Mergers and Acquisitions
• The terms Mergers and Amalgamations
treated synonymously.
• The terms Takeovers and Acquisitions treated
synonymously.
Mergers and Amalgamations
• Joining of two or more firms to form a new
entity or absorption of one/more firms with
another...
Mergers and Amalgamations
• Although the Mergers/Amalgamations of
firms in India is governed by the provisions of
the Comp...
First Condition
• All the properties and liabilities of the
amalgamated company/companies
immediately before amalgamation ...
Second Condition
• The shareholders holding at least 90 per cent
of shares/voting power in the amalgamating
company should...
Scheme of Merger/Amalgamation
• Whenever two companies agree to merge
with each other, they have to prepare a
scheme of am...
Contents of a model scheme
• Description of the transfer, transferee
company and the business of the transferor.
• Their a...
Contents of a model scheme
• Management: Board of Directors, their number
and participation of transferee company’s
direct...
Essential features of the Scheme of
Amalgamation
Determination of Transfer
Date( Appointed Date)
• Fixing of the cut off date from which all
properties are sought to be tr...
Determination of Effective date.
• The scheme would normally contain the
conditions to be satisfied for the scheme to be
e...
Companies Act
• Governed by the provisions of Section 391-
394 of the Companies Act.
Approvals
• Under Section 391 of the Companies Act,
shareholders of both amalgamated and
amalgamating companies should hol...
Approvals
• Further, under Section 81(1A) of the
Companies Act, the shareholders of the
amalgamated are required to pass a...
Approvals Creditors, FIs and Banks
• Under their respective agreements with each
of the companies.
Approval from respective High Courts
• Approval from various courts in terms of
Section 391-394.
• The court issues orders...
Step by Step Procedure
Object Cluse
• The first step is to examine the objects clause
of the Memorandum of Association of the
transferor and tran...
Step II
• The preparation of a scheme of
amalgamation.
Meetings
• Meetings of the Board of Directors of both the
companies to
• Decide the effective and appointed date.
• To app...
Informations
• Inform the stock exchanges concerned about
the proposed amalgamation immediately
after the board meeting.
•...
Application for Amalgamation
• Application under Section 191 to the
respective High Courts.
• The procedure for making app...
Passing the resolution
• Hold separate meetings of the shareholders
and creditors to seek approval of the scheme.
• The re...
Report of Chairman to the Court
• The chairman of the meeting must report the
results of the meeting to the court within t...
Presenting a petition before the Court
• Within seven days of filing the report by the
chairman, the company must present ...
Application for Direction
• An application may be made to the court to
provide for direction on all or any matters
indicat...
Court Order
• The Court would pass an order.
Certificate
• A certified copy of the order of the court
dissolving the amalgamating company or
giving approval to the sch...
• A copy of the court’s should also be also be
attached to the memorandum and articles of
association of the transferee co...
Financial Framework
Determining the Firm’s Value
Relate to
1.The value of the firm’s assets
2.The earnings of the firm
Book Value
• By dividing the Net Worth by the number of
shares outstanding.
• Net worth is a stockholder's equity, it cons...
Appraisal Value
• Acquired from an independent appraisal
agency.
• Normally based on the replacement cost of
the assets.
Market Value
• As reflected in the stock market quotations.
Earnings per Share
• Whether the acquisition will have a positive
impact on the earnings per share after the
merger or it ...
Merger as a Capital Budgeting
Decision
• The target firm should be valued in terms of
its potential to create future cash ...
• The present value of the expected benefits are
compared with the cost of acquisition of the
target firm.
Steps to evaluate merger decisions
Determination of Incremental Cash
Flows to Firm
After Tax operating earnings
• Plus: Non Cash expenses such as depreciatio...
Determination of Terminal Value
• Terminal Value (TV) is the present value of the
FCFF, after the Forecast period.
• You t...
• The sum of the PV of the forecast period FCFF
and the PV of the terminal value will give you
the enterprise value.
• You...
Discount Rate
• The discount rate used is normally the
Weighted Average Cost of Capital.
• The weighted average cost of ca...
Cost of Equity using CAPM
NPV Approach
• Here we calculate the PV of the cash flows
during the forecast period and add the PV of
the terminal Value ...
Adjusted Present Value
• Same as capital budgeting approach except
that you add the PV of tax shield.
• i.e tax savings on...
Tax Aspects of Amalgamation,
Mergers and Demergers
• Carry Forward and Set off of Business Losses
and Unabsorbed Depreciat...
• Certain capital expenditures incurred by the
amalgamating company like on Scientific
Research, acquisition of patents or...
• Free of Capital Gains tax – Transfer of capital
asset by an amalgamating company to an
amalgamated company.
• Would not ...
Acquisitions and Takeovers
1. Negotiated/Friendly
2. Open Market/Hostile
3. Bail out
• Generally understood to imply the acquisition
of shares carrying voting rights in a company
• With a view to gaining con...
Questions for Revision
• What is a Merger? How is it different from an
Acquisition?
• What is meant by a Scheme of Merger?...
• How is the concept of EPS used to evaluate
the effect of a merger?
• What is the tax definition of the term
‘amalgamatio...
The End
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Mergers acquisitions my khan

  1. 1. Mergers and Acquisitions
  2. 2. • The terms Mergers and Amalgamations treated synonymously. • The terms Takeovers and Acquisitions treated synonymously.
  3. 3. Mergers and Amalgamations • Joining of two or more firms to form a new entity or absorption of one/more firms with another. • The amalgamating firm loses its identity and its shareholders become shareholders of the amalgamated firm.
  4. 4. Mergers and Amalgamations • Although the Mergers/Amalgamations of firms in India is governed by the provisions of the Companies Act, 1956, it does not define these terms. • The Income Tax Act, 1961, stipulates two prerequisites for any amalgamation in order to benefit from provisions of the Income Tax Act.
  5. 5. First Condition • All the properties and liabilities of the amalgamated company/companies immediately before amalgamation should vest with/become the liabilities of the amalgamated company.
  6. 6. Second Condition • The shareholders holding at least 90 per cent of shares/voting power in the amalgamating company should become shareholders in the amalgamated company by virtue of amalgamation.
  7. 7. Scheme of Merger/Amalgamation • Whenever two companies agree to merge with each other, they have to prepare a scheme of amalgamation. • The scheme is generally prepared in consultation with its merchant bankers/financial consultants.
  8. 8. Contents of a model scheme • Description of the transfer, transferee company and the business of the transferor. • Their authorized, issued and paid up capital. • Change of name, object clause and accounting year. • Protection of employment. • Dividend position and prospects.
  9. 9. Contents of a model scheme • Management: Board of Directors, their number and participation of transferee company’s directors on the board. • Application under sections 391 and 394 of the companies Act, 1956, to obtain High Court approval. • Expenses of Amalgamation. • Conditions of the scheme to become effective and operative, effective date of amalgamation.
  10. 10. Essential features of the Scheme of Amalgamation
  11. 11. Determination of Transfer Date( Appointed Date) • Fixing of the cut off date from which all properties are sought to be transferred from the amalgamating company to the amalgamated company.
  12. 12. Determination of Effective date. • The scheme would normally contain the conditions to be satisfied for the scheme to be effective. • The effective date is the date by which all the required approvals under various statutes would be obtained.
  13. 13. Companies Act • Governed by the provisions of Section 391- 394 of the Companies Act.
  14. 14. Approvals • Under Section 391 of the Companies Act, shareholders of both amalgamated and amalgamating companies should hold their respective meetings under the directions of the respective high courts and consider the scheme of amalgamation.
  15. 15. Approvals • Further, under Section 81(1A) of the Companies Act, the shareholders of the amalgamated 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.
  16. 16. Approvals Creditors, FIs and Banks • Under their respective agreements with each of the companies.
  17. 17. Approval from respective High Courts • Approval from various courts in terms of Section 391-394. • The court issues orders for dissolving the amalgamating company without winding up.
  18. 18. Step by Step Procedure
  19. 19. Object Cluse • The first step is to examine the objects clause of the Memorandum of Association of the transferor and transferee companies so as to ascertain whether the power of amalgamation exists or not. • If not, it is necessary to amend the objects clause.
  20. 20. Step II • The preparation of a scheme of amalgamation.
  21. 21. Meetings • Meetings of the Board of Directors of both the companies to • Decide the effective and appointed date. • To approve the scheme of amalgamation and the exchange ratio. • To authorize the directors/officers to make applications to the appropriate High Court for necessary action.
  22. 22. Informations • Inform the stock exchanges concerned about the proposed amalgamation immediately after the board meeting. • The shareholders to be informed. • Bankers/FIs/debenture trustees etc to be informed at least 45 days before the board meeting so that their approval for the proposed amalgamation is available at the time of the board meeting.
  23. 23. Application for Amalgamation • Application under Section 191 to the respective High Courts. • The procedure for making application to the High Court has been laid down under the companies (court) rules, 1959.
  24. 24. Passing the resolution • Hold separate meetings of the shareholders and creditors to seek approval of the scheme. • The resolution approving the scheme needs to be passed by them.
  25. 25. Report of Chairman to the Court • The chairman of the meeting must report the results of the meeting to the court within the time fixed by the court or if no time is fixed, then within 7 days of the date of the meeting.
  26. 26. Presenting a petition before the Court • Within seven days of filing the report by the chairman, the company must present a petition to the court for confirmation of the arrangement.
  27. 27. Application for Direction • An application may be made to the court to provide for direction on all or any matters indicated in Section 194(1).
  28. 28. Court Order • The Court would pass an order.
  29. 29. Certificate • A certified copy of the order of the court dissolving the amalgamating company or giving approval to the scheme of merger, should be filed with the Registrar of Companies concerned within 30 days of the court order.
  30. 30. • A copy of the court’s should also be also be attached to the memorandum and articles of association of the transferee company.
  31. 31. Financial Framework
  32. 32. Determining the Firm’s Value Relate to 1.The value of the firm’s assets 2.The earnings of the firm
  33. 33. Book Value • By dividing the Net Worth by the number of shares outstanding. • Net worth is a stockholder's equity, it consist of equity share capital plus reserve and surplus. • In other words its a difference between total assest and total liabilities. • Based on historical costs of the assets.
  34. 34. Appraisal Value • Acquired from an independent appraisal agency. • Normally based on the replacement cost of the assets.
  35. 35. Market Value • As reflected in the stock market quotations.
  36. 36. Earnings per Share • Whether the acquisition will have a positive impact on the earnings per share after the merger or it will result in the dilution of the EPS.
  37. 37. Merger as a Capital Budgeting Decision • The target firm should be valued in terms of its potential to create future cash flows. • Free cash flows are equal to after tax operating earnings plus non cash expenses such as depreciation and amortization, less additional investments expected to be made in the long term assets and working capital of the acquired firm.
  38. 38. • The present value of the expected benefits are compared with the cost of acquisition of the target firm.
  39. 39. Steps to evaluate merger decisions
  40. 40. Determination of Incremental Cash Flows to Firm After Tax operating earnings • Plus: Non Cash expenses such as depreciation and Amortization • Less: Investment in Long Term Assets • Less: Investment in Net working capital
  41. 41. Determination of Terminal Value • Terminal Value (TV) is the present value of the FCFF, after the Forecast period. • You take the FCFF for the first year after the forecast period. • You divide this by (Discount rate – Perpetual growth rate. • Find out the PV of the result at Present by discounting it.
  42. 42. • The sum of the PV of the forecast period FCFF and the PV of the terminal value will give you the enterprise value. • You subtract the debt from the EV to arrive at the Equity Value. • Divide it by the number of shares to arrive at the share valuation.
  43. 43. Discount Rate • The discount rate used is normally the Weighted Average Cost of Capital. • The weighted average cost of capital (WACC) is the rate that a company is expected to pay on average to all its security holders to finance its assets.
  44. 44. Cost of Equity using CAPM
  45. 45. NPV Approach • Here we calculate the PV of the cash flows during the forecast period and add the PV of the terminal Value to arrive at the NPV of the firm.
  46. 46. Adjusted Present Value • Same as capital budgeting approach except that you add the PV of tax shield. • i.e tax savings on interest payments.
  47. 47. Tax Aspects of Amalgamation, Mergers and Demergers • Carry Forward and Set off of Business Losses and Unabsorbed Depreciation provided certain conditions are satisfied.
  48. 48. • Certain capital expenditures incurred by the amalgamating company like on Scientific Research, acquisition of patents or copyrights, know, for obtaining license to operate Telecommunication Services, bad debts etc are allowed in the hands of the amalgamated company.
  49. 49. • Free of Capital Gains tax – Transfer of capital asset by an amalgamating company to an amalgamated company. • Would not be regarded as Capital Gains in the hands of the shareholder.
  50. 50. Acquisitions and Takeovers 1. Negotiated/Friendly 2. Open Market/Hostile 3. Bail out
  51. 51. • Generally understood to imply the acquisition of shares carrying voting rights in a company • With a view to gaining control over the company. • Governed by the SEBI Takeover Code.
  52. 52. Questions for Revision • What is a Merger? How is it different from an Acquisition? • What is meant by a Scheme of Merger? Describe its key elements. • Describe the process of Merger? • Describe the NPV method for evaluating and Acquisition? How is it different from the Adjusted Present Value Method?
  53. 53. • How is the concept of EPS used to evaluate the effect of a merger? • What is the tax definition of the term ‘amalgamation’ ? Describe some of the Income tax concessions in case of an amalgamation?
  54. 54. The End

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