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    M&a M&a Presentation Transcript

    • Workshop on Mergers & Acquisitions February 17, 2005 presented by BABASAB PATIL
    • Why M&A?
      • Underlying Principle for
      • M&A Transactions
      • 2 + 2 ≠ 4
      • Additional Value of “ Synergy ”
    • Why M&A?
      • Market Intensification:
          • Horizontal Integration – Buying a competitor
            • Acquisition of equity stake in IBP by IOC
            • AT&T merger into SBC enables the latter to access the corporate customer base and exploit the predictable cash flows typical of this telephony section
          • Market Extensions – New markets for Present products
            • Maersk – Pipavav : strategic objective of investing in a container terminal in the west coast
            • Bharat Forge’s acquisition of CDP (Germany)
            • S&P’s proposed acquisition of CRISIL
    • Why M&A?
      • Vertical Integration : Internalization of crucial forward or backward activities
        • Vertical Forward Integration – Buying a customer
            • Indian Rayon’s acquisition of Madura Garments along with brand rights
        • Vertical Backward Integration – Buying a supplier
            • IBM’s acquisition of Daksh
    • Why M&A?
      • Diversification: Overcome Barriers to Entry
        • Product Extension : New product in Present territory
            • P&G acquires Gillette to expand its product offering in the household sector and smooth out fluctuations in earning
        • Free-form Diversification : New product & New territories
            • Flight Centre’s proposed acquisition of Friends Globe
            • Indian Rayon’s acquisition of PSI Data Systems
    • Why M&A?
        • Advantages:
          • Greater Economic Clout:
            • Proposed merger of Petroleum PSUs
            • P&G merger with Gillette expected to correct balance of power between suppliers and retailers.
          • Economies of scale and Sharing Overheads: Size really does matter
            • IOC & IBP
          • Synthesized capabilities
            • Proposed merger of nationalized banks
    • M&A Different Perspectives
      • Acquirer
        • Majority/ Strategic Partner
        • Minority/ Private Equity Investor
      • Target Company
      • Due Diligence – Full Disclosures
        • Linked with Reps & Warranties
        • Reps should be negative
        • DD in case of Listed Company
        • Post Closing Adjustment
      • Condition Precedents – Definitive
        • Include as Exhibits
      • Survival of Reps for limited period
      • Due Diligence – Risk Matrix and Value Depletor
        • Material Contracts
          • Any subsisting contracts granting similar or superior rights to other investors
          • Termination rights of major customers
          • Approval rights of financiers
        • Title to Properties & Assets: esp. where main business is situated
        • Statutory Dues
        • Litigation : Contingent Liabilities
        • IPR protection
        • Tax Compliance (Settlement Commission)
      • Mode of Acquisition
        • Pure Equity (Existing or New); Equity & Preference; Special Class (Differential voting rights, dividends or otherwise)
        • Leveraged Acquisitions
      • Corporate Governance
        • Related Party Transactions (past & going forward)
      • Board Representation
        • Quorum (Inclusive)
        • Fiduciary Responsibility of Board v. Shareholders
      • Deadlock Resolution
        • Majority/ Strategic Partner
        • Lenders
      • Return on Investment
        • Cap on dividends to preference shares
        • Liquidation Preference
      • Lock - in of Promoters
        • Enforceability of transferability restrictions
      • Non - Compete/ Non - Solicitation
        • Payment for Goodwill to exiting partner
      • Exclusivity
      • Enforceability against Company
        • Company as party to SHA
      • Exit Options
        • Listing (Private Equity)
        • Call/ Put Option
      • Effectiveness of SHA and SPA
      • Indemnity
        • Aggregate Liability Cap
        • De Minimis
        • Threshold
      • Participative Rights v. Protective Rights
        • Strategic Partner : Participative Rights
          • Control on Board
          • Sharing Control
        • Private Equity : Protective Rights
      • Special Rights
        • Tag – Along Rights: minority partner/ private equity
        • Drag - Along Rights: majority partner
        • Right to share the upside on revised valuation of Target eg: on Merger; Listing at higher valuation
        • Right of First Refusal
      • Earn-out Structure
        • Favorable Business Projections
      • FCPA
      • Arbitration v. Litigation: Effective Remedy
        • Proper Law of Arbitration
        • ICC v. UNICITRAL
        • Group Companies Doctrine
        • Place of Arbitration
        • Cost Effective
      • Companies Act
      • Income Tax Act
      • Stamp Acts
      • Competition Act
      • Foreign Exchange Management Act
      • SEBI Regulations
      • Stock Exchange – Listing Agreement
      • Mergers Spin Offs Acquisitions
      • Acquisition
        • Shares
        • Control
      • Acquisition of Assets
        • Slump Sale
    • Acquisitions ISSUES: COMPANIES ACT
      • Sections 108A to G : Central Government approval if in excess of threshold prescribed
        • ambiguity as to ‘ classification of goods ’
      • Section 372A : Compliance by transferee company in acquisition of shares
      • Section 77A : Buy Back may be used as a defense to a hostile takeover
        • Used in U.S.: PeopleSoft’s attempt to thwart Oracle
    • Acquisitions ISSUES: FEMA
      • Acquirer - Non-Resident:
      • No approval required for purchase of shares (including existing shares)
        • From R
        • From NR
      • Valuation prescribed in case of R-NR not less than
        • Ruling Market Price - Listed Target Company
        • Fair valuation by a CA as per CCI guidelines - Unlisted Target Company
      • Press Note 18 replaced by Press Note 1 of 2005
      • Investment has to comply with FDI policy
    • Acquisitions ISSUES: FEMA
      • Target Company is a Non-Resident
        • Direct investment in JV/ WOS outside India (other than financial services) requires no approval subject to conditions including inter alia
          • Financial commitment < or = 100% networth
          • Investment by way of remittance only if valuation
            • If > 5 million USD: by Merchant Banker/ Investment Banker registered with SEBI/ appropriate authorities
            • Other cases: by CA/ CPA
          • Investment by share swap: valuation by Merchant Banker/ Investment Banker registered with SEBI/ appropriate authorities
    • Acquisitions ISSUES: TAKEOVER CODE
      • Definition of “Control” - Inclusive
        • Ambiguous:
          • TATA Sellout in ACC.
        • Negative control?
      • S. 25(2) prohibits public offers after 21 days of the public announcement of first public offer
      • In case of indirect acquisition, foreign acquirer has three months from completion of transaction to make open offer. Therefore, foreign transactions can be concluded prior to open offer in India.
      • New thresholds of 54% and 74% in Regulation 7
      • 55% shares cannot be allotted by preferential allotment or market purchase – consolidation by public offer only
      • Acquisition by public offer under 11(2) can be for only so many shares as will keep float above listing requirements.
      • Where any acquisition reduces public float below Listing Agreement requirements, acquisition to comply with delisting guidelines
      • Where Code is triggered by a global deal, if the public offer will lower float to below the listing requirement, then acquirer has 12 months to raise float either by fresh issue or by disinvestment.
    • Acquisitions ISSUES: MISC
      • Stamp Duty
        • No stamp duty if transferred shares are dematerialized
      • Industrial Disputes Act (s. 25FF)
        • Workmen employed by transferor company entitled to retrenchment benefits unless retained in employment on same terms.
    • Mergers
      • Mergers
      • Spin-offs
        • Demergers
    • Mergers STRUCTURE 1
      • A = Amalgamating Company: Ceases to Exist
      • B = Amalgamated Company
      • B receives all of A’s assets and liabilities
      • Shareholders of A receive shares in B and maybe other benefits like debentures, cash
      • Transfer assets and liabilities
      A B
    • Mergers STRUCTURE 2
      • A, B and C = Amalgamating Companies: Cease to exist
      • D = Amalgamated Company: may or may not have existed before Merger
      • All assets and liabilities of A, B and C transferred to D
      • Shareholders in A,B and C get shares in D.
      A D B C
    • Spin-Offs STRUCTURE Y X Y Transfer of undertaking Y Company B Company A
      • Consideration is usually shares of Company B but
      • maybe cash.
      • Process may or may not be Court sanctioned.
        • Salora spinning off Panasonic to Matsushita under s. 391 Scheme. Consideration in cash.
      Consideration in cash or issue of shares
    • Demergers STRUCTURE
      • Demergers are one type of spin-offs: under s. 391
      • A = Demerging Company
      • B = Resulting Company: may or may not have existed earlier
      • A transfers undertaking to B
      • B issues shares to shareholders of A
      X Y Y Company B Company A Transfers undertaking Y Shareholders of A Issues shares
    • Merger & Demerger PROCESS
      • Phase- I
      • Draft Scheme
      • Notice to members of Board of both companies
      • Determine swap ratio based on valuation report
      • Board approval of both companies
      • Prior NoCs from secured creditors and shareholders for exemption from meeting: Reduce Time and Costs
        • In ICICI Ltd. merger with ICICI Bank, meeting of preference shareholders of ICICI Ltd. was dispensed with since sole preference shareholder furnished an NOC
      • Phase- II
      • Draft Application under s. 391(1)
      • Application to HCs in respective jurisdictions of both companies for sanction / direction to conduct meetings
        • Moving registered office to one jurisdiction: Reduce Time and Costs
    • Merger & Demerger PROCESS
      • Phase- III
      • Notice of EGM to members with statement of terms of merger, interests of directors and proxy forms: 21 days
      • Advertisement
      • Notice in 2 newspapers: 21 days
      • Affidavit certifying compliance with HC’s directions in respect of notice/ advertisement
      • Meetings of creditors and/ or shareholders: agreed to by majority in number representing ¾ of value present and voting
      • Chairman of meetings to file report within 7 days of meeting
      • Resolutions and Explanatory Statements to be filed with RoC
    • Merger & Demerger PROCESS
      • Phase- IV (Approval of the Scheme)
      • HC to be moved within 7 days of Chairman’s Report for second motion petition
      • 10 days notice of hearing of petition in same newspapers
      • Notice to Central Govt. (Regional Director), and OL (if applicable): Submit reports
      • Objections raised in 391 proceedings
      • HC Sanction
      • Certified copy of HC Order to be filed with RoC within 30 days of order.
    • Merger & Demerger ISSUES: COMPANIES ACT
      • s 391 - 394 : “Complete Code”, “Single Window Clearance”
        • Reduction of capital- Position unclear, Predominance of judicial view: substantial compliance with s. 100- 102 required.
      • Transnational Mergers : 391 - 394 mechanism operates only where amalgamated company is Indian. E.g. of transnational merger concluded under 391 route - Bank of Muscat merging into Centurion Bank by order of Karnataka HC
      • Alternative Mechanism: S. 494
        • Through Liquidation Process
        • Liquidator transfers assets to foreign company for shares
        • Process has to be “altogether voluntary”
        • Tax benefits are unavailable under this route
    • Other Spin-Offs ISSUES: COMPANIES ACT
      • Where spin-offs are outside the 391 mechanism, the following compliances need to be ensured
        • 293(1)(a) resolution
        • Voting has to be by postal ballot in a public listed company
    • Mergers and Demergers ISSUES: INCOME TAX
      • Transfer of capital assets by amalgamating company to amalgamated company is exempt from Capital Gains Tax provided amalgamated company is an Indian company
      • Capital Gains Exemption in respect of shares issued to members of amalgamating/ demerging company- s. 47
      • Exemption may not be available if members of amalgamating company receive anything besides shares in the amalgamated company like debentures or cash- Gujarat HC in Gautam Sarabhai v. CIT , 173 ITR 216.
    • Mergers and Demergers ISSUES: INCOME TAX
      • In case of fraction shares, issue to trustee who liquidates these and distributes money to shareholders of amalgamating company.
      • Carry forward of losses and unabsorbed depreciation provided the amalgamated company carry on the business of the amalgamating company for at least 5 years – s. 72A
        • Use of Reverse merger to meet above condition
      • Spin-off receives tax benefits under Income Tax Act only if it is a demerger
    • Slump Sale ISSUES: TAXATION
      • Slump Sale = Transfer of undertaking without itemizing individual assets and liabilities- s.2(42C) Income Tax Act
      • Treated as capital gains
      • If undertaking is older than 3 years, long term capital gains rates apply even if individual assets are new
      • Carry forward of losses and unabsorbed depreciation unavailable
    • Merger & Demergers ISSUES: SALES TAX
      • No Sales tax on Amalgamation or demerger.
      • Where effective date is retrospective, any transfers between amalgamating company and amalgamated company retrospectively cease to be liable to sales tax- Mad HC Castrol Oil v. State of TN , 114 STC 468
      • Some Sales Tax enactments contain specific provisions to tax such transactions eg. S.33C, Bombay Sales Tax Act. No such provision in Central Sales Tax Act.
      • Divergences between states: Shopping for beneficial rates usually pointless
      • Duty to be imposed on value of shares transferred not on individual assets transferred: Bom HC in Li Taka AIR 1997 Bom 7
      • States with Specific entries: Maharashtra, Karnataka, Rajasthan and Gujarat
      • States without specific entries: Unclear if duty leviable.
        • Cal HC in Madhu Intra Ltd. v. ROC, 2004 (3) CHN 607 - 394 Order is not an instrument chargeable to duty
        • Supreme Court in Ruby Sales v . State of Maharashtra (1994) 1 SCC 531 - specific inclusion of civil court decrees in Bombay Stamp Act only abundant caution
      • 1937 Notification under Indian Stamp Act, 1899 remits duty when merger is of a 90% subsidiary: Remission not available in states with own legislations eg. Kerala, Karnataka, Maharashtra, Gujarat and Rajasthan
      • Gujarat and Maharashtra have limits on stamp duty for mergers and demergers at Rs.10 crore and Rs. 25 crore.
    • Merger ISSUES: SEBI
      • Acquisition of shares pursuant to a scheme of arrangement or reconstruction under any law, Indian or foreign – exempt from SEBI Takeover Code.
        • Exemption claimed unsuccessfully by Luxottica in the acquisition of Ray Ban Sun Optics India
      • Listing Agreement:
        • Scheme before the Court/ Tribunal must not violate, override or circumscribe the securities laws or stock exchange requirements
        • Disclosure required
    • Merger ISSUES: SEBI
      • Shares allotted by unlisted transferee company to shareholders of listed transferor company under a HC sanctioned scheme – can be listed without an IPO subject to conditions (DIP).
        • Eg. Dabur Pharmaceuticals
      • Constitutes ‘Price Sensitive Information’ in terms of Insider Trading Regulations.
      • Compliance with Delisting Guidelines if public shareholding below prescribed limit.
      • Foreign Exchange Management Act, 1999
        • Where the amalgamated company is Indian, non resident shareholders of the foreign amalgamating company require RBI approval to receive shares.
        • Where the amalgamated company is foreign, the issue of its shares to Indian shareholders requires RBI approval.
        • Automatic route available where non residents have to be issued shares in a merger of Indian companies.
      • Human Resources
        • Workmen entitled to retrenchment benefits unless retained in employment on same terms.
        • Adjustments of pay scale needs to be resolved.
          • Global Trust employees were retained on same terms in OBC. Pay packages of former GTB staff could be altered only after 3 years. OBC management had to contend with GTB’s complex salary structure.
    • Mergers & Acquisitions COMPETITION LAW
      • Monopolistic and Restrictive Trade Practices Act, 1969
        • Status: Repealing provision in Competition Act, 2002 not notified.
        • No Central Government approval required for a merger or acquisition under the MRTPA
        • Act attracted only if amalgamated company discovered to be monopolistic in its working not at stage of amalgamation- Hindustan Lever, 1995 Supp (1) SCC 499
    • Mergers & Acquisitions COMPETITION LAW
      • Competition Act, 2002 (Partially notified)
        • Merger or Acquisition = “Combination” if stipulated thresholds respecting aggregate asset or turnover are exceeded
        • Prior approval of combination is not mandatory
        • Test – “ Cause or likely to cause an appreciable adverse effect on competition within the relevant market ”