Merger is a combination of two or more companies, whereby acquirer company acquire company loses its identify.
In finance literature merger and consolidation are technically differentiated. India text also makes such distribution between consolidation and merger wherein former is called absorption and the latter is called amalgamation wherein consolidation and merger are treated as amalgamation, thus the term merger are treated as amalgamation, thus the term merger and amalgamations are interchangeably used.
The tem “merger” and “amalgamation” have not been defined in the Company Act 1956. But as per the act, amalgamation may take place in any of the following methods.
A merger is a combination of two or more firms in which only one firm would survive and the other would cease to exist. Its assets/ liabilities being taken over by the surviving firm.
An amalgamation is an arrangement is which the assets/ Liabilities of 2 or more firms become vested in another firm.
Types of Mergers:
Horizontal merger
Vertical merger
Conglomertic merger
Concentric merger
Horizontal Mergers:
Horizontal merger take place when two or more corporate firms dealings in seemlier lines of activity combine together elimination co. reduction in competition, putting an end to price cutting, economic in competition putting an end to price cutting economic or scale in production, there are often motives underlying such mergers.
For Ex: Merger of valiant types Cosmo Films Ltd,
Vertical Mergers:
Vertical merger occurs when a firms acquires firms “Upstream or downstream from it in the case of “upstream merger” it extends to the firms supplying raw materials to those firms that sell eventually to the consumers. It the case of “downstream merger” thus the combination involves two or more stages of production or distribution that are usually separate, however saying cost of material lower distribution costs assured suppliers and market, increasing or creating barriers to entry for potential competitors or placing them at a cost disadvantage are the chief gains occurring from such merger’s.
For ex: Merging of Usha alloys and Steel Ltd., with Usha Martin Industries ltd., (on 01.01.1980).
Conglomeratic Merger:
When the companies having unrelated business combine together, it is known as Conglomerate Merger.
The objective of such type of merger is not synergies rather, it focuses on now the acquiring company can enhance the overall stability and balance the total portfolio in terms of better use of resources and generation of reserves. It does not have direct impact on acquisition of monopolistic power and then favoured throughout the world as a means of diversification, this type of merge occurred mainly during 1960’s.
Concentric Merger:
When merging companies are related through the basic technologies, production process or market, combine together, it is known as congeneric / cocentric merger, in thus type of merger the acquired company represent just an extension of product line, market participation or technologies of the acquiring company.
Congeneric merger can be further classified as product extension and market extension, when a new product line is added to the existing product line, it is production extension, market extension help to added a new market either through the same line of business or adding an allied filed.
For ex: Merger of alchemic organize limited with anti industries limited, spice organize limited with Monali Petro Chemical Ltd.,
Definition of Amalgamation:
According to “Halsburg’s Law” of England
“Amalgamation has no precise legal meaning. It is a blending of 2 or more existing undertaking into one undertakings, the shareholder of each blending company, becoming substantially the shareholder.
According to “Gower”
Under an amalgamation merger or takeover two companies are merged either defuse by a consolidation of their undertaking by the acquisition of controlling interest. In the share capital of one by the other or of the capital of both by a new companies. Thus, Gower makes no distinction between merger and acquisition.
Weinberg defines amalgamation as an arrangement by which the assets of 2 or more companies become vested in under the control of one of the existing companies or a newly formed company. The share capital of the combined company will spread amongst the shareholder of original companies. Thus, Weinberg treats mergers as different from acquisition.
Reasons for merger:
Merger evaluations are relatively more difficult. The two (2) chief reasons being;
All benefits from merger are not easily quantifiable and so also all costs for instance, benefits of less competition and economics of scale (technical, managerial, financial) are not easily measurable attributes.
Buying a company is more complicated than buying a new machine, in that the firm is to address itself to many tax, legal and accounting issues.
This describes the conceptual aspects of mergers acquisition, amalgamations, takeover, absorption and so on. In terms of their types, economics and limitation although the terms mergers, amalgamation and acquisition are different, their economic impact is the same as for so the business firms involved are concerned for this reason these terms are used interchangeably.
Demerger:
The need of the time to grow and proper is to concentrate on core competences, upto couple of years before, there was urge to expand in different ventures, but today the corporate world has realized the importance of core competence, so need arose to demerge some divisions or undertaking so as to enable to concentrate on main activity.
Definition:
Sec 2(19AA)13 of income tax act defines, “demerger” in relation to company as a transfer, pursuant to a scheme of arrangement under section 391 to 394 of the companies act 1956 by the transferor company of its one or more undertaking to any transferee company.
Demerged company:
Sec 2(19AAA) defines “demerged company as the company, whose undertaking is transferred pursuant to dermerger to a resulting company”.
Meaning:
Demerger means to split the conglomerate (multidivision) of a company into separate company.
Resulting company15:
Section 2(41A) defines resulting company as one or more companies concluding wholly owned subsidiary there of to which the undertaking of the demerged company is transferred in demerger and the resulting company. In consideration of such transfer of undertaking issues shares to the shareholder of demergered company.
The following conditions are to be satisfied:
All the properties and liabilities of the undertaking being transferred by seller become the properties and liabilities of the buyer and shall be transferred at their book values.
Shareholders holding not less than three-fourth. In value of the shares, in the transferor (other than shares already held there in immediately before the demerger by the transferee or its subsidiary) become shareholder of the transferee company.
The transferee company issues shares to the shareholders to transferor company on a proportionate basis.
The transfer of the under is in a going concern basis.
The demerger is in accordance with conditions if any notified under section 72 A (5) of the income tax act by the central government. In this behalf.
The tax concessions to amalgamated company the following are the major tax benefits available to the amalgamated company:
Carry forward and set off of business losses and unabsorbed depreciation.
Expenditure on scientific research.
Expenditure on acquisition of patent rights or copy right.
Expenditure on know-how.
Expenditure for obtaining licences to operate telecommunication services.
Preliminary expresens.
Expenditure on prospecting of certain minerals.
Capital expenditure on family planning.
Bad debts.
Acquisition / Takeover:
Acquisition differs from amalgamation as regards to implementation procedure, acquisition may take place either by outright purchase of assets or by acquisition of shares. It may also take the shape of holding company, although the economic considerations in terms of motives and effect of mergers and acquisitions are similar, the legal procedure involved are different, which merger constituted a subject matter of the companies act and acquisition or takeover side fall, under the preview of SEBI (Substantial acquisition of shares and takeover) regulation 1997.
The term “Takeover” has defined as acquiring, controlling interest in other company, takeover is also synonymous to acquisition. It does not lead to dissolution of the target company unlike in case of merger.
Types of takeover:
A company can takeover another company, in any of 3 ways.
Negotiated takeover (or) friendly.
Hostile takeover or raid on the company.
Bail-out takeover.
Negotiated takeover (or) friendly:
In this type of takeover, the management of target company, itself is ready to part with controlling interest to another management group through negotiation. The terms and conditions of the takeover are mutually settled by the groups. Most of the takeovers occurring are friendly nor hostile.
Hostile Takeover or Open Market:
In this type of takeover, in order to acquire the controlling interest in the target company, the management of acquiring company, acquires the shares from the open market / financial institution / mutual funds / willing shareholders at a price higher than the providing market price. This is also referred to as raid on the company.
Bail-out takeover:
When a healthy company takeover the side company to said it out (i.e., to protect it). It is known as bail-out takeover.
EFFECTIVENESS OF MERGERS AND ITS IMPACT ON SHAREHOLDERS
In this chapter the researcher has made an attempt to study the effectiveness of merger from the perspective of both merging and merged companies. And also the impact of merger on the shareholders of both merging and merged companies is studies. For the purpose of the study the researcher has analysed ten sample cases costing of 21 companies which underwent merger during 2000-03. The researcher has analysed and compared post-merger result of merging and merged companies with the pre-merger results or merging and merged companies with the per-merger results or respective companies.
Methodology adopted for case analysis:
The study has considered three years pre-merger and three years post merger period. For the purpose of analysis, balance sheets, income statements, etc., contained in the published annual reports or the companions have been used.
The study has analysed the data for each of the five cases in the following order.
Part –I
Brief history of the merging and merged companies and the scheme of merger.
Part –II
Effectiveness of merger and its impact on the shareholders of merging company.
In this part, the study of the effectiveness of merger for merging company and it impact on the shareholders of merging company.
Part –III
Effectiveness of merger and its impact on the shareholder of merged company.
In this part, the study of the effectiveness or merger of merged company and its impact of the shareholders of merged company.
For the purpose of studying the effectiveness of merger for merging and merged companions, the researcher has used key indicators like; Net profit (NP) margin, Return on Net worth (NONW). Liquidity Ration, Leverage Ratio, Sales and Reserves and Surplus. However, Sales and Reserves and surplus are considered only in the case of merged company, not in the case of merging company, because, the share of merging entity in the total sale and reserves and surplus after merger cannot be identified.
The Key indicators used for studying the effectiveness of mergers are calculated as under.
Sales:
Sales for this purposed means sales after deducting excise duty. The per-merger combined net sales (of both merging and merged companies) is compared with the post-merger net sales.
Reserves and Surplus (R&S) :
To measure the profitability of merger, the per-merger combined reserves and surplus (of both merging and merged companies) is considered for comparing it with the post – merger reserves and surplus.
For the purposed of studying the impact merger on the shareholders of both merging and merged companies, the researcher has used the key indicators like, Earning per share (EPS). Dividend per share (DPS). Book Value per Share (BVPS), Share Price.
The Sales and reserves and surplus for more or less then 12 months are annualized.
To measure the impact of merger on the shareholders or merging entity, the post-merger key indicator of merged are adjusted with the exchange ratio settled due to merger and compared with its pre-merger indicators.
The key indicators used for studying the impact of mergers on the shareholders of merging and merged companies are calculated as under.
Share Price:
Share price is used to judge the reaction of the shareholders to the merger for this purpose, the average market price of equity share is calculated by taking into account the high and low price traded in each financial year at Mumbai Stock Exchange.
Part –IV
In finance literature merger and consolidation are technically differentiated. India text also makes such distribution between consolidation and merger wherein former is called absorption and the latter is called amalgamation wherein consolidation and merger are treated as amalgamation, thus the term merger are treated as amalgamation, thus the term merger and amalgamations are interchangeably used.
The tem “merger” and “amalgamation” have not been defined in the Company Act 1956. But as per the act, amalgamation may take place in any of the following methods.
A merger is a combination of two or more firms in which only one firm would survive and the other would cease to exist. Its assets/ liabilities being taken over by the surviving firm.
An amalgamation is an arrangement is which the assets/ Liabilities of 2 or more firms become vested in another firm.
Types of Mergers:
Horizontal merger
Vertical merger
Conglomertic merger
Concentric merger
Horizontal Mergers:
Horizontal merger take place when two or more corporate firms dealings in seemlier lines of activity combine together elimination co. reduction in competition, putting an end to price cutting, economic in competition putting an end to price cutting economic or scale in production, there are often motives underlying such mergers.
For Ex: Merger of valiant types Cosmo Films Ltd,
Vertical Mergers:
Vertical merger occurs when a firms acquires firms “Upstream or downstream from it in the case of “upstream merger” it extends to the firms supplying raw materials to those firms that sell eventually to the consumers. It the case of “downstream merger” thus the combination involves two or more stages of production or distribution that are usually separate, however saying cost of material lower distribution costs assured suppliers and market, increasing or creating barriers to entry for potential competitors or placing them at a cost disadvantage are the chief gains occurring from such merger’s.
For ex: Merging of Usha alloys and Steel Ltd., with Usha Martin Industries ltd., (on 01.01.1980).
Conglomeratic Merger:
When the companies having unrelated business combine together, it is known as Conglomerate Merger.
The objective of such type of merger is not synergies rather, it focuses on now the acquiring company can enhance the overall stability and balance the total portfolio in terms of better use of resources and generation of reserves. It does not have direct impact on acquisition of monopolistic power and then favoured throughout the world as a means of diversification, this type of merge occurred mainly during 1960’s.
Concentric Merger:
When merging companies are related through the basic technologies, production process or market, combine together, it is known as congeneric / cocentric merger, in thus type of merger the acquired company represent just an extension of product line, market participation or technologies of the acquiring company.
Congeneric merger can be further classified as product extension and market extension, when a new product line is added to the existing product line, it is production extension, market extension help to added a new market either through the same line of business or adding an allied filed.
For ex: Merger of alchemic organize limited with anti industries limited, spice organize limited with Monali Petro Chemical Ltd.,
Definition of Amalgamation:
According to “Halsburg’s Law” of England
“Amalgamation has no precise legal meaning. It is a blending of 2 or more existing undertaking into one undertakings, the shareholder of each blending company, becoming substantially the shareholder.
According to “Gower”
Under an amalgamation merger or takeover two companies are merged either defuse by a consolidation of their undertaking by the acquisition of controlling interest. In the share capital of one by the other or of the capital of both by a new companies. Thus, Gower makes no distinction between merger and acquisition.
Weinberg defines amalgamation as an arrangement by which the assets of 2 or more companies become vested in under the control of one of the existing companies or a newly formed company. The share capital of the combined company will spread amongst the shareholder of original companies. Thus, Weinberg treats mergers as different from acquisition.
Reasons for merger:
Merger evaluations are relatively more difficult. The two (2) chief reasons being;
All benefits from merger are not easily quantifiable and so also all costs for instance, benefits of less competition and economics of scale (technical, managerial, financial) are not easily measurable attributes.
Buying a company is more complicated than buying a new machine, in that the firm is to address itself to many tax, legal and accounting issues.
This describes the conceptual aspects of mergers acquisition, amalgamations, takeover, absorption and so on. In terms of their types, economics and limitation although the terms mergers, amalgamation and acquisition are different, their economic impact is the same as for so the business firms involved are concerned for this reason these terms are used interchangeably.
Demerger:
The need of the time to grow and proper is to concentrate on core competences, upto couple of years before, there was urge to expand in different ventures, but today the corporate world has realized the importance of core competence, so need arose to demerge some divisions or undertaking so as to enable to concentrate on main activity.
Definition:
Sec 2(19AA)13 of income tax act defines, “demerger” in relation to company as a transfer, pursuant to a scheme of arrangement under section 391 to 394 of the companies act 1956 by the transferor company of its one or more undertaking to any transferee company.
Demerged company:
Sec 2(19AAA) defines “demerged company as the company, whose undertaking is transferred pursuant to dermerger to a resulting company”.
Meaning:
Demerger means to split the conglomerate (multidivision) of a company into separate company.
Resulting company15:
Section 2(41A) defines resulting company as one or more companies concluding wholly owned subsidiary there of to which the undertaking of the demerged company is transferred in demerger and the resulting company. In consideration of such transfer of undertaking issues shares to the shareholder of demergered company.
The following conditions are to be satisfied:
All the properties and liabilities of the undertaking being transferred by seller become the properties and liabilities of the buyer and shall be transferred at their book values.
Shareholders holding not less than three-fourth. In value of the shares, in the transferor (other than shares already held there in immediately before the demerger by the transferee or its subsidiary) become shareholder of the transferee company.
The transferee company issues shares to the shareholders to transferor company on a proportionate basis.
The transfer of the under is in a going concern basis.
The demerger is in accordance with conditions if any notified under section 72 A (5) of the income tax act by the central government. In this behalf.
The tax concessions to amalgamated company the following are the major tax benefits available to the amalgamated company:
Carry forward and set off of business losses and unabsorbed depreciation.
Expenditure on scientific research.
Expenditure on acquisition of patent rights or copy right.
Expenditure on know-how.
Expenditure for obtaining licences to operate telecommunication services.
Preliminary expresens.
Expenditure on prospecting of certain minerals.
Capital expenditure on family planning.
Bad debts.
Acquisition / Takeover:
Acquisition differs from amalgamation as regards to implementation procedure, acquisition may take place either by outright purchase of assets or by acquisition of shares. It may also take the shape of holding company, although the economic considerations in terms of motives and effect of mergers and acquisitions are similar, the legal procedure involved are different, which merger constituted a subject matter of the companies act and acquisition or takeover side fall, under the preview of SEBI (Substantial acquisition of shares and takeover) regulation 1997.
The term “Takeover” has defined as acquiring, controlling interest in other company, takeover is also synonymous to acquisition. It does not lead to dissolution of the target company unlike in case of merger.
Types of takeover:
A company can takeover another company, in any of 3 ways.
Negotiated takeover (or) friendly.
Hostile takeover or raid on the company.
Bail-out takeover.
Negotiated takeover (or) friendly:
In this type of takeover, the management of target company, itself is ready to part with controlling interest to another management group through negotiation. The terms and conditions of the takeover are mutually settled by the groups. Most of the takeovers occurring are friendly nor hostile.
Hostile Takeover or Open Market:
In this type of takeover, in order to acquire the controlling interest in the target company, the management of acquiring company, acquires the shares from the open market / financial institution / mutual funds / willing shareholders at a price higher than the providing market price. This is also referred to as raid on the company.
Bail-out takeover:
When a healthy company takeover the side company to said it out (i.e., to protect it). It is known as bail-out takeover.
EFFECTIVENESS OF MERGERS AND ITS IMPACT ON SHAREHOLDERS
In this chapter the researcher has made an attempt to study the effectiveness of merger from the perspective of both merging and merged companies. And also the impact of merger on the shareholders of both merging and merged companies is studies. For the purpose of the study the researcher has analysed ten sample cases costing of 21 companies which underwent merger during 2000-03. The researcher has analysed and compared post-merger result of merging and merged companies with the pre-merger results or merging and merged companies with the per-merger results or respective companies.
Methodology adopted for case analysis:
The study has considered three years pre-merger and three years post merger period. For the purpose of analysis, balance sheets, income statements, etc., contained in the published annual reports or the companions have been used.
The study has analysed the data for each of the five cases in the following order.
Part –I
Brief history of the merging and merged companies and the scheme of merger.
Part –II
Effectiveness of merger and its impact on the shareholders of merging company.
In this part, the study of the effectiveness of merger for merging company and it impact on the shareholders of merging company.
Part –III
Effectiveness of merger and its impact on the shareholder of merged company.
In this part, the study of the effectiveness or merger of merged company and its impact of the shareholders of merged company.
For the purpose of studying the effectiveness of merger for merging and merged companions, the researcher has used key indicators like; Net profit (NP) margin, Return on Net worth (NONW). Liquidity Ration, Leverage Ratio, Sales and Reserves and Surplus. However, Sales and Reserves and surplus are considered only in the case of merged company, not in the case of merging company, because, the share of merging entity in the total sale and reserves and surplus after merger cannot be identified.
The Key indicators used for studying the effectiveness of mergers are calculated as under.
Sales:
Sales for this purposed means sales after deducting excise duty. The per-merger combined net sales (of both merging and merged companies) is compared with the post-merger net sales.
Reserves and Surplus (R&S) :
To measure the profitability of merger, the per-merger combined reserves and surplus (of both merging and merged companies) is considered for comparing it with the post – merger reserves and surplus.
For the purposed of studying the impact merger on the shareholders of both merging and merged companies, the researcher has used the key indicators like, Earning per share (EPS). Dividend per share (DPS). Book Value per Share (BVPS), Share Price.
The Sales and reserves and surplus for more or less then 12 months are annualized.
To measure the impact of merger on the shareholders or merging entity, the post-merger key indicator of merged are adjusted with the exchange ratio settled due to merger and compared with its pre-merger indicators.
The key indicators used for studying the impact of mergers on the shareholders of merging and merged companies are calculated as under.
Share Price:
Share price is used to judge the reaction of the shareholders to the merger for this purpose, the average market price of equity share is calculated by taking into account the high and low price traded in each financial year at Mumbai Stock Exchange.
Part –IV
Conclusions based on the analysis made in the previous parts.
While analyzing the date the researcher was constrained of some information. And therefore, the researcher has confined the discussion relating to such information to a limited extent.
While analyzing the date the researcher was constrained of some information. And therefore, the researcher has confined the discussion relating to such information to a limited extent.
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