategies
• BCG Matrix: BCG Matrix is a corporate planning tool, which is used to portray
firm’s brand portfolio or SBUs on a quadrant along relative market share axis and
speed of market growth axis. BCG matrix is a framework created by Boston
Consulting Group to evaluate the strategic position of the business brand portfolio
and its potential. It classifies business portfolio into four categories based on
growth rate of that industry and relative market share.

Dogs. Dogs hold low market share compared to competitors and operate in a
slowly growing market. In general, they are not worth investing in because they
generate low or negative cash returns. But this is not always the truth. Some dogs
may be profitable for long period of time, they may provide synergies for other
brands or SBUs or simple act as a defense to counter competitors moves.
Therefore, it is always important to perform deeper analysis of each brand or SBU
to make sure they are not worth investing in or must be divested. Strategic
choices: Retrenchment, divestiture, liquidation.

Cash cows. Cash cows are the most profitable brands and should be “milked” to
provide as much cash as possible. The cash gained from “cows” should be invested
into stars to support their further growth. According to growth-share matrix,
corporates should not invest into cash cows to induce growth but only to support
them, so they can maintain their current market share. Cash cows are usually large
corporations or SBUs that are capable of innovating new products or processes,
which may become new stars. If there would be no support for cash cows, they
would not be capable of such innovations. Strategic choices: Product
development, diversification, divestiture, retrenchment.
 Stars. Stars operate in high growth industries and maintain high market share.
Stars are both cash generators and cash users. They are the primary units in which
the company should invest its money, because stars are expected to become cash
cows and generate positive cash flows. This is true in rapidly changing industries,
where new innovative products can soon be outcompeted by new technological
advancements, so a star instead of becoming a cash cow, becomes a dog. Strategic
choices: Vertical integration, horizontal integration, market penetration, market
development, product development.

Question marks. Question marks are the brands that require much closer
consideration. They hold low market share in fast growing markets consuming
large amount of cash and incurring losses. It has potential to gain market share
and become a star, which would later become cash cow. Question marks do not
always succeed and even after large amount of investments they struggle to gain
market share and eventually become dogs. Therefore, they require close
consideration to decide if they are worth investing in or not. Strategic choices:
Market penetration, market and product development, divestiture.

Synergy
Synergy is the concept that allows two or more companies to combine together and either
generate more profits or reduce cost together. These companies believe that combining with
each other gives them more benefits than being single and doing the same.

Empirical Evidence on Synergy

Synergy is a stated motive in many mergers and acquisitions. Bhide (1993) examined the motives
behind 77 acquisitions in 1985 and 1986 and reported that operating synergy was the primary
motive in one-third of these takeovers. A number of studies examine whether synergy exists and,
if it does, how much it is worth. If synergy is perceived to exist in a takeover, the value of the
combined firm should be greater than the sum of the values of the bidding and target firms,
operating independently.
V(AB) > V(A) + V(B)
Where
V(AB) = Value of a firm created by combining A and B (Synergy)
V(A) = Value of firm A, operating independently
V(B) = Value of firm B, operating independently
Operating Synergy
Operating synergies are those synergies that allow firms to increase their operating income,
increase growth or both. We would categorize operating synergies into four types:
• Economies of scale that may arise from the merger, allowing the combined firm to
become more cost-efficient and profitable.
• Greater pricing power from reduced competition and higher market share, which should
result in higher margins and operating income.
• Combination of different functional strengths, as would be the case when a firm with
strong marketing skills acquires a firm with a good product line
• Higher growth in new or existing markets, arising from the combination of the two firms.
This would be case when a US consumer products firm acquires an emerging market firm,
with an established distribution network and brand name recognition, and uses these
strengths to increase sales of its products.

Operating synergies can affect margins and growth, and through these the value of the firms
involved in the merger or acquisition.

Financial Synergy
With financial synergies, the payoff can take the form of either higher cash flows or a lower cost
of capital (discount rate). Included are the following:
• A combination of a firm with excess cash, or cash slack, (and limited project opportunities)
and a firm with high-return projects (and limited cash) can yield a payoff in terms of higher
value for the combined firm. The increase in value comes from the projects that were
taken with the excess cash that otherwise would not have been taken. This synergy is
likely to show up most often when large firms acquire smaller firms, or when publicly
traded firms acquire private businesses.
• Debt capacity can increase, because when two firms combine, their earnings and cash
flows may become more stable and predictable. This, in turn, allows them to borrow more
than they could have as individual entities, which creates a tax benefit for the combined
firm. This tax benefit can either be shown as higher cash flows or take the form of a lower
cost of capital for the combined firm.
• Tax benefits can arise either from the acquisition taking advantage of tax laws or from the
use of net operating losses to shelter income. Thus, a profitable firm that acquires a
money-losing firm may be able to use the net operating losses of the latter to reduce its
tax burden. Alternatively, a firm that is able to increase its depreciation charges after an
acquisition will save in taxes and increase its value.
Other Motives

Hubris Hypothesis of Takeovers

The Hubris (pride) hypothesis (Roll, 1986) implies that managers seek to acquire firms for their
own personal motives and that the pure economic gains to the acquiring firm are not the sole
motivation in the acquisition.

Roll stated that the following should occur to those takeovers which are motivated by hubris:
• The stock price of acquiring firm should fall after the market aware of the takeover bid.
This should occur because the takeover is not in the best interest of the acquiring firm’s
stakeholders and does not represent an efficient allocation of wealth.
• The stock price of the target should increase with the bid of control. This should occur
because the acquiring firm is not only going to pay the premium for excess of the value of
the target.
• The combined effect of the rising value of the target and the falling value of the acquiring
firm should be negative. This considers the cost of completing the takeover process.
Through takeover, management not only increase their own wealth but also their power over
richer resources, as well as an increased view of their own importance. But a weakness in this
theory is the assumption that efficient markets do not notice this behavior. According to Mitchell
and Lehn (1990), stock markets can discriminate between “bad” and ”good” takeovers and bad
bidders usually turn to be good targets later on. These empirical results imply that takeover is
still a device for correcting managerial inefficiency, if markets are efficient.

Takeover Process
Target Identification and Choice

Valuation and Offer

Due Diligence and Completion

Post-Acquisition Integration
Tax Motives
Under certain conditions, tax benefit may turn out to be underlying motive for a merger. When
a firm with accumulated losses merger with a profit bearing firm, tax benefits are utilized better
because its accumulated loses can be set off against profits of the profit-making company.
• Many mergers and acquisitions provide an opportunity for corporations and their
shareholders to receive some tax benefits.
• In a small minority of cases, these benefits are large in comparison to the value of the
acquired company, suggesting that taxes provided motivation.

There are several different ways that companies may reduce taxes through a merger or
acquisition, and tax benefits can accrue at both the corporate and the shareholder levels.
• Shareholder Tax: Shareholders of an acquired corporation can receive many forms of
payment when they sell their shares as part of a merger or acquisition. Such receipts may
be deemed taxable or non-taxable. If they are taxable, then the shareholders must pay
capital gains taxes on their gain over basis. If they are not taxable, then shareholders need
pay no taxes until they sell the shares in the acquiring company that they receive as
payment. The latter treatment is clearly preferable to the former from the perspective of
the acquired firm’s shareholders. It may also represent a net gain to shareholders relative
to the no-takeover situation; they may be less likely to sell their shares in the new
company and incur capital gains taxes than they would have been had no acquisition
occurred.
 • Corporate Tax: At the corporate level, the tax treatment of a merger or acquisition
depends on whether the acquiring firm elects to treat the acquired firm as being absorbed
into the parent with its tax attributes intact, or first being liquidated and then received in
the form of its component assets. As indicated earlier, a tax-free reorganization must
follow the first path, while a taxable transaction can be of either type.

Financial Evaluation
Financial evaluation is defined as the process of evaluating various projects, budgets, businesses
and further finance-related subsidiaries to agree on their viability for investment. Financial
evaluation or popularly known as financial analysis is used to examine whether a unit is steady,
liquid, solvent, or profitably adequate to be invested in.

Following approaches are undertaken to assess the value of the target firm:
• Valuation based on assets: Formula,
Value of Firm = Value of all Assets – External Liabilities

• Valuation based on earnings: The target firm may be value on the basis of its earning
capacity with reference to capital funds invested in the target firm, the firm value will
have positive correlation with profits of the firm.

• Dividend based valuation: Formula,

Ke = D0 (1+g) + g = D1 + g
P0 P0
Where,
D0 = Dividend in current year
g = Growth rate of dividend
P0 = Initial Price

• Capital Asset Pricing Model: It is used to find expected rate of return. Formula,
Rs = IRF + (Rm – IRF) Beta
Where,
Rs = Expected rate of return
IRF = Risk free rate of return
Rm= Rate of return on market portfolio
 • Valuation based on Cash Flow Statement: In this case, the value of target firm may be
arrived at by discounting cash flows, as in case if NPV method in case of budgeting as
follows:
Estimate future cash flows
Find out the total present value of these cash flows by discounting at an
appropriate rate
If acquiring firm is agreeing to take over the liabilities of the target firm, then
these liabilities are entered as cash flows.

Joint Venture
A joint venture (JV) is a business arrangement in which two or more parties agree to pool their
resources for the purpose of accomplishing a specific task. This task can be a new project or any
other business activity. In a joint venture (JV), each of the participants is responsible for profits,
losses, and costs associated with it. However, the venture is its own entity, separate from the
participants' other business interests.

Characteristics of a Joint Venture

• Creates Synergy: A joint venture is entered between two or more parties to extract the
qualities of each other. One company may possess a special characteristic which another
company might lack with. Similarly, the other company has some advantage which
another company cannot achieve. These two companies can enter into a joint venture to
generate synergies between them for a greater good. These companies can work on
economies of large scale to give cost advantage.

• Risk and Rewards can be Shared: In a typical joint venture agreement between two or
more organization, may be of the same country or different countries, there are many
diversifications in culture, technology, geographical advantage and disadvantage, target
audience and many more factors to overcome. So, the risks and rewards pertaining to the
activity upon can be shared between parties as decided.

• No Separate Laws: As for joint venture, there is no separate governing body which
regulates the activities of the joint venture. Once they are into a corporate structure, then
the Ministry of Corporate Affairs in association with Registrar of Companies keep a check
on companies. Apart from that, there is no separate law for governing joint ventures.
Advantages of Joint Venture
• Economies of Scale: Joint Venture helps the organizations to scale up with their limited
capacity. The strength of one organization can be utilized by the other. This gives the
competitive advantage to both the organizations to generate economies of scalability.

• Low Cost of Production: When two or more companies join hands together, the main
motive is to provide the products at a most efficient price. And this can be done when the
cost of production can be reduced, or cost of services can be managed. A genuine joint
venture aims at this only to provide best products and services to its consumers.

• Access to New Markets and Distribution Networks: When one organization enters into
joint venture with another organization, it opens a vast market which has a potential to
grow and develop. For example, when an organization of United States of America enters
into a joint venture with another organization based at India, then the company of United
States has an advantage of accessing vast Indian markets with various variants of paying
capacity and diversification of choice.

• Innovation: Joint ventures give an added advantage to upgrading the products and
services with respect to technology. Marketing can be done with various innovative
platforms and technological up gradation helps in making good products at efficient cost.
International companies can come up with new ideas and technology to reduce cost and
provide better quality products.

• Brand Name: A separate brand name can be created for the Joint Venture. This helps in
giving a distinctive look and recognition to the brand. When two parties enter into a joint
venture, then goodwill of one company which is already established in the market can be
utilized by another organization for gaining a competitive advantage over other players
in the market. For example, a big brand of Europe enters into a joint venture with an
Indian company will give synergic advantage as brand is already established across globe.

• Access to Technology: Technology is an attractive reason for organizations to enter into

a joint venture. Advanced technology with one organization to produce superior quality
of products saves a lot of time, energy, and resources. Without the further investment of
huge amount again to create a technology which is already in existence, the access to
same technology can be done only when companies enter into joint venture and give a
competitive advantage.
Disadvantages of Joint Ventures
• Vague objectives: The objectives of a joint venture are not 100 percent clear and rarely
communicated clearly to all people involved.

• Flexibility can be restricted: There are times when flexibility is restricted in a joint
venture. When that happens, participants have to focus on the joint venture, and their
individual businesses suffer in the process.

• There is no such thing as an equal involvement: An equal pay may be possible, but it is
extremely unlikely for all the companies working together to share the same involvement
and responsibilities.

• Limited outside opportunities: It is very common for joint venture contracts to restrict
outside activities of participant companies while working on a venture project. You need
to make sure you understand what you are getting into if you don’t want to negatively
impact your entire business.

• Great imbalance: Because different companies are working together, there is a great
imbalance of expertise, assets, and investment. This can have a negative impact on the
effectiveness of the joint venture.

• Clash of cultures: A clash of cultures and management styles may result in poor co-
operation and integration. People with different beliefs, tastes, and preferences can get
in the way big time if left unchecked.

Strategic Alliance
Strategic Alliance is an arrangement between two or more firms to carry out a number of
objectives agreed upon by the entities or to fulfil a critical business requirement while operating
as separate organizations. In finer terms, a strategic alliance is a relation that exists amidst two
firms, to do business together, which is more than a regular firm to firm dealing, but less than a
merger or complete partnership.

Types of Strategic Alliance

• Non-equity alliance: A non-equity strategic alliance is created when two or more
companies sign a contractual relationship to pool their resources and capabilities
together.
 Cooperating firms agree to work together, but do not take equity positions in each or
form an independent organization. Contract is given to supply, produce or distribute a
firm’s goods or services. For example,
Licensing agreements
Supply agreements
Distribution agreements

• Equity alliance: An equity strategic alliance is created when one company purchases a
certain equity percentage of the other company. If Company A purchases 40% of the
equity in Company B, an equity strategic alliance would be formed. Equity alliances can
be classified into two general types:
Partial acquisitions, where a company purchases a minority equity stake in
another, such as Viacom purchasing a 35 percent stake in Infinity Broadcasting)
and Mazda(33%) & Ford. Car giants Mazda and Fiat are working together on
developing and manufacturing a roadster, or two-seater convertible
Cross-equity transactions, where each partner becomes an equity stakeholder in
the other. British Airways (25%) and American Airlines (25%)

• Joint Ventures: Where two or more companies, usually of similar size or value, form a
new entity to exploit a business opportunity that neither could do alone.
The teaming up between GE Capital and BankOne to create Monogram Credit
Services
Microsoft & NBC (MSNBC)

Platform Joint Ventures - Two or more partners realize that even together they are
missing a critical core competency or competencies to meet their strategic cooperative
objectives. In order to move quickly, they form a JV to purchase a company or a stake in
a company that has the missing core competency.

Platform alliances work best when the opportunity is very large and the window of time
for exploitation is narrow. Cooperating firms create a legally independent firm. For
Example, BellSouth and Royal KPN wanted to enter the German wireless market without
the risk associated with an acquisition. In 1999, KPN and BellSouth agreed to jointly
purchase E-Plus, a German wireless company. E-plus was the third-largest mobile
operator in Germany with nearly four million customers.
 • Business Level Strategic Alliance
Complementary Alliance:
I. Vertical Alliance: Partnerships that build on the complementarities among
firms that make each more competitive. Include distribution, supplier or
outsourcing alliances where firms rely on upstream or downstream
partners to build competitive advantage. For e.g., Japanese manufacturers
rely on close relationships among suppliers to implement Just-In-Time
inventory systems.

II. Horizontal Alliance: Used to increase the strategic competitiveness of the

partners. Example: Product development agreements between Microsoft
and DreamWorks SKG.

Competition Reduction Alliance: Avoiding competition by using tacit collusion

such as price fixing. Example: OPEC petroleum cartel.

Competition Response Alliance: Firms join forces to respond to a strategic action

of another competitor.

Uncertainty Reduction Alliance: Alliances can be used to hedge against risk and
uncertainty.

• Corporate Level Strategic Alliance:

Diversifying Alliance: Allows a firm to expand into a new product or market area
with an acquisition. For Example, Samsung Group joins with Nissan to build new
autos.

Synergetic Alliance: Create economies of scope between two or more firms,

creating synergy across multiple businesses between firms. For Example, Sony
shares development with many small firms.

Franchising: Allows firms to grow and relatively strong centralized control without
significant capital investments. For Example, McDonald’s.

Reasons for Strategic Alliance

For companies whose product falls in a different product lifecycle, the reasoning for strategic
alliances are different:
 • Slow Cycle: In a slow cycle, the company’s competitive advantages are shielded for
relatively long periods of time. The pharmaceutical industry operates in a slow product
life cycle as the products are not developed yearly and patents last a long time. Strategic
alliances are formed to gain access to a restricted market, maintain market stability, and
establishing a franchise in a new market.

• Standard Cycle: In a standard cycle, the company launches a new product every few years
and may or may not be able to maintain their leading position in an industry. Strategic
alliances are formed to gain market share, try to push out other companies, pool
resources for large capital projects, establish economies of scale, and gain access.

• Fast Cycle: In a fast cycle, the company’s competitive advantages are not protected and
companies operating in a fast product lifecycle need to constantly develop new
products/services to survive. Strategic alliances are formed to speed up the development
of new goods or services, share R&D expenses and streamline market penetration.

Value Creation in Strategic Alliances

• Strategic alliances create value by:
Improving current operations
Changing the competitive environment
Ease of entry and exit

• Current operations are improved due to:

Economies of scale from successful strategic alliances
The ability to learn from the other partner(s)
• Changing the competitive environment through:
Creating technology standards. This would help set new standard in competitive
environment.
Creating tacit collusion.

• Easing entry and exit of companies through:

A low-cost entry into new industries.
A Low-cost exit from industries.

Risks of Strategic Alliances

• Partners may exaggerate or misrepresent the benefits they bring to the table. Are you
giving more than you are getting?
 • One partner may commit more than the other, leading to frustration and conflict. Is the
alliance only strategic to one partner in the alliance?
• Differences in how the two partners operate can cause conflict.
• With long-term alliances, the parties will become mutually dependent. What impact does
this have on your autonomy? What if you become more dependent on the partner than
the partner is on you?
• The alliance stops adding value to your business and becomes no more than a
conventional business relationship. Can you get out?

Difference Between Joint Venture and Strategic Alliance

Basis Joint Venture Strategic Alliance
Meaning Joint Venture refers to a form of Strategic Alliance implies an agreement amidst two
business organization, set up by two or or more entities to work jointly with one another, to
more companies, to carry out financial increase performance of both the entities.
activity.
Independent The entities which come together in a The entities which come together in a strategic
Organization joint venture, do not continue to alliance, continue to operate as independent
operate as independent companies. companies.
Contract Exist May or may not exist
Form of Strategic Alliance Collaboration or corporate Partnering
Separate Legal Yes No
Entity
Objective Risk limitation Reward maximization
Unit 2. Legal Aspects of Mergers/Amalgamation and Acquisition
• Analysis of Proposal by the Companies: Whenever a proposal for amalgamation or
merger comes up then managements of concerned companies look into the pros and cons
of the scheme. The likely benefits such as economies of scale, operational economies,
improvements in efficiency, reduction in costs, benefits of diversification, etc. are clearly
evaluated. The likely reactions of shareholders, creditors and others are also assessed.
The taxation implications are also studied. After going through the whole analysis work,
it is seen whether the scheme will be beneficial or not. It is pursued further only if it will
benefit the interested parties otherwise the scheme is shelved.

• Determining Exchange Ratios: The amalgamation or merger schemes involve exchange

of shares. The shareholders of amalgamated companies are given shares of the
amalgamated company. It is very important that a rational ratio of exchange of shares
should be decided. Normally a number of factors like book value per share, market value
per share, potential earnings, and value of assets to be taken over are considered for
determining exchange ratios.

• Approval of Board of Directors: After discussing the amalgamation scheme thoroughly

and negotiating the exchange ratios, it is put before the respective Board of Directors for
approval.

• Approval of Shareholders: After the approval of this scheme by the respective Boards of
Directors, it must be put before the shareholders. According to section 391 of Indian
Companies Act, the amalgamation scheme should be approved at a meeting of the
members or class the of members, as the case may be, of the respective companies
representing three-fourth in value and majority in number, whether present in person or
by proxies.

In case the scheme involves exchange of shares, it is necessary that is approved by not
less than 90 per cent of the shareholders (in value) of the transferor company to deal
effectively with the dissenting shareholders.

• Consideration of Interests of the Creditors: The views of creditors should also be taken
into consideration. According to section 391, amalgamation scheme should be approved
by majority of creditors in numbers and three-fourth in value.
 • Approval of the Court: After getting the scheme approved, an application is filed in the
court for its sanction. The court will consider the viewpoint of all parties appearing, if any,
before it, before giving its consent. It will see that the interest of all concerned parties is
protected in the amalgamation scheme. The court may accept, modify or reject an
amalgamation scheme and pass orders accordingly. However, it is upto the shareholders
whether to accept the modified scheme or not. It may be noted that no scheme of
amalgamation can go through unless the Registrar of Companies sends a report to Court
to the effect that the affairs of the company have not been conducted as to be prejudicial
to the interests of its members or to the public interest.

• Approval of Reserve Bank of India: In terms of Section 19 (1) (d) of the Foreign Exchange
Regulation Act, 1973, permission of the RBI is required for the issue of any security to a
person resident outside India Accordingly, in a merger, the transferee company has to
obtain permission before issuing shares in exchange of shares held in the transferor
company. Further, Section 29 restricts the acquisition of the whole or any part of any
undertaking in India in which non-residents’ interest is more than the specified
percentage.

Provisions of Companies Act 2013

Chapter XV of the 2013 Act, Sections 230 to 240 deal with “Compromises, Arrangements and
Amalgamations.” In this chapter, the Act consolidates the applicable provisions and related issues
of compromises, arrangements and amalgamations; however, other provisions are also attracted
at different stages of the process. Central Government issued notification for enforcement of
sections related to merger & amalgamation on 7th November 2016.Vide notification dated 14th
December 2016 of Ministry of Corporate Affairs issued rules regarding Companies (Compromises,
Arrangements, and Amalgamations) Rules, 2016.

Merger means combining of two or more entities into one, which results in merger of all the
assets, liabilities of the entities under one business. The dissolution of company/companies
involved in a merger takes place without winding up. The possible objectives of mergers are
manifold- economies of scale, acquisition of technologies, access to sectors / markets etc.

Who can File Application for Merger & Amalgamation?

• An application is required to be a file with Tribunal (NCLT). An application shall be made
by both the transferor and the transferee company in the form of a petition to the tribunal
for the purpose of sanctioning the scheme of amalgamation.
 • Joint Application: In the case where more than one company is involved than at the
discretion of such companies, an application may be filed as a joint application. But if the
registered office of the Companies is in different states then, in that case, there will be
two tribunals having jurisdiction hence separate petition is required to be filed.

• Process: Companies should have the power in the object clause of their Memorandum of
Association for amalgamation. Scheme of amalgamation shall be drafted for the purpose
of getting it approved at a Board meeting of the company.

Process of Filing Application for Merger and Acquisition

Format of Application

Calling for meeting by Tribunal

Notice of Meeting

Step I. Format of Application

An Application is required to be filed with the tribunal for Merger & Amalgamation and this
application will be submitted in form NCLT-1 along with the following documents:
1. Notice of admission in Form NCLT-2.
2. Affidavit in form NCLT-6.
3. Copy of Scheme of Compromise & Arrangement / Merger & Amalgamation.
4. Following Disclosure in form of the affidavit:
5. Material facts relating to the company, such as
• Latest Information related to the financial position of the company.
• Latest auditor’s report of the company
• Information related to investigation or proceedings against the company

6. Reduction of the share capital of the company.

7. Consent of the secured creditors have been obtained by not less than 75% in relation to
scheme of Corporate Debt Restructuring
• Creditor’s Responsibility statement in form CAA-1.
• For the protection of secured and unsecured creditors, Safeguards.
• Auditor’s Report that the fund requirements of the company after the corporate
debt restructuring is approved.
• The statement in relation to company proposes to adopt the corporate debt
restructuring guidelines specified by the Reserve Bank of India.
 • Valuation report by a registered valuer in respect of the shares, property, and
assets, whether tangible and intangible/ movable and immovable/ of the
company.

8. It is required for an applicant to disclose to the tribunal, the basis on which each class of
members or creditors has been identified for the purposes of approval of the scheme in
the application.

Step II. Calling for meeting by Tribunal

On the application Tribunal shall unless it thinks necessary to dismiss the application, will provide
such directions in respect of the meeting of the creditors or class of creditors, or of the members
or class of members to be called or held and conducted in such manner as prescribed.
• Fix the time and place of the meeting.
• Appoint a Chairperson and scrutinized for the meeting and fix the term of the
appointment and remuneration;
• Fix the quorum and procedure to be followed at the meeting including voting in person
or by proxy or by postal ballot or by voting through electronic means.
• Determine the values of the creditors or the members, whose meeting is required to be
held.
• Notice to be given of the meeting with the advertisement of such notice.
• Notice to be given to authorities required under sub-section (5) of section 230.
• The time period within which the chairperson of the meeting is required to report the
result of the meeting to the Tribunal.
• Such other matters as the Tribunal may deem necessary.
• Notice of Meeting (Form No. CAA-2.)

Who is Entitled to Receive the Notice?

It is required to be sent to each Creditor/Member and debenture-holders at the registered
address of the company.

Who is Authorized to Send the Notice?

• Chairman of the Company.
• In case Tribunal direct than either by the Company or its liquidator or by any other person.

Modes of Sending of notice

• Registered post, or by Speed post/ courier
• E-mail or by hand delivery or by any other mode as directed by the tribunal
Merging of listed Co. With unlisted Co.
If a listed company merges with an unlisted company under the Act, then unlisted will by default
not become listed. The option is given to the transferee company to remain unlisted till it is listed
or applies for listing, provided the shareholders of the merged listed company are given an exit
opportunity. It also provides that provision should be made by the NCLT for an exit route for the
shareholders of a transferor company who decide to opt out of the transferee company by
making payment amounting to the value of the shares and other benefits.

Fast track mergers

The Act provides for Fast track mergers in cases of merger between:
• Two or more small companies or
• Between a holding company and its wholly-owned subsidiary company or
• Such other class or classes of companies as may be prescribed;

Under the procedure for fast track mergers, the notice of the proposal to the Registrar, official
regulators and persons affected by the merger has to be sent within thirty days. They can provide
their objections and suggestions. The merger proposal has to be approved by member holders of
90% shares at the general meeting and majority representing nine-tenths in value of the creditors
at the meeting convened by giving 21-day notice. The notice to the meeting to members and
creditors has to be accompanied by merger scheme and declaration of solvency.

The transferee company has to file merger scheme (within 7 days of meeting) and declaration of
solvency with ROC. Objections of ROC or official liquidator have to be communicated to Central
Government within 30 days in writing. Central government has time period of 60 days after
receiving merger proposal to file objections before tribunal which will consider whether the
scheme is appropriate for fast track merger or not.

Cross border mergers

The Act also permits ‘Cross border mergers’ between Indian and foreign company located in a
jurisdiction notified by Central government in consultation with RBI. The consideration of a
merger, which will also be subject to the approval of the RBI, could either be in cash or depository
receipts, or partly in cash and partly in depository receipts.

Demerger
Demerger includes transfers, pursuant to the scheme of arrangement by a “demerged company”
of one or more undertakings to any resulting company in such a manner as provided in section
2(19AA) of the Income Tax Act, 1961.
The rules prescribe that the difference in the value of assets and liabilities in the books of a
demerged company will be credited to its capital reserve or debited to its goodwill. Moreover,
the difference in the net assets taken over and shares issued as consideration will be credited to
the capital reserve (excess) or debited to goodwill (deficit) in the books of the resulting company.
A certificate from a Chartered Accountant will also be required to be submitted to the NCLT to
the effect that the accounting treatment follows the conditions so prescribed.

Minority shareholders
Minority shareholders are provided with an exit mechanism, when majority shareholders (90%
or more) notify their intention to buy shares of such holders. Minority shareholders may also
offer their shares Suo-motto to majority shareholders. The buyback option will be at the price
determined by registered valuer according to SEBI’s regulations.

Regulations by SEBI
• SEBI Takeover Regulations permit consolidation of shares or voting rights beyond 15% up
to 55%, provided the acquirer does not acquire more than 5% of shares or voting rights
of the target company in any financial year.
• There is a limit in acquiring shares of another company making any offer to any
shareholders that is 10% of the voting capital.
• If the holding of the acquiring company exceeds 10%, a public offer to purchase a
minimum of 20% of the shares shall be made to the remaining shareholders by a public
announcement.
• If the offer made to shareholder, the minimum offer price shall not be less than average
of the weekly high and low of the closing prices during the last six months before the date
of announcement of such offer.

The main objective of SEBI guidelines of Takeover is to ensure full disclosure about the mergers
and takeovers and to protect the interest of the shareholders especially the small shareholders.

Process of Takeover
Disclosure of Holding

Trigger Point of Making an Open Offer

Public Announcement
Step 1. Disclosure of holding.
• If an acquirer company holding 5-14% of voting capital and wants to acquire more shares
in company, they are bound to disclose this holding to the target company or stock
exchange within 2 days of acquisition.
• If the holder is having 15-55% of voting capital and wants to purchase/sell share
aggregates 2% or more, the holder is bound to disclose to the target company or stock
exchange within 2 days of acquisition.

Step 2. Trigger Point of Making an Open Offer.

• 15% shares or voting rights: An acquirer who intends to acquire shares along with his
existing shareholding would entitle him to exercise 15% or more voting rights, can
acquire such additional shares only after making a public announcement to acquire
atleast additional 20% of voting capital through an open offer.

• Creeping acquisition limit: If acquirer only wants 3% or less shares could be required as
aggregate, whether the person acquired it individually or together with person, is not
required to make a public announcement.

• Consolidation of Holding: An acquirer who holds 55% or more but less than 75% shares
or voting rights of the target company, can acquire further shares or voting rights only
after making public announcement to acquire atleast additional 20% of shares of target
company from shareholders through an open offer.

Step 3. Public Announcement. It is generally an announcement given in the newspaper by the

acquirer primarily to disclose intention to acquire minimum of 20% of voting capital of the target
firm by means of an open offer.

Types of Takeovers
1. Legal Context: From legal perspective, takeover is of two types:
• Friendly or Negotiated Takeover: Friendly takeover means takeover of one
company by change in its management & control through negotiations between
the existing promoters and prospective investor in a friendly manner. Thus, it is
also called Negotiated Takeover. This kind of takeover is resorted to further some
common objectives of both the parties. Generally, friendly takeover takes place
as per the provisions of Section 395 of the Companies Act, 2013.
 • Hostile Takeover: Hostile takeover is a takeover where one company unilaterally
pursues the acquisition of shares of another company without being into the
knowledge of that other company, or if the target company’s board rejects the
offer, or the bidder makes the offer directly after having announced its firm
intention to make an offer. The most dominant purpose which has forced most of
the companies to resort to this kind of takeover is increase in market share.

2. Business Context: In the context of business, takeover is of three types:

• Horizontal Takeover: Takeover of one company by another company in the same
industry. The main purpose behind this kind of takeover is achieving the
economies of scale or increasing the market share. E.g. takeover of Henkel by
Jyothy Laboratories, Patni Computers by iGATE.

• Vertical takeover: Takeover by one company of its suppliers or customers. The

former is known as backward integration and latter is known as Forward
integration. E.g. takeover of Sona Steerings Ltd. by Maruti Udyog Ltd.

• Conglomerate takeover: Takeover of one company by another company

operating in totally different industries. The main purpose of this kind of takeover
is diversification.

Necessity of Takeover Code

• To provide a transparent legal framework for facilitating takeover activities.
• To balance the conflicting objectives and interests of various stakeholders in the context
of substantial acquisition of shares in, and takeovers of, listed companies.
 • To protect the interests of investors in securities and the securities market, considering
that both the acquirer and the other shareholders or investors and need a fair, equitable
and transparent framework to protect their interests.
• To provide each shareholder an opportunity to exit his investment in the target company
when a substantial acquisition of shares in or takeover of a target company takes place.
• To provide acquirers with a transparent legal framework to acquire shares in or control
of the target company and to make an open offer.
• To ensure that the affairs of the target company are conducted in the ordinary course
when a target company is subject matter of an open offer.
• To regulate and provide for fair and effective competition among acquirers desirous of
taking over the same target company.
• To ensure that only those acquirers who are capable of actually fulfilling their obligations
under the Takeover Regulations make open offers.

Takeover Code: Scheme of Amalgamation, Approval from Court

1. Determination of Transfer Date: This involves fixing of transfer date from which all
properties, movable as well as immovable rights attached are sought to be transferred
from amalgamating company to the amalgamated company. It is normally the first date
of financial year.

2. Approvals for the Scheme: The scheme of merger / amalgamation is governed by the
provisions of Section 391-394 of the Companies Act. The legal process requires approval
to the schemes as detailed below.
• Approvals from Shareholders: In terms of Section 391, shareholders of both the
amalgamating and the amalgamated companies should hold their respective
meetings under the directions of the respective high courts and consider the
scheme of amalgamation. A separate meeting of both preference and equity
shareholders should be convened for this purpose. Further, in terms of Section
81(1A), the shareholders of the amalgamated company are required to pass a
special resolution for issue of shares to the shareholders of the amalgamating
company in terms of the scheme of amalgamation.

• Approval from Creditors / Financial Institutions / Banks: Approvals are required

from the creditors, banks and financial institutions to the scheme of
amalgamation in terms of their respective agreements / arrangements with each
of the amalgamating and the amalgamated companies as also under Section 391.
 • Approval from Respective High Court: Approvals of the respective high court(s)
in terms of Section 391-394, confirming the scheme of amalgamation are
required. The courts issue orders for dissolving the amalgamating company
without winding-up on receipt of the reports from the official liquidator and the
regional director, Company Law Board, that the affairs of the amalgamating
company have not been conducted in a manner prejudicial to the interests of its
members or to public interests.

3. Report of Chairman to the Court: The chairman of the meeting must within the time fixed
by the court or where no time is fixed within 7 days of the date of the meeting, report the
result of the meeting to the court. The report should state accurately the number of
creditors or class of creditors or the numbers of members or class of members, as the
case may be, who were present and who voted at the meeting either in person or by
proxy, their individual values and the way the voted.

Valuation of Business
When a Business or Shares are transferred from one party to another, it becomes very important
for both buyer as well as seller to know what is the worth of that particular asset which is being
transferred. The process which is undertaken to know the worth is nothing but “Valuation”. It is
popularly said that “Price” is what you pay, and “Value” is what you get. “Value” refers to the
worth of an asset, whereas “Price” is the result of a negotiation process between a willing but
not an overeager buyer and a willing but not an overeager seller. In simple terms, valuation is a
process of determining value of a company or an asset.

Valuation is an art and not exact science. What the buyer thinks is whether the product is “worth
the price” he has paid, this “worth” itself is the value of the product. Depending on the structure
of the transaction, the management may want to value the entire business or a component of a
business – such as division, a brand, distribution network, etc. The importance of intangible
assets such as brands, patents, intellectual property rights, human resources, etc. is increasing
and the valuation of such assets is also becoming a more common phenomenon.

Some of the instances for which valuation is called for are listed below:
• Purchase or Sale of Business or Shares
• Corporate Restructuring such as Merger or Demerger
• Purchase or Sale of Equity stake by joint venture partners
• To comply with the requirements of Accounting Standards issued by the ICAI –
Impairment testing
• Purchase price allocation
It is important to understand the purpose for which the valuation is being attempted before
commencement of any valuation exercise. The structure of the transaction also plays a very
important role in determining the value. The ‘general purpose’ value may have to be suitably
modified for the special purpose for which the valuation is done. The factors affecting that value
with reference to the special purpose must be judged and brought into final assessment in a
sound and reasonable manner.

Benefits of Business Value

• Better Knowledge of Company Assets: It is significantly important to obtain an accurate
business valuation assessment. Estimates are not acceptable as it is a generalization.
Specific numbers need to be gained from valuation processes so that business owners can
obtain proper insurance coverage, know how much to reinvest into the company, and
how much to sell your company for so that you still make a profit.

• Understanding of Company Resale Value: If you are contemplating selling your company,
knowing its true value is necessary. This process should be started far before the business
goes up for sale on the open market because you will have an opportunity to take more
time to increase the company's value to achieve a higher selling price. As a business
owner, you should know what your company's valuation is.

• Obtain a True Company Value: You may have a general idea of what your business is
worth, based upon simple data such as stock market value, total asset value and company
bank account balances. But, there is much more to business valuations than those simple
factors. Work with a reputable valuations company to ensure that the correct numbers
are provided. Knowing the true value of your company is often a deciding factor if selling
the business becomes a possibility. It also helps to show company income and valuation
growth over the course of the previous five years.
• Better During Mergers/Acquisitions: If a major company asks about purchasing your
company, you have to be able to show them what the value is as a whole, what its asset
withholdings are, how it has grown, and how it can continue to grow. Major corporations
will attempt to acquire your business or merge with it for as little money as possible.
When you know what your business valuation really is, you are able to negotiate your way
to the appraised valuation numbers provided by a well-known and reputable valuation
determination service. If you are offered less for your company than it is shown to be
worth, reject the deal or offer to enter negotiation mediation. It will help both sides come
to a comfortable agreement.

• Access to More Investors: When you seek additional investors to fund company growth
or save it from financial disaster, the investor is going to want to see a full company
valuation report. You should also provide potential investors with a valuation projection
based upon their provided funding. Investors like to see where their money is going and
how it is going to provide them with a return on the investment. You are more likely to
gain the attention of a potential investor when they can see that their funds will carry the
company to the next level, increase its value, and put more money back into their own
products.
Unit 3. Methods of Valuation
Each method proceeds on different fundamental assumptions, which have greater or lesser
relevance, and at times even no relevance to a given situation. Thus, the methods to be adopted
for a particular valuation must be judiciously chosen. Following are generally accepted
methodologies for valuation of shares / business:
1. NET ASSET VALUE (NAV) METHOD: The Net Assets Method represents the value of the
business with reference to the asset base of the entity and the attached liabilities on the
valuation date. The Net Assets Value can be calculated using one of the following
approaches, viz.:
• At Book Value. While valuing the Shares/Business of a Company, the valuer takes
into consideration the last audited financial statements and works out the net
asset value. This method would only give the historical cost of the assets and may
not be indicative of the true worth of the assets in terms of income generating
potential. Also, in case of businesses which are not capital intensive viz. service
sector companies or trading companies this method may not be relevant. The
shortcomings of this method may be partly overcome by applying the Price to
Book multiple of a listed company to derive market price of a business with given
underlying value of assets.

• At Intrinsic Value. At times, when a transaction is in the nature of transfer of asset

from one entity to another, or when the intrinsic value of the assets is easily
available, the valuer would like to consider the intrinsic value of the underlying
assets. The intrinsic value of assets is worked out by considering current
market/replacement value of the assets. Some of the common adjustments that
the valuer considers while valuing the Shares/Business of a Company are
contingent liabilities, appreciation/depreciation in the value of investments,
surplus assets, etc. In case of revaluation of surplus assets, the effect of tax outgo
in the event of transfer of the assets should also be considered.

2. EARNINGS CAPITALISATION METHOD: This method is used while valuing a going concern
business with a good profitability history. It involves determining the future maintainable
earning level of the entity from its normal operations. Capitalization of earnings is a
method of determining the value of an organization by calculating the worth of its
anticipated profits based on current earnings and expected future performance. This
method is accomplished by finding the net present value (NPV) of expected future profits
or cash flows and dividing them by the capitalization rate (cap rate). This is an income-
valuation approach that determines the value of a business by looking at the current cash
flow, the annual rate of return, and the expected value of the business.
 Determining a capitalization rate for a business involves significant research and
knowledge of the type of business and industry. Typically, rates used for small businesses
are 20% to 25%, which is the return on investment (ROI) buyers typically look for when
deciding which company to purchase. When all variables are known, calculating the
capitalization rate is achieved with a simple formula, operating income / purchase
price. First, the annual gross income of the investment must be determined. Then, its
operating expenses must be deducted to identify the net operating income. The net
operating income is then divided by the investment's/property's purchase price to
identify the capitalization rate.

3. EV/EBIDTA MULTIPLE METHOD: This method is also called the “price-to-EBIDTA multiple”
or “Comparable Companies Multiple Method”. The EBITDA multiple is the ratio of the
value of capital employed (enterprise value) to EBITDA. This method is similar to Earnings
Capitalisation Method, only difference being EBITDA of the company needs to be
capitalised to arrive at the Enterprise Value. While considering the EV/EBITDA Multiple of
comparable companies, the valuer needs to keep in mind that EBITDA multiple does not
capture the differences in depreciation methods and also the debt funding that one
company may have taken vis-a-vis another. EV/EBIDTA multiple is calculated as:

Enterprise Value
EV/ EBITDA Multiple = ———————–
EBITDA

Enterprise Value = Market Value of Equity + Market Value of Debt

4. COMPARABLE TRANSACTION METHOD: The Comparable Transaction Method is a

relative valuation method, wherein the details of recent transactions of similar business/
companies are considered to estimate the business/ company value. This method is
seldom used in practice since, there may not be enough transactions of similar business/
company or the details of relevant transactions may not be available in the public domain.
It is more used as a cross check. Adequate care is to be exercised by the valuer when
carrying out valuation since, the comparable transaction value may include control
premium or liquidity discount which needs to be adjusted.
5. MARKET PRICE METHOD: This method evaluates the value on the basis of prices quoted
on the stock exchange. Average of quoted price is considered as indicative of the value
perception of the company by investors operating under free market conditions. The
average for such Market Prices could be taken on a Weighted Average method taking into
consideration the value and the volumes of the transactions taken place on the stock
exchange. Since the Secondary Equity Market is not only a reflection of the fair value of
the company, but also of other market information it is important for a valuer to know
the perception of the market prevailing during the span of time for which he evaluates
the price of the share. At times, the valuer may also want to ignore this value, if according
to the valuer, the market price is not a fair reflection of the company’s underlying asset
or profitability status.

6. DISCOUNTED CASH FLOW (DCF) METHOD: Discounted cash flow (DCF) is a valuation
method used to estimate the value of an investment based on its future cash flows. DCF
analysis finds the present value of expected future cash flows using a discount rate. A
present value estimate is then used to evaluate a potential investment. If the value
calculated through DCF is higher than the current cost of the investment, the opportunity
should be considered.

Where,
CF = Cash Flow
r = Discount Rate (WACC)

(Cost of Equity x Equity Weight) +

(After Tax Cost of Debt x Debt weight)
WACC = ——————————————-
(Debt weight + Equity weight)

Pros of DCF
• DCF offers the closest estimate of a stock’s intrinsic value. It’s considered the
soundest valuation method if the analyst is confident in his or her assumptions.
• Unlike other valuation methods, DCF relies on free cash flows, considered to be a
reliable measure that eliminates subjective accounting policies.
• DCF isn’t significantly influenced by short-term market conditions or non-
economic factors.
• Useful when there’s a high degree of confidence regarding future cash flows.
 Cons of DCF
• DCF valuation is very sensitive to the assumptions/forecasts made by the analyst.
Even small adjustments can cause DCF valuation to vary widely – which means
the fair value may not be accurate.
• DCF tends to be more time-intensive compared with other valuation techniques.
• DCF involves forecasting future performance, which can be very difficult,
especially if the company isn’t operating with 100% transparency.
• DCF valuation is a moving target: If any company expectations change, the fair
value will change accordingly.

Computation of Impact of Earning Per Share

Earnings per share (EPS) is the portion of a company’s profit allocated to each outstanding share
of common stock. Earnings per share serves as an indicator of a company’s profitability. EPS is
calculated as:
EPS = (Net Income – Dividends on Preferred Stock) / Average Outstanding Shares

How to Calculate ‘Earnings Per Share – EPS’

To calculate the EPS of a company, the balance sheet and income statement should be used to
find the total number of shares outstanding, dividends on preferred stock, and the net income
or profit value. When calculating, it is more accurate to use a weighted average number of shares
outstanding over the reporting term, because the number of shares outstanding can change over
time. Any stock dividends or splits that occur must be reflected in the calculation of the weighted
average number of shares outstanding.

Importance of Earnings Per Share – EPS

• Earnings per share (EPS) is generally considered to be the single most important variable
in determining a share’s price. It is also a major component used to calculate the price-
to-earnings (P/E) valuation ratio, where the ‘E’ in P/E refers to EPS. By dividing a
company’s share price by its earnings per share, an investor can understand the fair
market value of a stock in terms of what the market is willing to pay based on a company’s
current earnings.

• The EPS is an important fundamental used in valuing a company because it breaks down
a firm’s profits on a per share basis. This is especially important as the number of shares
outstanding could change, and the total earnings of a company might not be a real
measure of profitability for investors.
 • An important aspect of EPS that’s often ignored is the capital that is required to generate
the earnings in the calculation. Two companies could generate the same EPS number, but
one could do so with less equity – that company would be more efficient at using its
capital to generate income and, all other things being equal, would be a “better”
company. Investors also need to be aware of earnings manipulation that will affect the
quality of the earnings number. It is important not to rely on any one financial measure,
but to use it in conjunction with statement analysis and other measures.

Computation of Impact of Market Price

Impact cost is the cost that a buyer or seller of stocks incurs while executing a transaction due to
the prevailing liquidity condition on the counter. In other words, it represents the cost of
executing a transaction of a given security, with a specific predefined order size, at any given
point in time. It is a realistic measure of liquidity of the stock or security and is deemed to be
closer to the true cost of execution faced by a trader in comparison to the bid-ask spread
(difference between the best buy and the best sell orders). It is the percentage markup observed
while buying or selling a desired quantity of shares with reference to its ideal price.

The ideal price can be illustrated by an example. Suppose a buyer wants to purchase 3,000
shares of, say, ABC. If the best buy order for 1,000 shares is placed at Rs 237 and the best sell
order for 1,500 shares is placed at Rs 239, the ideal price for the deal should be:
(239+237)/2 = Rs 238

At this price, one can expect the buyer to ideally get the desired quantity of ABC shares.

But suppose that the buyer was able to buy 3,000 ABC shares at an average cost of Rs 239.67.
Average cost: [(1500x 239) + (1000 x 240) + (500 x 241)]/3000 = 239.83

The impact cost, therefore, would be 0.70 per cent. To find the impact cost, the formula is:
(Actual cost – ideal cost)/ideal cost*100
In our example, the ideal price is Rs 238, but the average acquisition price for that buyer is Rs
239.67. By formula, the impact cost should thus be:
(239.67 – 238)/239.67*100 = 0.70

This is a cost that the buyers incur due to lack of market liquidity. The importance of impact cost
can be judged from the fact that it is one of the criteria to select a stock for inclusion in the NSE’s
benchmark index Nifty50.

Determination of Exchange Ratio

In mergers and acquisitions (M&A), the share exchange ratio measures the number of shares
the acquiring company has to issue for each individual share of the target firm. For M&A deals
that include shares as part of the consideration (compensation) for the deal, the share exchange
ratio is an important metric. Deals can be all cash, all shares, or a mix of the two. Formula,
Exchange Ratio = Offer Price for the Target’s Shares / Acquirer’s Share Price

Exchange Ratio example: Assume Firm A is the acquirer and Firm B is the target firm. Firm B has
10,000 outstanding shares and is trading at a current price of $17.30 and Firm A is willing to pay
a 25% takeover premium. This means the Offer Price for Firm B is $21.63. Firm A is currently
trading at $11.75 per share. To calculate the exchange ratio, we take the offer price of $21.63
and divide it by Firm A’s share price of $11.75. The result is 1.84x. This means Firm A has to issue
1.84 of its own shares for every 1 share of the Target it plans to acquire.

Importance of the Exchange Ratio

In the event of an all-cash merger transaction, the exchange ratio is not a useful metric. In fact,
in this situation, it would be fine to exclude the ratio from the analysis. Often times, M&A
valuation models will note the ratio as “0.000” or blank, when it comes to a full cash transaction.
Alternatively, the model may display a theoretical exchange ratio, if the same value of the cash
transaction were instead to be carried out by a stock transaction. However, in the event of a
100% stock deal, the exchange ratio becomes a powerful metric. It becomes virtually essential
and allows the analyst to view the relative value of the offer between the two firms.
In the event of a split deal, where a portion of the transaction involves cash and a portion involves
a stock deal, the percentage of stock involved in the transaction must be considered. Excluding
any cash effects, what is the actual exchange ratio based on the stock. Additionally, M&A models
may want to also show what this transaction would look like if there was a 100% stock deal.

Impact of Variation in Growth of the Firms

• Variation in profit ratios: An examination of the degree of variation in the ratio of
ordinary profit to sales in different sectors of the economy shows that the standard
deviation is especially high in the case of the service industry, and that the retail sector
too has a high standard deviation despite a low mean, indicating that there is considerable
variation in profit ratios in these sectors. It is also apparent that the degree of variation in
profit ratios varies according to firm size among firms in the same sector.

Taking manufacturing as an example, it can be seen that the average profit ratio increases
the greater the size of the workforce. There is no major difference in the average profit
ratios of the top 10% of firms in each size category, however; indeed, the top firms with
fewer than 10 employees have extremely high profit ratios. The average profit ratio of
the bottom 10%, on the other hand, is increasingly negative the smaller the size of the
company.

• Variation in sales growth rates: As in the case of the ratio of ordinary profit to sales, the
average sales growth rate increases with the size of a business establishment, but there
is greater variation among smaller establishments.

• Increasing variation in business performance: A study of trends over time reveals that
the variation in business performance is changing. The standard deviation of returns on
sales among manufacturing business establishments has increased since 1986, and there
is growing variation in performance irrespective of size. As the standard deviation grew
particularly noticeably between 1990 and 1994, it may be surmised that it was the
collapse of the economic bubble that caused the performance of individual firms to
become so much more disparate. Although business performances are growing
increasingly varied in all size categories, the degree of variation is greater among smaller
firms.

Moreover, as has already been noted, variation is relatively greater in the service sector,
which suggests that with services playing an increasingly important economic role,
variance in the performances of individual firms as economic entities is growing.
Causes of variation in business performance
• Relationship between new activities and business performance: The small business
environment is changing tremendously, and it is crucial that SMEs seize the opportunities
that such change offers and aggressively engage in new business activities. An
examination of the relationship between new business activities and the ratio of ordinary
profit to sales shows that SMEs that upgraded existing products and services and made
technological improvements saw their ratio of ordinary profit to sales increase from 2.0%
in fiscal 1994 to 2.9% in fiscal 1996, and that profit ratios are higher at SMEs engaged in
some form of new business activities than at those not so engaged. Moreover, SMEs that
engaged in new activities also had relatively higher sales growth rates.

• Relationship between networks and business performance: In order for SMEs to

respond to the changing business environment and maintain and improve their
performance, it is important that they develop their own unique strengths. However, it is
difficult for individual SMEs to possess all the necessary managerial resources to enable
them to do so and attempting to acquire all these resources could on the contrary reduce
efficiency. Building networks with other firms and relevant organizations to procure the
necessary managerial resources externally.

• Relationship between outsourcing and business performance: Outsourcing has

attracted attention in recent years as an important part of corporate business strategy.
The term outsourcing is used here to refer to outsourcing using services, i.e. the external
procurement of services traditionally provided within the firm and new services, and it is
on the basis of this definition that we will consider the relationship between outsourcing
and business performance. The most commonly cited advantages of outsourcing were
related to using outside sources in a firm’s weak areas and making up for shortages of
managerial resources, reducing costs, and speeding up business activities.

• Other factors related to business performance: A variety of other factors impact on

business performance. A regression equation was therefore estimated to explain the ratio
of ordinary profit to sales in manufacturing and the wholesale sector. The results show
that in manufacturing, workforce size, capital investment, the specialization ratio,
overseas sales ratio, overseas purchases ratio, sales growth rate and patents all have a
positive effect on the ratio of ordinary profit to sales. The fact that the number of patents
owned by a firm has a positive effect shows that firms that put more resources into R&D
perform better, while the fact that the overseas sales and overseas purchases ratios also
have a positive effect suggests how important it is that SMEs adopt an international
approach in their business strategies.
Management Buyout
A management buyout (MBO) is a transaction where a company’s management team purchases
the assets and operations of the business they manage. A management buyout (MBO) is
appealing to professional managers because of the greater potential rewards from being owners
of the business rather than employees. MBOs are favored exit strategies for large corporations
who wish to pursue the sale of divisions that are not part of their core business, or by private
businesses where the owners wish to retire. The financing required for an MBO is often quite
substantial and is usually a combination of debt and equity that is derived from the buyers,
financiers and sometimes the seller.

Process of Management Buyout

Assess the Opportunity

Assess the Viability of the Deal

Create a Credible Business Plan

Making an Agreement with the Seller

Raise Finance

Conduct Due Diligence

Close the Deal

Build the Company

Advantages of Management Buyout

• MBO enables a better and more effective management.
• It encourages better performance and commitment from the members involved.
• It leads to reorganization of the organizational structure. This thereby results in
identification and removal of deficiencies in the operations.

Disadvantages of Management Buyout

• MBO requires fixing of individual responsibilities and goals. However, an organization
functions with a group effort.
• MBO is a time-consuming process.
 • It compares ratings of individuals. However, this may deem to be unfair as every individual
has different goals.
• MBO requires a level of trust throughout the hierarchy of the organization. This is difficult
to achieve in the corporate world.
• It is suitable for professional and managerial jobs. It is not applicable for worker-level jobs.

Things to Consider When Planning a Management Buyout

• Research the feasibility of the transaction.
• Be open and transparent with executives and shareholders.
• Cut key employees in on the deal.
• Have a strong employee and customer retention plan.
• Develop a thorough understanding of the value of the business.
• Get your financing all lined up.
• Don’t get hostile, remain friendly.
• Design a well thought out shareholders agreement.
• Keep the buyout low key until the deal is signed.
• Don’t neglect the operations of the business while working on the deal

Leverage Buyout
A leveraged buyout (LBO) is the acquisition of another company using a significant amount of
borrowed money to meet the cost of acquisition. The assets of the company being acquired are
often used as collateral for the loans, along with the assets of the acquiring company.
• Purchase of a company by a small group of investors using a high percentage of debt
financing,
Investors are outside financial group or managers or executives of company
Management buyout (MBO) — leveraged buyout performed mainly by managers
or executives of the company

• A leveraged buyout or LBO is a type of aggressive business practice whereby investors or

a larger corporation utilizes borrowed funds (junk bonds, traditional bank loans, etc.) or
debt to finance its acquisition.
• Both the assets of the acquiring corporation and acquired company function as a form of
secured collateral in this type of business deal.
• Any interest that accrues during the buyout will be compensated by the future cash flow
of the acquired company.
• Other terms used synonymously with an LBO are “hostile takeover,” “highly leveraged
transaction,” and “bootstrap transaction.”
 • Results in significant increase of equity share ownership by managers.
• Turnaround in performance is usually associated with formation of LBO.

Typical LBO operation

• Financial buyer purchases company using high level of debt financing.
• Financial buyer replaces top management.
• New management makes operating improvements.
• Financial buyer makes public offering of improved company at higher price than originally
purchased.

LBO Financing
• Secured Debt: Secured debt is also called asset-based lending, and it can be either senior
or intermediate term debt.

• Senior Debt: Comprises loan secured by liens on particular assets of the company. The
collateral includes physical assets such as land, plant and equipment, accounts receivable,
and inventories. Lenders will usually advance 85% of the value of the accounts receivable
and 50% of the value of the target inventories. The process of determining the collateral
value of the LBO candidate's assets is sometimes called qualifying the assets.

Steps for LBO

Purchase Price Assumption

Create Sources and Uses

Financial Projections

Balance Sheet Adjustment

Calculate EBITDA

Calculate Internal Rate of Return on your Initial Investment

Uses for a Leveraged Buyout

• To Privatize a Public Company: Taking a publicly traded company private means
consolidating its public shares in the hands of private investors who take those shares off
the market. Those investors will now own either all or a majority of the target company.
This requires enough capital to purchase all or most of the company's net value. Since
these investors will now own the company, they can have the company assume the debt
liability for this transaction.
 • To Break Up a Large Company: Sometimes a company may grow large and inefficient,
such that the whole is worth less than the sum of its parts. In this case an investor may
purchase the company and split it off, selling it as a series of smaller companies. For
example, a company that manufactures cars, airplanes and tanks might get split up into
an automotive, an aerospace and a defence firm, each of which would get sold to larger
companies in the relevant industries. In this case the investor would buy the company
through a leveraged buyout in the belief that these individual sales will more than pay off
that loan.

• To Improve an Underperforming Company: Finally, an investor might believe that a firm

is significantly underperforming its potential. In this case the purchase price of the
company would be worth much less than what the company could eventually be worth,
making a leveraged buyout a good option. This is the case with our example above. David
believes that ShopKo could be worth substantially more than it currently is. He will have
it assume $100 million in debt because he believes that in five years the company will be
worth $200 million or more. Another investor might purchase ShopKo with the intention
of holding and operating the company, believing that he can improve the company and
generate profits worth considerably more than the debt payments.

• To Enrich Shareholders and Owners: When a company is purchased, the purchase price
flows to all owners and the stock price generally surges. For a privately held firm the
individual owner(s) collect that money directly minus any partnerships or other liabilities.
For a publicly held firm the purchase capital accrues to shareholders. This typically
enriches executives and members of the board of directors. The former group will often
have their compensation tied to stock performance, while the latter group typically
comprises some of the company's largest shareholders

Advantages of an LBO
• More control. Once the acquisition is converted to private ownership from public, the
new owners can completely overhaul to company’s operations and cost structure, making
it easier for the venture to succeed.
• Financial upside. Since, by definition, LBOs require acquiring companies to put up little to
nothing of their own money, as long as the company being acquired can generate more
than enough cash to fund its purchase, investors win.
• Continued operation. Sometimes a company’s financial situation becomes so dire that it
is at risk of being shuttered altogether. When a buyer comes in, whether internal
management or outsiders, the company at least has the opportunity to keep its doors
open.
Disadvantages of an LBO
• Poor morale. Especially in cases of a hostile takeover, where the company has no interest
in being acquired, unhappy workers can convey their disappointment by slowing down or
stopping work, further hampering the company’s efforts to succeed.
• Bankruptcy a big risk. If the acquired company’s finances cannot, on their own, cover the
cost of the loan payments needed to buy the company in the first place, it’s possible the
company will end up declaring bankruptcy. Weak finances are extremely risky.
• Deeper cuts. While employees may hope that a new owner will help turn the acquired
company around, in many cases, the cost-cutting required to return a company to
profitability may involve serious job cuts and other unpopular measures. That means
many employees will lose their jobs and the result could have a negative impact on the
surrounding region.

Bootstrapping
Bootstrap is a situation in which an entrepreneur starts a company with little capital. An
individual is said to be bootstrapping when he or she attempts to found and build a company
from personal finances or from the operating revenues of the new company.

Compared to using venture capital, boot strapping can be beneficial, as the entrepreneur is able
to maintain control over all decisions. On the downside, however, this form of financing may
place unnecessary financial risk on the entrepreneur. Furthermore, boot strapping may not
provide enough investment for the company to become successful at a reasonable rate.

How Bootstrapping Works

Bootstrapping is a tough way to go. It places all the financial risk on the entrepreneur. Extremely
limited resources can inhibit growth, prevent promotion, and even undermine the quality and
integrity of the product or service that is envisioned. On the other hand, the entrepreneur is able
to maintain total control over all decisions and the business itself. And all the energy goes into
the product itself, not into pitching venture capitalists and other potential sources of capital
investment. Studies show that more than 80% of startup operations are funded by the founders'
personal finances. The median in start-up capital is about $10,000.

Example: Tough Mudder. Tough Mudder, the endurance race event series, was co-founded by
Will Dean and Guy Livingstone in 2010. Their total expenditure was $300 for a website and $8,000
on Facebook ads. More than 5,000 people participated in the first Tough Mudder event. Since
then, more than two million people have run the company's races in 10 countries. The founders
have made more than $100 million through registration fees and sponsorship deals.
Stages in boot strapping
Stage 1. Seed money. This stage starts with some personal savings, or perhaps “friends and
family” funding to get going. Or it may start as a side business, where the founder continues to
work a day job to keep body and soul together. But somehow, the founder manages to scrape
up enough resources to get the business off the ground.
Stage 2. Customer-funded money. The second stage is about getting in money from customers.
That customer funding is pumped back into the business. It is what keeps the business operating
and, eventually, funds growth. Growth is often slow, because the business first has to meet its
operating expenses to stay in business.

Stage 3. A word about credit. Bootstrapping does not mean going out to get a big loan to start a
business. Yes, along the way, some start-ups may take on loans or lines of credit. Others lean
heavily on credit cards. A few may even get small grants. But those are typically short-term fixes
to fund specific growth activities, such as buying equipment or hiring more staff, or to even out
cash flow dips. It’s not so much about using credit as the main source to start the business, but
rather as a secondary source to keep it operating and grow it. The founder still has to pay the
monthly payments or debt service, out of funds earned in the business.

Pros of Bootstrapping
• Ownership of Your Business: As a solo entrepreneur bootstrapping means you can
continue to own 100% of your business. Even with a co-founder or two, your share of the
equity is going to be far larger than if you go through multiple rounds of fundraising and
are continuously diluting your ownership. Even with a much smaller company and
revenues, your share may be worth more than if you raised money to achieve a billion-
dollar valuation.

• Control Over Direction: As soon as you take outside money you take on exterior pressure
and responsibility to satisfy other people’s interests. Those may be very different from
your vision. Their timeline and values can be different than yours. There are solutions like
super-voting rights that can give you more control when raising capital. Though, if artistic
direction and control over decisions is a top priority for you, bootstrapping is probably
the way to go.

• Keeping Your Business: If your idea is to keep this as a lifetime business, and maybe even
make it a multigenerational business, then bootstrapping is what you want. Otherwise
outside investors are going to put you on a clock for achieving a sizable exit. Normally
within about 10 years.
 • Sense of Accomplishment: For some entrepreneurs the ability to one day look at this
venture and say, “I built that!” is where they get their sense of significance.

• Being Forced to Build a Business Model That Really Works: It’s no secret that a lot of
today’s fastest growing, big valuation start-ups and even IPOs have been losing money.
At least on paper. They are playing with a different strategy. One that can work very well,
but which can also be highly risky. If you are going to bootstrap, you are forced to quickly
build a business model which really works, and which can produce positive cash flow and
profits right away. That’s a good thing. Everything else can be built on and scaled from
there.

Cons of Bootstrapping
• Chances of Survival: One of the top reasons for business failure is running out of money.
It’s cash flow shortages. You can have an amazing and much needed product or service
that people love. Though, if you run into a crunch for just a month or two you may never
realize the potential of your start-up. It’s going to take careful budgeting to stay afloat. If
budgeting shows you that outside capital is the way to go at one point, then be prepared
have ready 15 to 20 slides with your story to convince investors quickly.

• Growth: The main reason that entrepreneurs go out to fundraise lots of capital is to scale
big and fast. For many that is their strategy to survive and thrive. Without outside capital
you’ll be limited on your visibility, the marketing you can do, and what you can do to serve
your customers. All of that can stunt growth potential.
• Top Level Help: Cash is actually just one of the benefits of fundraising for start-ups. It may
not even be the most significant. Enrolling others with a vested interest in your success
can bring top level help. It can put board members, shareholders, influencers and big deal
makers with the keys to sizable sales channels in your corner and going to bat for you.

• Hard Work: You’re going to have to hustle a lot harder, work more hours and manage
more roles as a bootstrapped start-up. You’ll have less of a budget for recruiting the best
talent and retention efforts. Your stock options might not mean much.

• Staying Organized: When you have a leaner team, and you are a gung-ho entrepreneur
out to hustle to get traction, it can often mean basics get second priority. Like
bookkeeping, taxes, and systemizing processes. Those can really bite you back later when
it comes to filing with the IRS, trying to scale, and if you decide you do need to or want to
raise money.
Criteria for Negotiating Friendly Takeover
Friendly takeover means takeover of one company by change in its management & control
through negotiations between the existing promoters and prospective investor in a friendly
manner. Thus, it is also called Negotiated Takeover. This kind of takeover is resorted to further
some common objectives of both the parties. Generally, friendly takeover takes place as per the
provisions of Section 395 of the Companies Act, 2013.

Criteria is as follows:
Screening Potential Deals

From Talking to Planning

Check Obvious Value Creation

Risk Assessment

Disclosure from the Buyer

Cultural Fit

Regulatory Approval

Financing in Merger
• Cash Offer: After the value of the firm to be acquired has been determined, the most
straight forward method of making the payment could be by way of offer for cash
payment. The major advantage of cash offer is that it will not cause any dilution in the
ownership as well as earnings per share of the company. However, the shareholders of
the acquired company will be liable to pay tax on any gains made by them. Another
important consideration could be the adverse effect on liquidity position of the company.

• Debt and Preference Share Financing: A company may also finance a merger through
issue of fixed interest-bearing convertible debentures and convertible preference shares
bearing a fixed rate of dividend. The shareholders of the acquired company sometimes
prefer such a mode of payment because of security of income along with an option of
conversion into equity within a stated period. The acquiring company is also benefited on
account of lesser or no dilution of earnings per share as well as voting/controlling power
of its existing shareholders.
• Equity Share Financing: It is one of the most commonly used methods of financing
mergers. Under this method shareholders of the acquired company are given shares of
the acquiring company. It results into sharing of benefits and earnings of merger between
the shareholders of the acquired companies and the acquiring company. The
determination of a rational exchange ratio is the most important factor in this form of
financing a merger. The actual net benefits to the shareholders of the two companies
depend upon the exchange ratio and the price-earnings ratio of the companies. Usually,
it is an ideal method of financing a merger in case the price-earnings ratio of the acquiring
company is comparatively high as compared to that of the acquired company. When the
shareholders receive shares, they are not liable to any immediate tax liability.

• Deferred Payment: Deferred payment also known as earn-out plan is a method of making
payment to the target firm which is being acquired in such a manner that only a part of
the payment is made initially either in cash or securities. In addition to the initial payment,
the acquiring company undertakes to make additional payment in future years if it is able
of increase the earnings after the merger or acquisition. It is known as earn -out plan
because the future payments are linked with the firm’s future earnings. This method
enables the acquiring company to negotiate successfully with the target company and
also helps in increasing the earning per share because of lesser number of shares being
issued in the initial years. However, to make it successful, the acquiring company should
be prepared to co-operate towards the growth and success of the target firm.

• Leveraged Buy – Out: A merger of a company which is substantially financed through debt
is known as leveraged buy-out. Debt, usually, forms more than 70 percent of the purchase
price. The shares of such a firm are concentrated in the hands of a few investors and are
not generally, traded in the stock, exchange. It is known as leveraged buyout because of
the leverage provided by debt source of financing over equity. A leveraged buy-out is also
called Management Buy-Out (MBO). However, a leveraged buy-out may be possible only
in case of a financially sound acquiring company which is viewed by the lenders as risk
free.

• Tender Offer: Under this method, the purchaser, who is interested in acquisition of some
company, approaches the shareholders of the target firm directly and offers them a price
(which is usually more than the market price) to encourage them sell their shares to him.
It is a method that results into hostile or forced take-over. The management of the target
firm may also tender a counter offer at still a higher price to avoid the takeover. It may
also educate the shareholders by informing them that the acquisition offer is not in the
interest of the shareholders in the long-run.
Unit 4. Defence Against Hostile Takeover
A takeover or acquisition is the purchase of one company by another. We call the purchaser the
bidder or acquirer, while the company it wants to buy is the target. It is a type of merger, but not
of equals. In the case of an acquisition, there is a predator and a prey.

Hostile takeover is a takeover where one company unilaterally pursues the acquisition of shares
of another company without being into the knowledge of that other company, or if the target
company’s board rejects the offer, or the bidder makes the offer directly after having announced
its firm intention to make an offer. The most dominant purpose which has forced most of the
companies to resort to this kind of takeover is increase in market share. The acquirers usually
employ the following hostile takeover techniques:
• Toehold acquisition – a purchase of the target’s shares on an open market. They allow
the acquirer to become a shareholder of the target and provide an opportunity to sue the
target later on if the takeover attempt turns out unsuccessful.

• Tender offer – an acquirer’s offer to the target’s shareholders to buy their shares at a
premium over the market price. A partial, two-tier, front-end loaded tender offer usually
involves a back-end merger. The takeover literature generally treats tender offer as a
hostile takeover technique. It should not be treated as hostile, however, if it favor the
interests of the majority of shareholders. Such a majority should be adequate to approve
the relevant merger or acquisition. To claim that any tender offer is hostile would make
virtually any merger or acquisition hostile.

• Proxy fight – a solicitation of the shareholders’ proxies to vote for insurgent directors.
Proxy fights can run along with “board packing,” where the number of board members
increases, and the acquirer intends to fill this increase with his slate of directors.

Poisson Pill
A poison pill is a corporate maneuver put in place to try and prevent a hostile takeover. The target
corporation uses this strategy to make its stock less attractive to the acquirer. This is
accomplished by making the target company’s stock more expensive. There are several methods
for implementing a poison pill. One poison pill strategy involves allowing the existing
shareholders to buy more stock at a discount. This increases the number of shares the acquirer
will have to buy. A variant of this is to offer a highly advantageous preferred stock that is
convertible to common shares should the company be acquired. Another related poison pill
involves creating an employee stock option plan that vests only if the company is acquired in a
takeover. This makes it more difficult to retain key employees after the takeover.
The pills can be flip-in, flip-over, dead hand, and slow/no hand.
• Flip-in poison pill can be “chewable,” which means that the shareholders may force a pill
redemption by a vote within a certain timeframe if the tender offer is an all-cash offer for
all of the target’s shares. The poison pill can also provide for a window of redemption.
That is a period within which the management can redeem the pill. This window hence
determines the moment when the management’s right to redeem terminates.

• “Dead hand” pill creates continuing directors. These are current target’s directors who
are the only ones that can redeem the pill once an acquirer threatens to acquire the
target. While the earlier court decisions restricted use of dead hand and no hand pills, the
more recent decisions uphold such pills.

• “No hand” (aka “slow hand”) pill prohibits redemption of the pill within a certain period
of time, for example six months.

Advantages of Poisson Pill

• A “Poison Pill” is a strong defense mechanism for a “target company” allowing the
company to identify fruitful acquisitions and discourage the actions of corporate
raiders. The “Poison Pill” also acts as speed-breakers of potential raids. The spin-off
effects are usually positive and could lead to shareholders earning higher premiums, if an
acquisition is favorable.
• Poison Pills are usually triggered as a negotiation tactic to clinch a sweeter deal. It allows
company to buy time and grant management the dictate the terms of any takeover in a
manner that is most lucrative for them.

Bear Hug
A bear hug is an acquisition strategy where the acquirer makes an offer to buy the shares of the
target company at a price that is clearly higher than what the target is currently worth. This offer
is intended to eliminate the possibility of competing bids, while making it difficult for a target
company to reject the offer.

The name “bear hug” reflects the persuasiveness of the offering company’s overly generous offer
to the target company. By offering a price far in excess of the target company’s current value,
the offering party can usually obtain an agreement. The target company’s management is
essentially forced to accept such a generous offer because it is legally obligated to look out for
the best interests of its shareholders.
A bear hug can be interpreted as a hostile takeover attempt by the company making the offer, as
it is designed to put the target company in a position where it is unable to refuse being acquired.
Unlike some other forms of hostile takeovers, a bear hug often leaves shareholders in a positive
financial situation. The acquiring company may offer additional incentives to the target company
to increase the likelihood that it will take the offer.

To qualify as a bear hug, the acquiring company must make an offer well above market value for
a large number of a company’s shares. Since the target company is required to look out for the
best interest of their shareholders, it is often required to take the offer seriously even if there
was no previous intention to change the business model or previous announcement of looking
for a buyer. At times, bear hug offers may be made to struggling companies or start-ups in hopes
of acquiring assets that will have stronger values in the future, though companies that do not
demonstrate any financial needs or difficulties may be targeted as well.

Refusal of a Bear Hug Offer

Refusal to take the bear hug offer can potentially lead to a lawsuit being filed on behalf of the
shareholders if the target company cannot properly justify the refusal. Since the business has a
responsibility to the shareholders, refusing an offer that otherwise may seem too good to be true
could be considered a poor decision.

Why Attempt a Bear Hug ?

A business may attempt a bear hug in an effort to avoid a more confrontational form of takeover
attempt, or one that would require significantly more time to complete. The offer, though
financially favourable, is generally unsolicited by the target company. The acquiring company
may use a bear hug to limit competition or acquire goods that complement its current offerings.

Greenmail
Greenmail is a buyout by the target of its own shares from the hostile acquirer with a premium
over the market price, which results in the acquirer’s agreement not to pursue obtaining control
of the target in the near future. The taxation of greenmail used to present a considerable obstacle
for this defense. Plus, the statute may require a shareholder approval of repurchase of a certain
number of shares at a premium.

Like blackmail, greenmail is money paid to an entity to stop or prevent aggressive behavior. In
mergers and acquisitions, it is an anti-takeover measure in which the target company pays a
premium, known as greenmail, to purchase its own stock shares back at inflated prices from a
corporate raider. After accepting the greenmail payment, the raider generally agrees to
discontinue the takeover and not purchase any more shares for a specific time.
How Does Greenmail Work?
There are four basic steps to committing Greenmail:
1. An investor or company “raider” acquires a large stake in a company by purchasing shares
from the open market.
2. The investor or company threatens a hostile takeover but offers to sell the shares back to
the target company at a premium price. The raider also promises to leave the target
company alone upon the target company repurchasing the shares.
3. The target company uses shareholder money to pay the ransom.
4. The target company’s value is reduced, and the greenmailer walks away with a significant
amount of profit.

Challenges Faced by Target Companies in a Greenmail

Greenmail, which is a challenging situation for target companies, presents two choices:
• Do nothing and allow their company to be taken over
• Pay a high premium to avoid a hostile takeover

Often, target companies will purchase back the shares at a premium to prevent a hostile
takeover. For example, Company A buys 20% shares of Company B and then threatens a
takeover. The management of Company B, without any other options, buys back the shares at a
premium in order to avoid being taken over. After the greenmail, Company A makes a significant
gain through the resale of the shares at a premium back to Company B and Company B loses a
significant amount of money.

Pacman
The Pac-Man defense is a defensive tactic used by a targeted firm in a hostile takeover situation.
In a Pac-Man defense, the target firm then tries to acquire the company that has made the hostile
takeover attempt. In an attempt to scare off the would-be acquirers, the takeover target may use
any method to acquire the other company, including dipping into its war chest for cash to buy a
majority stake in the other company.

Pac-Man Game Strategy

In the actual Pac-Man video game, the player has several ghosts chasing and trying to eliminate
it. If the player eats a power pellet, he may turn around and eat the ghosts. Companies may use
a similar approach as a means of avoiding a hostile takeover by turning the tables on the acquirer
and mounting a bid to take over the raider. During the acquiring phase, the takeover company
may begin a large-scale purchase of the target company’s stocks to gain control of the target
company. As a counter-strategy, the target company may begin buying back its shares and
purchasing shares of the acquiring company.
How to Employ a Pac-Man Defense Strategy
For a company to use a Pac-Man Defense effectively, the target must possess substantial
resources, since it is attempting a hostile takeover of its own. The target must have the finances
available to purchase enough shares of the potential acquiring company to be a credible threat
to the acquirer’s control of its own firm. The resources needed for the strategy are usually made
available through:
• Selling its own assets: The target company can use existing cash or cash equivalent assets
or sell off non-vital assets to generate enough money to buy large amounts of shares of
the acquirer.
• Selling non-core business units: The company can sell off non-core business units to
generate cash.
• Borrowing cash: The company can borrow cash from lenders or by issuing bonds or
additional stock shares. The latter method of financing offers the additional benefit of
diluting the target company’s outstanding stock shares, so that the acquirer would have
to purchase more shares in order to obtain 50%+ of the total outstanding stock of the
target company.
• War chest: A war chest is a cushion of cash stored by the company in the event of adverse
events – a sort of emergency expenses fund. It typically includes assets that can be easily
liquidated to produce cash such as bank deposits and T-Bills. Using war chest financing
for a Pac-Man Defense is essentially just saying that the target company is using its excess
cash or cash reserves.

Example: The Pac-Man defense does not always work, but it was first successfully used in 1982
by Martin Marietta to prevent a takeover by Bendix Corp. In 1988, American Brands used it
successfully against E-II, and TotalFina used it in 1999 to prevent a takeover by Elf Aquitaine.
Some analysts speculated that Cadbury would try to use the Pac-Man defense against Kraft in
2009.

Post-Merger HR
HR Role in Merger & Acquisition: Success of merger and acquisitions depends on the people who
drive the business, their ability to drive, lead, and formulate strategy, execution and
implementation. It is very important to involve HR professionals in merger & acquisition as it
involves people and has an impact on key people issues. HR professionals play an active role in
the change process by offering their interventions to help ensure a successful merger and
acquisition. HR plays a vital role in:
• Employees coping up with change and culture and organizational hierarchy structure,
• Maintaining the productivity by placing of right people at right place
• Alignment of compensation, benefits and welfare schemes
 • Job security
• Relocation and compliance of local labour laws
• Employee communication and taking care of personal records.

Best practices to be followed by HR during and after merger & acquisition

• Identify leaders from both the companies for effective implementation, transition and
communication of the same to employees.
• Train managers on the nature of change and explain new roles to the people
• Orientation programs on policies and procedures, performance management,
compensation, benefits and welfare schemes.
• Identify the skills of people and mapping them appropriately

HR Post-Merger Activities
• Simplify and streamline. As a company grows larger by way of merger or acquisition, HR
should focus on reducing complexity in both the structure and processes for the post-
merger/acquisition organization. Look to decrease the number of pay grades, job titles
and occupational classifications.

• Be nimble and flexible. The simpler your HR system, the more adaptable it will be to
current and future structural changes. Be careful not to carve your HR practices in stone.
Especially early on in the integration of the two companies, err on the side of flexibility
and deploy your systems gradually. Set up employee committees to offer continuous
feedback and suggestions for improvements.

• Expand best practices outward. Model and share your best practices – simplification,
streamlining, agility, flexibility – and encourage their adoption throughout the new
organization. Lead the newly merged business to improve the efficiency and effectiveness
of their processes and practices. Work with management and staff to handle changes
step-by-step and establish workable timelines to effect those changes.

• Pay close attention to your software. Chances are your HR software isn’t optimal. Add in
a merger, which necessitates perhaps the combining of two systems or maybe the
elimination of one and at the very least, the integration of two sets of employee
information, and things can get messy quickly. Be aware that the integration process is
probably not going to be as easy as simply importing data. Assign an IT-savvy staffer to
lead the project—or it may be even wiser to contract an outside expert to integrate the
different systems or recommend another solution.
Post-Merger HR Cultural Issues
• Employee Attitudes: One of the most challenging HR issues following a merger is the
attitudes of the employees. Depending on the effect the merger has on their jobs,
employees can become worried, disgruntled or resentful. Some may have resentment if
friends or colleagues were let go following the merger. Others are worried about how
their jobs may change. Change is a major cause of stress for most people, and job roles
often change significantly.

• New Norms: Every organization has a unique cultural makeup. The shared norms and
values in a company evolve over time, are typically guided by leaders and are perpetuated
by employees. When two entities combine, they bring two distinct cultures. HR
professionals must diligently work to build a new organizational culture without forcing
employees to give up key values and rituals they have enjoyed. Many newly merged
companies conduct more regular employee meetings and try to organize company
activities during the first few months.

• Compensation and Benefits: Whichever organizations leadership remains in charge

following the merger often influences the direction of pay and benefits in the new
company. Generally, if employees gain or experience consistency in pay and benefits,
issues are minimized. If some employees are asked to take pay decreases or face
significant benefits cuts, complaining and low morale will likely result.

• Team-Building: Integrating employees from the merging organizations is critical to

maintaining or improving production and performance quickly following the merger. The
first step is to introduce new colleagues and give them ample time and opportunity to
bond. Team-building activities and scheduled department meetings strengthen rapport
and enable work groups to formulate new ways of doing things.

Recent Cases of Mergers and Acquisition

• A global retail giant buys India’s largest e-commerce firm. In a move which decidedly its
global implications given its war against Amazon, Walmart announced plans to acquire
77% stake in Flipkart. For around $16 Billion in May 2018. The deal which is completed in
August, also included $2 Billion fresh equity funding to support Flipkart expansion plans
as it takes on Amazon’s India subsidiary for the top spot in India’s e-commerce market.

• The merger of India’s No.3 and No.4 telecom players finally gets approved. In August
2018, Vodafone’s Indian subsidiary and Idea Cellular received the final approval for their
merger by National Company Law Tribunal (NCLT).
 Vodafone will own a 45% stake in the combined entity. Meanwhile, Idea’s shareholder
will take a 29% stake and Aditya Birla Group, parent company, will own 26%

• A state-run energy giant is created to help the government meet its disinvestment
Target. In January 2018, Oil and Natural Gas Corporation Ltd. Announce their acquisition
of a 51% stake in Hindustan Petroleum Corporation Ltd. in a deal aimed at helping the
Central Government meet its disinvestment target for 2017-18. ONGC spent nearly ₹370
Billion on the purchase of majority stake in the state-backed refiner.

• Tata Steel takes over another steel firm after submitting the highest bid for it in an
insolvency auction. In May 2018, Tata Steel successfully submitted the winning bid for
bankrupt rival Bhushan Steel in auction. The ₹352 Billion offer for a stake of 73% in
Bhushan Steel was approved by NCLT.

• Hindustan Unilever buy GlaxoSmithKline’s consumer nutrition brands in one of the

India’s largest consumer goods deal. The all stock deal, which also includes majority
stakes in Bangladesh unit and distribution rights to medical brands, is valued at ₹317
Billion. The deal is slated for completion at the end of 2019, by that time HUL is expected
to become India’s largest publicly-listed food and refreshment company.