MERGERS & AMALGAMATIONS By DIVYA RAMAN Corporate Department
Introduction Today, there has been an increase in the number of companies coming together for better business development. In this scenario, I would like to draw your attention to the beaming area of mergers and amalgamations.
What is a Merger? Merger is one in which the assets and liabilities of a Company gets vested in another Company, the Company which is merged, losing its identity and the shareholders of the merged Company becoming the shareholders of the other Company. Eg: An already existing Company A merging with Company B, wherein all the assets and liabilities of Company A vests in Company B and Company A shall no longer be in existence after the merger. Moreover all the shareholders of Company A shall become the shareholders become the shareholders of Company B.
What is an Amalgamation? Amalgamation is an arrangement wherein the assets and liabilities of two or more companies get vested in another company (which may or may not be the original Companies) and which would have as its shareholders substantially all the shareholders of the amalgamating companies. Eg: Company A and Company B comes to an arrangement wherein they agree that the entire assets and liabilities of Companies A and B shall vest in Company C, which is newly incorporated. Post amalgamation, Company C shall have substantially all the shareholders of Company A and Company B.
Transferor and Transferee Companies The transferor company is one whose assets and liabilities gets transferred to the other company. The transferee company is the one to which the assets and liabilities of the transferor company gets vested. Eg: where company A proposes to amalgamate with company B, company A shall be called “Transferor Company” and company B shall be called “Transferee Company”.
Legal Procedure Sections 391 to 394A of the Companies Act, 1956 deals with the procedure for amalgamation. The procedure is as follows: 1. Any Company, creditors of the Company, any class of them, members or any class of them can file an application under Section 391 seeking sanction of any scheme of compromise or arrangement. While filing an application under section 391 or 394, the applicant is supposed to disclose all material particulars in accordance with the provisions of the Act.
2. Upon satisfying that the scheme is prima facie workable and fair, the Tribunal order for the meeting of the members, class of members, creditors or the class of creditors as the case may be. Rather, passing an order calling for meeting, if the requirements of holding meetings with class of shareholders or the members, are specifically dealt with in the order calling meeting, then, there won’t be any subsequent litigation. The scope of conduct of meeting with such class of members or the shareholders is wider in case of amalgamation than where a scheme of compromise or arrangement is sought for under section 391.
3. The scheme must get approved by the majority of the stake holders viz., the members, class of members, creditors or such class of creditors. The scope of conduct of meeting with the members, class of members, creditors or such class of creditors will be restrictive somewhat in an application seeking compromise or arrangement. 4. There should be due notice disclosing all material particulars and annexing the copy of the scheme as the case may be while calling the meeting.
5. In a case where amalgamation of two companies is sought for, before approving the scheme of amalgamation, a report is to be received from the registrar of companies that the approval of scheme will not prejudice the interests of the shareholders. 6. The Central Government is also required to file its report in an application seeking approval of compromise, arrangement or the amalgamation as the case may be under section 394A. 7. After complying with all the requirements, if the scheme is approved, then, the certified copy of the order is to be filed with the concerned authorities.
Types of mergers Horizontal merger It is a combination of two or more companies in the same area of business. For eg: merger of two pharmaceutical companies or two toothpaste companies. Vertical merger It is the combination of two or more companies involved in different stages of production or distribution of the same product. For eg: merger of a TV manufacturing (assembling) company and a TV marketing company or merging of a spinning company and a weaving company.
Conglomerate merger It is a merger of companies engaged in different lines of business activity. For eg: merging of different businesses like manufacturing of cement products, fertilizer products, electronic products, insurance investment and advertising agencies. L&T and Voltas Ltd. are examples of such mergers.
Types of Amalgamations Generally speaking amalgamations fall into two broad categories Amalgamation in the nature of merger This is a form of amalgamation which satisfies the following conditions:
All the assets and liabilities of the transferor company become, after amalgamation, the assets and liabilities of the transferee company.
Shareholders holding not less than 90% of the face value of the equity shares of the transferor company (other than the equity shares already held therein, immediately before the amalgamation, by the transferee company or its subsidiaries of or their nominees) become equity shareholders of the transferee company by virtue of the amalgamation.
The consideration for the amalgamation receivable by those equity shareholders of the transferor company who agree to become equity shareholders of the transferee company is discharged by the transferee company wholly by the issue of equity shares in the transferee company, except that cash may be paid in respect of any fractional shares.
The business of the transferor company is intended to be carried on, after the amalgamation, by the transferee company.
No adjustment is intended to be made to the book values of the assets and liabilities of the transferor company when they are incorporated in the financial statements of the transferee company except to ensure uniformity of accounting policies.
Amalgamation in the nature of purchase In this category are those amalgamations which are in effect a mode by which one company acquires another company and, as a consequence, the shareholders of the company which is acquired normally do not continue to have a proportionate share in the equity of the combined company, or the business of the company which is acquired is not intended to be continued.
Motives behind mergers & amalgamations The following are the motives behind mergers and amalgamations: Economies of Scale: When two or more companies merge/amalgamate, the average cost per unit is reduced through increased production since fixed costs are shared over an increased number of goods. Increased Revenue/Increased Market Share: When two or more Companies merge, then the resultant Company loses a competitor and this enables the resultant company to achieve more revenue, by capturing increased market share.
3. Corporate Synergy: Merger results in better use of complimentary resources. It may take the form of revenue enhancement (to generate more revenue than its predecessor standalone companies would be able to generate) and cost savings (to reduce or eliminate expenses associated with the running of the business). 4. Geographical or other diversification: This is designed to smooth the earning results of a company, which over the long term smoothens the stock price of the company giving conservative investors more confidence in investing in the company. However, this does not always deliver value to shareholders.
5. Resource transfer: The merger of companies results in a transfer of scarce resources whereby it enables the resultant company to reduce costs spent on such scarce resources, in a way enhancing the revenue of the company. 6. Improved market reach and industry visibility: A merger can expand two companies’ marketing and distribution, giving new sales opportunities. A merger can also improve a company’s standing in the Investment community. Bigger companies often have an easier time raising capital than smaller ones
Advantages of M&A The general advantage behind mergers and amalgamations is that it provides a productive platform for the companies to grow. It is a way to increase market penetration in a particular area with the help of an established base. As per Mr. D.S. Brar, (former CEP of Ranbaxy pharmaceuticals) few reasons for mergers and amalgamations are as follows:
(i) Accessing new markets (ii) Maintaining growth momentum (iii) Acquiring visibility and international brands (iv) Buying cutting technology rather than importing it (v) Taking on global competition (vi) Improving operating margins and efficiencies (vii) Developing new product mixes
Conclusion In real terms, the rationale behind mergers and amalgamations is that the two companies are more valuable, profitable than individual companies and that the shareholder value is also over and above that of the sum of the two companies. Despite negative studies and resistance from the economists, M&A’s continue to be an important tool behind growth of a company. Reason being, the expansion is not limited by internal resources, no drain on working capital - can use exchange of stocks, is attractive as tax benefit and above all can consolidate industry - increase firm's market power.