Merger,Acquisition And Corporate Restructuring

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Merger,Acquisition And Corporate Restructuring

  1. 1. Merger,acquisition And Corporate Restructuring
  2. 2. Structure • Conceptual framework • Financial framework • Corporate restructuring • Accounting for amalgamation • Tax benefits • Exercise
  3. 3. CONCEPTIONAL FRAMEWORK MEANING OF • MERGERS • ACQUSITIONS • AMALAMATIONS • TAKEOVERS • ABSORPTIONS
  4. 4. TYPES OF MERGERS • HORIZONTAL MERGER – SIMILAR LINES OF ACTIVITY ADVANTAGES • REDUCTION OF COMPETITION • PUTTING AN END TO PRICE CUTTING • ECONOMIES OF SCALE IN PRODUCTION • RESEACH AND DEVELOPMENT • MARKETING AND MANAGEMENT
  5. 5. VERTICAL MERGER – FIRMS SUPPLYING RAW MATERIALS MERGE WITH FIRM THAT SELLS ADVANTAGE • LOWER BUYING COST OF MATERIAL • LOWER DISTRIBUITION COST • ASSURED SUPPLIES AND MARKET • COST ADVANTAGE
  6. 6. CONGLOMERATE MERGER UNRELATED INDUSTRIES MERGE PURPOSE • DIVERSIFICATION OF RISK • Egs Time warner-(they were into media & movie production) & AOL-(leading american website
  7. 7. FINANCIAL FRAMEWORK IT COVERS THREE INTERRELATED ASPECTS 1.DETERMINING THE FIRM’S VALUE 2.FINANCING TECHNIQUES IN MERGER 3.CAPITAL BUDGETING
  8. 8. DETERMINIG THE FIRMS VALUE QUANTITATIVE FACTORS – BASED ON 1. THE VALUE OF THE ASSETS • BOOK VALUE – OWNERS EQUITY • DEPENDS ON FIXED ASSETS AND WORKING CAPITAL 2. APPRAISAL VALUE- INDEPENDENT APPRISAL AGENCIES 3. MARKET VALUE – BASED ON STOCK MARKET QUATATIONS ,BUT CHANCE FOR SPECULATION 4. EARNING PER SHARE AND P/E RATIO – IMPACT OF EPS AFTER MERGER
  9. 9. EXERCISE COMPANY A • NO. OF SHARES 2 LACS • MARKET VALUE PER SHARE RS.25 • EPS RS.3.125 COMPANY B • NO. OF SHARES 1 LAC • MARKET VALUE RS.18.75 • EPS RS.2.5
  10. 10. CONCLUSIONS • EXCHANGE AT EPS – NO EFFECT ON EPS AFTER MERGER • EXCHANGE MORE THAN EPS RATIO – COMPANY WITH LOWER EPS GAINS • IF LESS THAN EPS RATIO – COMPANY WITH HIGHER EPS BEFORE MERGER GAINS
  11. 11. PRICE EARNING RATIO APPROACH • MEANING • COMPUTATION : P/E RATIO = MP/EPS • EPS = EAT/NO. OF EQUITY SHARES • MARKET PRICE = P/E (NO. OF TIMES) * EPS
  12. 12. EXAMPLE PRE MERGER SITUATION FIRM A FIRM B EAT 6,25,000 2,50,000 NO. OF SHARES 2,00,000 1,00,000 EPS 3.125 2.5 P/E RATIO(TIMES) 8 7.5 MARKET PRICE PER SHARE(MPS) 25 18.75 TOTAL MARKET VALUE (N*MPS) OR (EAT*P/E RATIO) 50,00,000 18,75,000
  13. 13. POST MERGER SITUATION 1 (BASED ON CURRENT MARKET PRICE SITUATION 2 EXCHANE RATIO/ SWAP RATIO (ASSUMING) 2.5:3.125=.8 1 : 1 EAT(COMBINED FIRM) 6.25+2.5=8.75 8,75,000 NO. OF SHARES 2.8 lakhs 2,00,000+1,00,000=3,00,0 00 EPS 8.75/2.8=3.125 8,75,000/3,00,000=2.91/ P/E RATIO (ASSUMED TO BE THE SAME) 8 7.5 MPS 3.125*8=25 21.825 TOTAL MARKET VALUE 70,00,000 65,47,500
  14. 14. CONCLUSION • IF SHARES ARE EXCHANGED BASED ON CURRENT MARKET PRICE PER SHARE , POST MARKET PRICE SHARE INCREASED AT HIGHER RATE THAN EXCHANGED BELOW THIS RATIO
  15. 15. • MARKET VALUE AFTER MERGER = MARKET VALUE BEFORE MERGER = 68,75,000 • NET GAIN = 15,00,000 ? IF EXCHANGE RATIO IS 2.5:1 WHO GAINS WHO LOSES ? IF EXCHANGE RATIO IS 1:1 WHO GAINS WHO LOSES ? HOW TO CALCULATE TOLERABLE SHARE EXCHANGE RATIO
  16. 16. DETERMINATION OF TOLERABLE SHARE EXCHANGE RATIO TOTAL MV LESS: MINIMUM TO BE GIVEN TO B 75,00,000 10,00,000 NET BENEFIT TO A 65,00,000 NO. OF SHARES OF A TO A CO. SHARE HOLDERS 1,00,000 DESIRED POST MERGER MPS 65 PER SHARE NO. OF EQUTY SHARES TO BE ISSUED BASED ON DESIRED MARKET PRICE 10,00,000/65 = 15,385 SHARES TOLERANCE SHARE EXCHANGE RATIO 50,000/15385 = 3.25 SHARES OF FIRM B, 1 SHARE IN FIRM A 1:3.25
  17. 17. CONCLUSION • FIRM WITH HIGHER P/E RATIO CAN ACQUIRE FIRM WITH LOWER P/E RATIO WHICH WILL INVARIABLY INCREASES MARKET VALUE AFTER MERGER
  18. 18. CAPITAL BUDGETING • THE TARGET FIRM SHOULD BE VALUED BASED ON PV OF INCREMENTAL CASH INFLOWS
  19. 19. CORPORATE RESTRUCTURING • FINANCIAL RESTRUCTURING • RESTRUCTURING SCHEMES : INTENAL AND EXTERNAL RESTRUCTURING • DEMERGERS • BUYOUTS
  20. 20. ACCOUNTING FOR AMALGAMATION • POOLING INTEREST METHOD CONDITIONS AS PER AS 14: 1. ALL ASSETS AND LIABILITIES OF TRANSFEROR CO. TO BE THE ASSETS OF THE TRANSFREE CO. 2. AT LEAST 90% OF F.V OF EQUITY SHARE HOLDERS SHOULD BE SHAREHOLDERS OF NEW CO. 3. PURCHACE CONSIDERATION TO BE SETTLED BY THE NEW CO. 4. THE BUSINESS OF NEW CO. SHOULD CONTINUE 5. NO ADJUSTMENT IS INTENDED TO BE MADE TO BOOK VALUE OF ASSETS AND LIABILITIES OF TRANSFEROR CO.
  21. 21. OTHER ACCOUNTING TREATMENTS 1. CROSS HOLDINGS OF SHARES TO BE CANCELLED SUBSIQUENT TO MERGER 2. INTER CO. TRANSACTIONS LIKE DEBTORS AND CREDITORS – SALE OF GOODS FROM ONE CO. TO ANOTHER 3. SALES TAX PAID ALREADY CAN NOT BE RECOVERED
  22. 22. INCOME TAX RELATED ISSUES FOR AMALGAMATION CONDITIONS OF AMALGAMATION UNDER INCOME TAX ACT SEC 2 (1B) 1. ALL ASSETS AND LIABILITIES OF TRANSFEROR CO. TO BE THE ASSETS OF THE TRANSFREE CO. 2. SHARE HOLDERS HOLDING NOT LESS THAN 3/4TH IN VALUE OF SHARES OTHER THAN SHARES ALREADY HELD SHOULD BECOME SHARE HOLDERS OF AMALGAMATED COMPANY EX. NO. OF SHARES OF Altd CO. 1,00,000 NO. OF SHARES HELD BY Bltd IN Altd IS 20,000 NOMINAL VALUE OF SHARE IS RS.10 ASSUME Altd MERGE WITH Bltd THEN 75% OF 1,00,000- 20,000 = 60,000 TO BE THE SHARE HOLDES OF B CO. NOTE:SHARE HOLDERS MAY BE EQUITY OR PREFERNCE SHARE HOLDERS
  23. 23. OTHER CONDITIONS • THE AMALGAMATED CO. IS AN INDIAN CO. EXCEPTION 1. IF SHARES OF INDIAN CO.HELD BY FOREIGN BEFORE MERGER AND SUCH FOREIGN CO. TAKEN OVER BY ANOTHER FOREIGN CO. 2. ATLEAST 25% OF THE FOREIGN CO. (BEFORE MERGER) TO BE SHARE HOLDERS OF THE NEW FOREIGN CO. ? WHAT IS THE BENEFIT TO THE AMALGAMATED CO. AMALGAMATING CO.(OLD CO.)
  24. 24. • NO CAPITAL GAIN ON TRANSFER ON CAPITAL ASSETS BY THE TRANSFEROR CO. UNDER SEC 47(VI) OF I.T ACT ? CAN NEW CO. CARRY FORWAD AND SET OF LOSS AND DEPRECIATION SEC 72 A TO BE FULFILLED 1. ACCUMULATED LOSSES REMAIN UNABSORBED FOR 3 OR MORE YEARS 2. 75% OF BOOK VALUE TO BE HELD ATLEAST FOR 2 YEARS BEFORE AMALGAMATION 3. THE AMALGAMATED CO. CONTINUES TO HOLD 3/4TH OF BOOK VALUE ATLEAST FOR 5 YEARS 4. NEW CO. SHOULD CONTINUE FOR ANOTHER 5 YEARS 5. NEW CO. SHOULD ACHIEVE ATLEAST 50%OF INSTALLED CAPACITY BEFORE END OF 5 YEARS AND SHOULD CONTINUE FOR 5 YEARS
  25. 25. 6. THE NEW AMALGAMATED CO. SHOULD FURNISH TO ASSESSING OFFICER ABOUT PARTICULARS OF PRODUCTION BENEFIT • THIS SCHEME IS ALSO APPLICABLE TO BANKING INSTITUTIONS ?TATA VOLTAS & KELVINATOR HYDERABAD DIVISION vs. CBDT
  26. 26. EXAMPLE A LTD AMALGAMATES WITH B LTD AS ON 2007 PARTICULARS DOES NOT SATISFY SEC 2(1B) & 72 A SATISFIES 2(1B) BUT DOES NOT SATISFY 72 A SATISFIES BOTH 2(1B) & 72 A A MERGES WITH B (A GOES OUT) NO BENEFIT TO A & B DOES NOT ATTRACT CAPITAL GAIN FOR A BUT NO GAIN FOR B NO CAPITAL GAIN TAX & ACCUMULATED LOSSES & UNABSORBED DEPERICIATION CAN BE CARRIED FORWARD
  27. 27. ? If b merges with a & b goes out of market who gains under above 3 situations ? If a&b merge with c what are the tax implication under above situations Assume b is a loss making co.& Have accumulated losses & unabsorbed depreciation ? If c is not an Indian co.
  28. 28. OTHER TAX BENEFITS 1. Expenditure on amalgamation or de-merger – allowed under sec 35DD both revenue and capital expenditure allowed 2. Expenditure on scientific research can be carried forward 3. Expenditure on acquisition of patent rights copyrights – depreciation can be provided 4. Expenditure for obtaining license for tele-communication service can be written off 5. Preliminary expenses 6. Capital expenditure on family planning 7. Bad debts are allowed
  29. 29. Tax Concession To Share Holders Of Amalgamating Co. • No capital gain tax provided new co. Is a Indian co.& Shareholders are acquired everything in shares
  30. 30. EXERCISE PARTICULARS CO. A CO. B EAT 1,40,000 37,500 NO. OF SHARES 20,000 7,500 EPS 7 5 MARKET PRICE 70 40 P/E RATIO 10 8
  31. 31. • Co. A is acquiring co. B Exchanging one share for every 1.5 shares of B ltd & p/e ratio will continue even after merger ? Are they better or worse of than they were before in merger ? Determine the range of minimum & maximum ratio between the two firms ? A is an Indian co. ? A is a foreign co. ? A merges with T & formed a new co. AT ltd ? What are the tax planning required before & after merger

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