Description
This is a presentation describes merger and acquisition explained.
M & A – Introduction & Current Trends ? Corporate Restructuring – Introduction & Motives ? Modes of Restructuring ? Valuation – Introduction, Purpose & Methods ? Due Diligence Review – Introduction & Types ? Financing for Restructuring ? Implications ? Points to be noted ? Intermediaries Involved ? Pitfalls of M & A
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Liberalization of economy and reform programmes have resulted in a 'churn' in the industrial and services sector. Companies are resorting to acquisitions as a means to consolidate and grow rapidly. Globalization has given importance to size for competing effectively with the multinationals and exploring the world markets. As a result, there is a manifold increase in the level of M & A activity.
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Acquirer
Target
Sector
Acquisition price in $ mn
10700 3720 1025 659
Bharti Airtel Abbott Laboratories Reliance Industries Limited ICICI Bank
Zain Telecom Piramal’s Healthcare Solutions Business Infotel Broadband Services (P) Ltd. Bank of Rajasthan
Telecom Pharmaceuticals Telecom Services Banking
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Corporate Restructuring Significant modification made to the debt, operations or structure of a company Usually done when there are significant problems in a company, which are causing some form of financial and operational inefficiency Objective is to eliminate financial and/or operational inefficiency
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Achieve Growth And Survive
Gain Better Competitive Position
Strategic Reasons
Focus on Core Activities
Achieve Economies of Scale
Cont…
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Fund Raising
Dividend Distribution Tax minimisation
Financial Reasons
Utilisation of Excess Cash
Tax Planning & Reducing Costs Cont…
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Bail Out ‘Takeovers’
Diversification – Entering into a new segment
Other Reasons
Family Separation
Warding-off Predators
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M&A
Acquisition
Merger
Demerger
Others
Asset Purchase
Share Purchase Subsidarisation Slump Sale Buyback Capital Reduction
Itemised Sale
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ACQUISITION
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Purchase of a company by another company. ? Acquirer more interested in assets (including intangibles) / cash flows; less interested in mutual sharing of risks and benefits with the target company. Examples: ? Bain Capital Private Equity acquired a 20% stake in Himadri Chemicals and Industries ? Tata Steel acquired Corus Group Plc.
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Types: ? Asset Purchase: This type of transaction leaves the target company as an empty shell. It is further divided into: a) Slump Sale b) Itemised Sale
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Share purchase: The buyer buys the shares, and therefore control, of the target company Example: Essar has entered into a share purchase agreement with Sierra Communication International Llc and Avaya Mauritius Ltd to buy 59.13% stake in AGC Networks (erstwhile known as Avaya Global Connect) for $44.5 mn.
Cont…
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Acquisition - friendly or unfriendly
Friendly Takeovers: Target agrees to acquirer’s offer and cooperates.
Unfriendly Takeovers: Target's management/owner defends the bid by an acquirer
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SHARE PURCHASE
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Purchase of shares from the existing shareholders
OR
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Fresh issue of shares to the investor/acquirer
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? On
Sale of shares the shareholder is liable to tax based on the following criteria; ? Gains on transfer of Capital Assets is taxable at rates prescribed below:
? Short-Term (Unlisted less than 12 Months) - Slab tax rate (10%, 20% or 30%
based on the taxable income**)
? Short-Term (Listed Shares & units
of equity fund subjected to STT)
-
15% ** Exempt 10%(without Indexation) or 20% (with indexation) **
? Long-Term (Listed Shares & units
of equity fund subjected to STT)
? Other Long-Term Gains
** Plus applicable Education Cess & Surcharge
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SLUMP SALE
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The term ‘slump sale’ connotes the sale of an entire business undertaking, comprising of various assets net of liabilities relating to the undertaking for a lump sum or ‘slump’ consideration. (Section 2(42C) of the Income Tax Act, 1961) The consideration may be discharged by issuing shares and/or cash to the Transferor Company. Example: Fortis Healthcare Limited acquired 10 Wockhardt hospitals for INR 9.09 billion on slump sale basis.
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Cont…
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? A sale in order to constitute a slump sale must satisfy the
following tests:
? The business has been sold off as a whole and as a going concern at its realisable value ? The seller has not withdrawn any assets or liabilities from the business sold or the buyer has not rejected any assets or liabilities comprised in the business ? Materials available on record do not indicate item-wise value of the assets transferred
? The business or the undertaking should have a separate existence in the books of accounts
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In the books of Selling Co.
PARTICULARS
Share Capital Reserves & Surplus Loan Funds
BEFORE
50 150 300
(Rs. In cr.)
PARTICULARS
Share Capital
AFTER
50
(Rs. in cr.)
Reserves & Surplus
Add: Pft. on sale of business Loan Funds Total Liabilities Fixed Assets Net Current Assets Cash & Bank (on sale of business) Total Assets
150
440 200 840 90 250 500 840
Total Liabilities
Fixed Assets Net Current Assets Total Assets
500
100 400 500
The Business with the book value of 60 crores sold at 500 crores on slump sale basis (taxation impact not considered) Cont…
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In the books of Acquiring Co.
PARTICULARS Share Capital Loan Funds Total Liabilities Fixed Assets Goodwill Net Current Assets Intangible Assets (Patents, Trademark, Copyrights etc.) Total Assets
(Rs. In cr.)
500 100 600 100 100 150
250
600
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Slump Sale – Income Tax Case Study
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The undertaking transferred is held for more than 36 months therefore it will be long term capital gains In case of Slump sale Indexation benefit is not available
The Long term capital gain tax will be computed as under;
(Rs. in crores) Sales Consideration Less : Cost of Acquisition (without Indexation) 500 (60)
Long term capital Gain
Tax on long term capital gain @ 22.145%
440
97.44
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MERGER
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In common parlance it means combination of two or more commercial organizations into one. Merging company loses its separate identity. It is fusion of two or more existing companies. All assets and liabilities of one or more Companies are transferred to another Company.
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Example: Merger of Centurion Bank of Punjab with HDFC Bank
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Before Merger
Shareholders of X
Shareholders of Y
X Ltd
Y Ltd
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After Merger
Option 1 Option 2 Option 3
Shareholders of X & Y
Shareholders of X & Y
Shareholders of X & Y
X Ltd
Y Ltd
New co Z
Note- Based on the swap ratio, the shareholders of the transferor company are issued shares of transferee company
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“We can’t merge again. Our letterhead already takes up the entire page.”
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Vertical Merger:
Merger with suppliers or customers
Eg: Kochi Refineries Ltd Merger with Bharat Petroleum Corporation Limited Cont…
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Horizontal Merger:
? Between firms in the same kind
of business usually as competitors. ? Generally has the effect of reducing competition
Countries committed to a competitive economy use Antitrust laws to prohibit such mergers.
Eg: Bank of Rajasthan merger with ICICI Bank
Cont…
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Conglomerate Merger:
Lines of business have nothing to do with one another
Eg: Indo Gulf and Birla Global Finance merging into Indian Rayon. New Co rechristened Aditya Birla Nuvo
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Difference between Merger & Acquisition
Merger
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Acquisition
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Consideration discharged by issue of shares of transferee co. Shareholders of merging co. will become shareholders of Merged co. Usually by negotiations.
Consideration may be by cash or shares.
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Acquirer company shareholders have controlling interest. May be friendly or hostile.
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Drivers for Merger
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Synergy of operations and economies of scale. Diversification. Capital restructuring. To increase the market share and to reduce the competition. Benefit of carry forward losses. Drop Down Effect of Global Restructuring Reduce the number of Companies in Group Backwards & Forward Integration
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Due Diligence by parties Agreement on Appointed Date Valuation Fairness opinion by category I Merchant Banker ? Scheme of Arrangement ? Approval by the Board of Directors ? Stock Exchange approval for listed Companies ? Meeting of Shareholders/ Creditors ? Registrar of Companies approval ? NOC from Liquidator ? High Court approval ? Filing of High Court Order with ROC
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Definitions:
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Appointed Date, Effective Capital Undertaking Transferor Company Transferee Company
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Share Capital Transfer & Vesting of Undertaking of Transferor Company (Assets & Liabilities)
Cont…
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? Conduct of Business during Interim Period ? Transfer of Employees, Legal Proceedings, Contracts and
Deeds ? Consideration ? Accounting Treatment ? Modifications to the Scheme ? Conditions for Effecting the Scheme ? Cost relating to Scheme
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?Clause 24 of the Listing Agreement
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Filing of the Scheme at least one month before filing with the court for approval Pre and Post restructuring shareholding pattern to be intimated Filing of the notice, Explanatory Statement, etc. with the Stock Exchange Undertaking that the Scheme is in conformity with the Laws
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?High Court under whose jurisdiction the Registered
office of the companies are situated ?Merger of WOS in the Holding Company - Application by Holding Company can suffice ?Direction of convening meeting of shareholders & creditors
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?Publication of Advertisement
? Notice of the Meeting
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At least 21 days clear notice To be sent under certificate of posting Explanatory Statements, Scheme & Proxy Form to be attached to the notice Voting by polls Scrutinizers
? Conducting Meeting
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Cont…
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?Approval of Scheme at the Meeting
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Majority in number and ¾ th in Value
?Results of the meeting to be reported to the High
Court
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? Petition for the Approval of the
Scheme ? Approval of the Regional Director ? Approval of Official Liquidator (OL) ? Appeals Against High Court’s Order Possible
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?Order to be filed with the ROC within 30 days of receipt
of the order of High Court ? Obtain RBI approval, if required
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?Payment of Stamp Duty
? Fixing Record Date for Allotment of Shares ? Arrangement for Listing of Newly Issued Shares
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The following factors should be kept in mind during merger:
?Accounting
?Income Tax
?Stamp Duty ?Sales Tax
?Excise
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? Came into ? Deals with: ?
effect from April 1,1995
Accounting for Amalgamation & ? Treatment of any resultant Goodwill or Reserves ? Applicable only to company form of Organisation ? Does not deal with Acquisition of the whole or part of a company by another ? In Amalgamation, one company loses its Identity; In Acquisition, identity of companies are maintained
Cont…
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Amalgamation means an amalgamation as per the provision of Companies Act, 1956 or any other law applicable to Companies, sections 391 to 394 of Companies Act, 1956 governs the provisions of amalgamation
In the nature of MERGER
In the nature of PURCHASE
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?Conditions for Amalgamation in the nature of Merger:
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All Assets & Liabilities are transferred At least 90% Share holders of transferor co. become share holders of transferee co Consideration for Amalgamation to be discharged by issue of Equity shares Business of the transferor co. is intended to be carried on No Adjustments are intended to be made to the book value of assets and liabilities of transferor co
Cont…
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?All
the above simultaneously
conditions
should
be
satisfied
? If any of the above conditions are not fulfilled it would be
termed as Amalgamation in the nature of Purchase
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Amalgamation in the nature of MERGER
Pooling of Interest Method
Amalgamation in the nature of PURCHASE Purchase Method
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All Assets, Liabilities & Reserves of Transferor company are taken over at their existing carrying values Identity of Reserves is preserved Uniform Accounting Policy to be adopted Difference between the Consideration and Share Capital of transferor company shall be adjusted in Reserves of the Merged company
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?Assets
taken either at existing carrying value or fair value, value can also be assigned to non existent assets/liabilities ?The identity of the reserves, other than the statutory reserves is not preserved ?In case of Statutory Reserves, ”Amalgamation Adjustment a/c” of a Corresponding amount needs to be created which shall be reversed when separate identity of statutory reserve is no longer required ?Difference between Net Assets and Consideration: ? If Positive – Capital Reserve ? If Negative - Goodwill
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MERGER OF A LTD. INTO B LTD. LIABILITITES Share Capital (See assumption i) General Reserve Profit & Loss A/c Debenture Redemption Reserve Capital Reserve Loans Current Liabilities & Provisions TOTAL
Co A 40 7 5 21 12 85
Co B
ASSETS
(Rs. in '000) Co A Co B 23 22 34 6 112 40 80 -
75 Fixed Assets 65 Investments Current Assets, Loans & 15 Advances - Profit & loss A/c (Dr. bal) 25 52 232 TOTAL
85
232
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Assumptions
i) The share exchange ratio for the merger of A Ltd. into B Ltd. is: "For every 2 equity shares of Rs. 10 each fully paid up of A Ltd., 1 equity share of Rs. 10 each fully paid up of B Ltd."; which means that B Ltd. will issue equity share capital of Rs. 20 to the shareholders of A Ltd. 120 25
ii) Market Value of Fixed Assets of A Ltd is Rs iii) Market Value of Investments of A Ltd is Rs
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LIABILITITES Share Capital (See assumption i) General Reserve Profit & Loss A/c Debenture Redemption Reserve Amalgamation Reserve Loans Current Liabilities & Provisions TOTAL
Co A Co B Merged 40 7 5 21 12 85 75 65 15 25 52 232
ASSETS
(Rs. in '000) Co A Co B Merged 23 22 34 6 112 40 80 135 62 114 -
95 Fixed Assets 72 Investments Current Assets, Loans & 9 Advances 5 Profit & loss A/c (Dr. bal) 20 46 64 311 TOTAL
85
232
311
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?For Amalgamation under Pooling of Interest Method
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Exchange ratio, description and number of shares Difference between consideration and net identifiable assets acquired and treatment of the same
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LIABILITITES Share Capital (See assumption i) General Reserve Profit & Loss A/c Debenture Redemption Reserve Capital Reserve Loans Current Liabilities & Provisions TOTAL
Co A Co B Merged 40 7 5 21 12 75 65 15 25 52 95 65 15 5
ASSETS
(Rs. in '000) Co A Co B Merged 23 112 22 40 34 80 6 232 65 114 5
Fixed Assets Investments Current Assets, Loans & Advances Profit & loss A/c (Dr. bal) Amalgamation Adjustment A/c 126 (created against DRR) 46 64 416 TOTAL
85 232
85 232
416
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?For Amalgamation under Purchase Method
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Consideration for amalgamation and its description Difference between consideration and net identifiable assets acquired and treatment thereof including the period of amortisation of any goodwill arising on amalgamation.
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For all Amalgamations ?Name and general nature of the companies ?Effective date of amalgamation ?Method of accounting used ?Particulars of the scheme sanctioned under a statute
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Special treatment for Restructuring under Income Tax Act. Salient Features are: ? Definitions/ Qualifying Conditions ? Capital Gains ? Carry Forward & Set-off of Losses ? Others
Cont…
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Income Tax
?Definition
(cont.)
2(1B)
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of Amalgamation / Merger – Section
All the properties and liabilities to be transferred
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Shareholders holding not less than 75% of value of shares to become shareholders of Transferee Co.
Cont…
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Income Tax
(Cont.)
?Capital Gain Tax – Sec 47(vi) & 47(vii)
Not a transfer - no liability for capital gains tax in the hands of the Transferor Co. as well as for shareholders
?Cost
of acquisition of shares of Transferee Co. in the hands of Shareholders
COA of shares of Transferor Co. = COA of shares of Transferee Co.
Cont…
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Income Tax
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(Cont.)
?Depreciation on the Assets being transferred
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Transferee Company will be entitled to Depreciation on the written down value (WDV) of the block of assets transferred which will be the same as in the case of Transferor Company had it continued to hold such assets Depreciation to transferor company and transferee company in the year of merger shall be apportioned in the ratio of the number of days for which the assets were used.
Cont…
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Income Tax
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(Cont.)
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Carry Forward & Set-off of Losses of Transferor Co – Sec 72A Qualifying Companies ? Companies Owning ? Industrial Undertaking or ? Ship or Hotel ? Banking Companies ? Public Sector Companies engaged in business of operation of aircraft Business Losses – 8 Years (Fresh Life) Unabsorbed Depreciation – Unlimited Period
Cont…
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Income Tax
?Conditions
(Cont.)
?Transferor Company ? Engaged in Business for at least three years to which the loss or Unabsorbed depreciation relates ? Holds ¾th of the book value of fixed assets held by it 2 years prior to the date of merger
Cont…
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Income Tax
(Cont.)
Transferee company ? Holds for at least 5 years ¾th of book value of fixed assets of transferor Co. ? Continues business of transferor Co. for at least 5 years Rule 9 C ? Achieve 50% level of installed production capacity of undertaking of transferor co. before 4 years, and continue till 5th year
Cont…
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Income Tax
?Closely held Co.- Section 79
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(Cont.)
Carry forward Business loss would lapse if shareholding pattern changes by more than 49 % Applies only to Business loss and not to unabsorbed depreciation
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?Stamp Duty Payable in the states
of Rajasthan, Maharashtra, Gujarat & Karnataka is on Court Order
?Other States - Duty Payable on
Immovable Properties & Movable Properties as per applicable rates
Cont…
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Stamp Duty
?Rates for Maharashtra
?
(Cont.)
Schedule 1 to the Bombay Stamp Act, 1958 under Article 25(2)(da) relating to Conveyance
10% of market value of shares allotted in exchange and consideration if any paid but not exceeding the higher of: (i) 5% of Market Value of the immovable property in Maharashtra or (ii) 0.7% of Market Value of shares allotted in exchange and consideration if any paid
High Court order under section 394 of the Companies Act, in respect of amalgamation or reconstruction of companies
67 of 55
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Market Capital of XYZ ltd is Rs 1,000 lacs, Where as Immovable property transferred amounts to Rs 500 lacs. In the above case Stamp Duty will be calculated as follows:
Market value of Shares Immovable Property
1000 10% of market Value of Shares = 100 lacs 500 Not exceeding higher of:
- 5% of Market Value of Immovable Property = 25 lacs
- 0.7% of market value of Shares = 7 lacs
Therefore the Stamp duty payable will be Rs. 25 Lacs
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?On Transfer of Business
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Sales tax payable is on sale of goods. ‘Business’ does not fall under the purview of ‘goods’ under the Sales tax Act. Transfer of business on a going concern basis. No sale of goods – No Sales Tax However, this view is not free from doubt
?Incentive / Deferment Loan – Available to Transferee
Co
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?Excise Law
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New Registration No. CENVAT Credit available
? Raw Material ? Capital Goods
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DEMERGER
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? Demerger contemplates hiving off a division/unit/business of
a company into a new/existing company.
? Demerger involves a vertical split of company, whereby
business is transferred on a going concern basis to a new/existing company.
? This division may either: ? form a new company and operate separately from the original
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one or may get merged into another existing co.
Cont…
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Demerger - Introduction
PRE
Shareholders
(cont.)
POST
Shareholders
Undertaking A
AB Ltd
Undertaking B
Undertaking A
AB Ltd
Undertaking B
B Ltd
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?Unlocking Shareholder value
?Streamlining business
segments
?To make financial and managerial resources available
for developing other more profitable opportunities as a restructuring strategy parts in the business
?Selling unwanted and surplus
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Demerger - Examples
Examples of Demerger
? Demerger of Ferro Alloys Division of Utkal Manufacturing and Services Limited into Indian Metal and Ferro Alloys Limited. ? Demerger of Tobacco Undertaking of Golden Tobacco Limited into Golden Realty & Infrastructure Limited.
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DEMERGED COMPANY PARTICULARS
Share Capital
Reserves & Surplus Loan Funds Total Liabilities Fixed Assets Net Current Assets
Before
100
600 300 1,000 600 400
After
100
350 200 650 400 250
RESULTING COMPANY
40
210 100 350 200 150
Total Assets
1,000
650
350
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Reliance Demerger Date : January 18, 2006 (in Mn) Name of Company Pre- Demerger Market price No. of shares Market Cap 912.90 1,39,35,08,041 12,72,133 Post- Demerger Market price No. of shares Market Cap 708.46 289.00 43.84 22.61 1,39,35,08,041 1,39,35,08,041 1,39,35,08,041 1,39,35,08,041 9,87,245 4,02,724 61,091 31,507 27,480 15,10,047 18.70%
RIL Reliance Communications ventures Ltd Reliance Energy Ventures Ltd Reliance Capital Ventures Ltd Reliance Natural Resources Limited Total % Increase/(decrease)
19.72 1,39,35,08,041 12,72,133
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? Agreement on Appointed Date ? Scheme of Arrangement ? Convening a Board meeting ? Approval by the Board of Directors ? Petition to the Court ? Valuation ? Fairness opinion by category I
Merchant Banker ? Stock Exchange approval for listed Companies ? Meeting of Shareholders/ Creditors ? Registrar of Companies approval ? High Court approval ? Filing of High Court Order with ROC
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Demerger – Conditions
? Definition of Demerger
– Section 2(19AA)
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All the properties and liabilities of the demerged undertaking to be transferred on going concern basis Properties and liabilities are transferred at book value The resulting company issues shares to shareholders of demerged company on a proportionate basis Shareholders holding minimum 75% of the value of shares become shareholders of resulting company
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Demerger – Tax aspects
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Capital Gain Tax – Sec 47(vid) ? Not a transfer - no liability for capital gains tax in the hands of shareholders of Transferee Co. Deemed Dividend – Sec 2(22)(v) ? Not treated as Deemed dividend. Hence no tax liability for shareholders Amortisation of expense – Sec 35DD ? Where an assessee, being an Indian company, incurs any expenditure, on or after the 1st day of April, 1999, for the purposes of amalgamation or demerger, the assessee shall be allowed a deduction equal to one-fifth of such expenditure for five successive previous years.
TAX BENEFITS
Cont…
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Demerger – Tax aspects (cont..)
? Cost of Acquisition– Sec 49(2C) & 49(2D) ?
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Cost of acquisition of shares of the transferee/resulting company will be the amount which bears to the cost of acquisition of shares of the transferor/demerged company, the same proportion as the net book value of assets transferred bears to the net worth of the demerged company immediately before demerger. Cost of acquisition of shares of the Demerged Co will be the original cost of shares of Demerged Co after reducing the cost of shares of the Resulting Co as computed above
Cont…
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Demerger – Tax aspects (cont.)
? Depreciation
on
the
Assets
being
transferred
? WDV in the hands of the demerged company shall be the WDV of the block of assets before demerger less WDV of the assets transferred to the transferee company.
? Depreciation to transferor company and transferee company in the year of demerger shall be apportioned in the ratio of the number of days for which the assets were used
Cont…
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Tax Aspects
Demerger – Tax aspects (cont.)
? Carry
Forward & Set-off Losses– Sec 72A(4) & 72A(5) ? Business Losses ? Brought forward loss of Demerged undertaking to be carried forward and set off in hands of Resulting company ? Allowed to be carried forward for set off in the hands of the resulting company for the unexpired period ? Unabsorbed Depreciation – Unlimited Period
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SUBSIDARISATION
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Subsidiarisation means transferring the business to a wholly owned subsidiary. ? The transfer can be made either at book value or at fair value. ? Companies resort to Subsidiarisation when the undertaking needs to be sold but there is no buyer ready to buy all the assets at a given point of time. ? Under this option business gets transferred to a subsidiary and the parent company continues to hold 100% equity stake in the subsidiary. ? This option facilitates the process of disinvestment, as only the shares of subsidiary company will have to be handed over when the suitable buyer is found out. ? This option shifts the control of business from the shareholders to the holding company. Example: Grasim Industries Limited transferred its Cement Division to a wholly owned subsidiary, namely Samruddhi Cement Limited
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In the books of Holding Co.
PARTICULARS Share Capital Reserves & Surplus Loan Funds Total Liabilities BEFORE 50 150 300 500 PARTICULARS Share Capital Reserves & Surplus Loan Funds Total Liabilities Fixed Assets Net Current Assets AFTER 50 150 200 400 90 250 60 400
(Rs in Cr)
(Rs in Cr)
Fixed Assets
Net Current Assets Total Assets
100
400 500
Investment in subsidiary
Total Assets
The Division with a Net Book value of 60 crores is transferred to WOS. Cont… 86
In the books of Subsidiary Co.
AFTER 60 100
PARTICULARS Share Capital Loan Funds
(Rs in Cr)
Total Liabilities
160
Fixed Assets Net Current Assets Total Assets
10 150 160
87
CAPITAL REDUCTION
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It is the process of decreasing a company’s shareholder equity through share cancellations and share repurchases. ? The reduction of capital is done by companies for numerous reasons such as:
?
? increasing shareholder value ? producing a more efficient capital structure
After a capital reduction, the number of shares in the company decrease by the reduction amount. ? In some situations, shareholders receive a cash payment for shares cancelled – but mostly, there is minimal impact on shareholders. Example: KMC Speciality Hospitals announced reduction in face value of equity shares from Rs. 10 per share to Re. 1 per share.
?
Cont…
89
?Reduction of share capital may be effected in the
following ways:
? In respect of share capital not paid-up, extinguishing or reducing the liability on any of its shares; ? Cancel any paid-up share capital, which is lost, or is not represented by available assets. This may be done either with or without extinguishing or reducing liability on any of its Shares; or ? Pay off the paid-up share capital, which is in excess of the needs of the company. This may be achieved either with or without extinguishing or reducing liability on any of its shares.
Cont…
90
?Situations in which a Co. may reduce its capital: ? Where the capital is unrepresented by assets; ? Where substantial trading losses have accumulated; ? Where there are extensive capital losses requiring revaluation of the assets; ? To return excess cash to its shareholders where there is no likelihood of the cash ever being required for the business
91
PARTICULARS
(Rs. in Cr.)
BEFORE
(Rs. in Cr.)
AFTER
(Face Value Rs. 10)
(Face Value Rs.5)
Share Capital
Reserves & Surplus Loan Funds
100
500 400 1,000
50
500 400 950
Fixed Assets Net Current Assets Profit & Loss
600 350 50
600 350 -
1,000
950
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BUY BACK OF SHARES
93
? In common parlance, "Buyback is acquiring its own shares
from the existing shareholders by the company.” ? It means that a company reduces its paid-up capital by buying back its shares held by the shareholders. ? The company’s decision to buyback is influenced by a host of factors such as: ? the company’s growth opportunities ? sourcing of funds ? optimum allocation of the funds generated
Example: Binani Cement Ltd has announced a buyback of shares at a price of Rs. 90 per share
94
?
After passing of the special/Board resolution, make a public announcement at the place of the registered office.
?
The public announcement shall specify a date, which shall be "specified date" for the purpose of determining the names of shareholders to whom the letter of offer has to be sent.
Give a public notice containing disclosures as specified in Schedule I of the SEBI regulations. A draft letter of offer shall be filed with SEBI through a merchant Banker. The letter of offer shall then be dispatched to the members of the company.
? ?
Cont…
95
?
A copy of the Board resolution authorising the buy back shall be filed with the SEBI and stock exchanges. The date of opening of the offer shall not be earlier than seven days or later than 30 days after the specified date. The buy back offer shall remain open for a period of not less than 15 days and not more than 30 days. A company opting for buy back through the public offer or tender offer shall open an escrow Account.
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? Reasons for buy back include:
? ? ? ? ?
putting unused cash to use raising earnings per share helping capital restructuring by way of capital reduction reduced equity base strengthens management control obtaining stock for employee stock option plans or pension plans ? increasing the value of shares (reducing supply) ? eliminating any threats by shareholders looking for a controlling stake
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PARTICULARS
BEFORE BUYBACK (Rs. In Crores)
(Face Value Rs.10)
ADJUSTMENTS (Rs. In Crores)
AFTER BUYBACK (Rs. In Crores)
(Face Value Rs.10)
Share Capital Free Reserves Capital Redemption Reserve Loans & Advances Total Liabilities Fixed Assets Net Current Assets Total Assets
100 300 600 1,000 650 350 1,000
(10) (60) 10 (60) (60) (60)
90 240 10 600 940 650 290 940
1 crores Shares bought back at Rs. 50 premium.
98
VALUATION
99
What is Valuation ?
? Valuation means assigning a value to underlying assets ? The value should be a fair value ? Valuation is not a science; more of an art ? Valuation is largely influenced by Valuer’s judgment,
knowledge of business, analysis and interpretation and the use of different methods ? Valuation varies with purpose ? Valuation is time sensitive
100
? Determining the consideration for Acquisition/ Sale of
Business or for Purchase/Sale of equity stake ? Determining the swap ratio for Merger/Demerger ? Corporate Restructuring ? Sale/Purchase of Intangible Assets including brands, patents, copyrights, trademarks, rights ? Determining the value of family owned business and assets in case of Family Separation ? Determining the Fair Value of shares for issuing ESOP as per the ESOP guidelines
Cont…
101
?Determining the fair value of shares for Listing on the
Stock Exchange ?Determining the Portfolio Value of Investments by Venture Funds or Private Equity Funds ?Liquidation of a Company ?Other Corporate Decisions
102
? Asset Based Approach ? Book Value ? Replacement Value/Realisable Value ? Earning Based Approach ? Capitalisation of Maintainable Earnings ? Discounted Cash Flow Method ? Market Approach ? Market Price ? Market Comparables
103
Case Laws
It is fair to use combination of three well known methods - asset value, yield value & market value
Hindustan Lever Employees ‘ Union Vs. HLL (1995) 83 Com. Case 30 SC
Valuation job can be entrusted to people who know the Company rather than giving to outsiders who will start from scratch
Consolidated Coffee V/s Arun Kumar Agrawal (1999) 21 SCL 11 (Kar)
Cont…
104
Case Laws
(Cont.)
Exchange Ratio not disturbed by Courts unless objected and found grossly unfair
Miheer H. Mafatlal Vs. Mafatlal Industries (1996) 87 Com Cases 792 Dinesh v. Lakhani Vs. Parke-Davis (India) Ltd.. (2003) 47 SCL 80 (Bom)
Brands of a company are part of goodwill, cannot be separately valued
Brooke Bond Lipton India Limited (1998) 15 SCL 81 (Cal)
105
DUE DILIGENCE REVIEW
106
?Dictionary meaning of ‘Due’ is ‘Sufficient’ & ‘Diligence’
is ‘Persistent effort or work’ ?It is an investigation into the affairs of an entity prior to its acquisition, flotation, restructuring or other similar transaction ?Due Diligence Review is a process whereby an individual, or an organization, seeks sufficient information about a business entity to reach an informed judgement as to its value for a specific purpose
107
? Business/Market Due Diligence ? Technical Due Diligence ? Human Resource Due Diligence ? Legal Due Diligence ? Environmental Due Diligence
? System Due Diligence
? Financial Due Diligence ? Accounting Due Diligence ? Tax Due Diligence
108
FINANCING FOR RESTRUCTURING
109
?Stock Financing Route: ? Acquirer issues the stock of his firm ? As compared to Debt, cost being dividend does not increase the fixed cost ? Dilution of EPS ? Risk as well as Synergies will be shared by the share holders of both the firms Example: Gitanjali Gems Limited acquired a majority stake in Samuels Jewelers, Inc by allotting 1,554,050 equity shares of Rs. 10 each at an issue price of Rs. 290 per share.
Cont…
110
? Cash Financing ? Entail heavy out flow of cash upfront (PSU disinvestment) ? Synergetic benefit pay for interest cost. Example: ? Acquisition of Parkway by Fortis
Cont…
111
?
Leveraged Buy-Outs (LBO)
Creation of Debt using the target’s stock as security ? Characteristics: ? Stable Cash Flow ? Room for significant cost reduction ? Equity interest of owners
?
Example: The Tata-Corus (the Anglo-Dutch steelmaker) $12.1billion mega-acquisition
112
The following factors should be kept in mind during restructuring: 1. Regulatory Considerations a) Companies Act b) SEBI & Other Capital Market Regulations c) FEMA Guidelines 2. Accounting 3. Income Tax 4. Stamp Duty 5. Sales Tax
Cont…
113
6. Excise Duty 7. Other Laws a) Competition Act b) Rent Act – if valuable tenanted property c) IPR Legislation d) Labour Laws
114
Buyer
Seller
? Do not Sign any confidential
documents without consulting advisors
?Conduct your own Due Diligence ?Have a thoughtful communication
plan on when and how will you inform your Employees, regulators, and customers.
?Consider the structure of your
acquisition
?Conduct a thorough Due – Diligence
of the Seller
?Determine when you should place
the enterprise on market
?Base your price on Economics and
not Emotions
?Retain Legal & Financial Advisors
as soon as possible
?Retain Legal & Financial Advisors as
soon as possible
115
Intermediaries Involved
? ? ? ? ? ? Merchant Bankers Lawyers Chartered Accountants Company Secretaries Technical Valuers Bankers, etc.
116
Reasons why M & A may fail: ? Cultural Clash ? Wrong/Improper estimates ? Contractual limitations ? Synergies not well understood ? Loss of Key talent ? Inability to sustain financial performance
117
THANK YOU
doc_511166727.ppt
This is a presentation describes merger and acquisition explained.
M & A – Introduction & Current Trends ? Corporate Restructuring – Introduction & Motives ? Modes of Restructuring ? Valuation – Introduction, Purpose & Methods ? Due Diligence Review – Introduction & Types ? Financing for Restructuring ? Implications ? Points to be noted ? Intermediaries Involved ? Pitfalls of M & A
?
2
?
? ?
?
Liberalization of economy and reform programmes have resulted in a 'churn' in the industrial and services sector. Companies are resorting to acquisitions as a means to consolidate and grow rapidly. Globalization has given importance to size for competing effectively with the multinationals and exploring the world markets. As a result, there is a manifold increase in the level of M & A activity.
3
Acquirer
Target
Sector
Acquisition price in $ mn
10700 3720 1025 659
Bharti Airtel Abbott Laboratories Reliance Industries Limited ICICI Bank
Zain Telecom Piramal’s Healthcare Solutions Business Infotel Broadband Services (P) Ltd. Bank of Rajasthan
Telecom Pharmaceuticals Telecom Services Banking
4
? ? ?
Corporate Restructuring Significant modification made to the debt, operations or structure of a company Usually done when there are significant problems in a company, which are causing some form of financial and operational inefficiency Objective is to eliminate financial and/or operational inefficiency
?
5
Achieve Growth And Survive
Gain Better Competitive Position
Strategic Reasons
Focus on Core Activities
Achieve Economies of Scale
Cont…
6
Fund Raising
Dividend Distribution Tax minimisation
Financial Reasons
Utilisation of Excess Cash
Tax Planning & Reducing Costs Cont…
7
Bail Out ‘Takeovers’
Diversification – Entering into a new segment
Other Reasons
Family Separation
Warding-off Predators
8
M&A
Acquisition
Merger
Demerger
Others
Asset Purchase
Share Purchase Subsidarisation Slump Sale Buyback Capital Reduction
Itemised Sale
9
ACQUISITION
10
Purchase of a company by another company. ? Acquirer more interested in assets (including intangibles) / cash flows; less interested in mutual sharing of risks and benefits with the target company. Examples: ? Bain Capital Private Equity acquired a 20% stake in Himadri Chemicals and Industries ? Tata Steel acquired Corus Group Plc.
?
11
?
Types: ? Asset Purchase: This type of transaction leaves the target company as an empty shell. It is further divided into: a) Slump Sale b) Itemised Sale
?
Share purchase: The buyer buys the shares, and therefore control, of the target company Example: Essar has entered into a share purchase agreement with Sierra Communication International Llc and Avaya Mauritius Ltd to buy 59.13% stake in AGC Networks (erstwhile known as Avaya Global Connect) for $44.5 mn.
Cont…
12
Acquisition - friendly or unfriendly
Friendly Takeovers: Target agrees to acquirer’s offer and cooperates.
Unfriendly Takeovers: Target's management/owner defends the bid by an acquirer
13
SHARE PURCHASE
14
?
Purchase of shares from the existing shareholders
OR
?
Fresh issue of shares to the investor/acquirer
15
? On
Sale of shares the shareholder is liable to tax based on the following criteria; ? Gains on transfer of Capital Assets is taxable at rates prescribed below:
? Short-Term (Unlisted less than 12 Months) - Slab tax rate (10%, 20% or 30%
based on the taxable income**)
? Short-Term (Listed Shares & units
of equity fund subjected to STT)
-
15% ** Exempt 10%(without Indexation) or 20% (with indexation) **
? Long-Term (Listed Shares & units
of equity fund subjected to STT)
? Other Long-Term Gains
** Plus applicable Education Cess & Surcharge
16
SLUMP SALE
17
?
The term ‘slump sale’ connotes the sale of an entire business undertaking, comprising of various assets net of liabilities relating to the undertaking for a lump sum or ‘slump’ consideration. (Section 2(42C) of the Income Tax Act, 1961) The consideration may be discharged by issuing shares and/or cash to the Transferor Company. Example: Fortis Healthcare Limited acquired 10 Wockhardt hospitals for INR 9.09 billion on slump sale basis.
?
Cont…
18
? A sale in order to constitute a slump sale must satisfy the
following tests:
? The business has been sold off as a whole and as a going concern at its realisable value ? The seller has not withdrawn any assets or liabilities from the business sold or the buyer has not rejected any assets or liabilities comprised in the business ? Materials available on record do not indicate item-wise value of the assets transferred
? The business or the undertaking should have a separate existence in the books of accounts
19
In the books of Selling Co.
PARTICULARS
Share Capital Reserves & Surplus Loan Funds
BEFORE
50 150 300
(Rs. In cr.)
PARTICULARS
Share Capital
AFTER
50
(Rs. in cr.)
Reserves & Surplus
Add: Pft. on sale of business Loan Funds Total Liabilities Fixed Assets Net Current Assets Cash & Bank (on sale of business) Total Assets
150
440 200 840 90 250 500 840
Total Liabilities
Fixed Assets Net Current Assets Total Assets
500
100 400 500
The Business with the book value of 60 crores sold at 500 crores on slump sale basis (taxation impact not considered) Cont…
20
In the books of Acquiring Co.
PARTICULARS Share Capital Loan Funds Total Liabilities Fixed Assets Goodwill Net Current Assets Intangible Assets (Patents, Trademark, Copyrights etc.) Total Assets
(Rs. In cr.)
500 100 600 100 100 150
250
600
21
Slump Sale – Income Tax Case Study
? ?
The undertaking transferred is held for more than 36 months therefore it will be long term capital gains In case of Slump sale Indexation benefit is not available
The Long term capital gain tax will be computed as under;
(Rs. in crores) Sales Consideration Less : Cost of Acquisition (without Indexation) 500 (60)
Long term capital Gain
Tax on long term capital gain @ 22.145%
440
97.44
22
MERGER
23
?
In common parlance it means combination of two or more commercial organizations into one. Merging company loses its separate identity. It is fusion of two or more existing companies. All assets and liabilities of one or more Companies are transferred to another Company.
?
?
Example: Merger of Centurion Bank of Punjab with HDFC Bank
24
Before Merger
Shareholders of X
Shareholders of Y
X Ltd
Y Ltd
25
After Merger
Option 1 Option 2 Option 3
Shareholders of X & Y
Shareholders of X & Y
Shareholders of X & Y
X Ltd
Y Ltd
New co Z
Note- Based on the swap ratio, the shareholders of the transferor company are issued shares of transferee company
26
“We can’t merge again. Our letterhead already takes up the entire page.”
27
2 7
Vertical Merger:
Merger with suppliers or customers
Eg: Kochi Refineries Ltd Merger with Bharat Petroleum Corporation Limited Cont…
28
Horizontal Merger:
? Between firms in the same kind
of business usually as competitors. ? Generally has the effect of reducing competition
Countries committed to a competitive economy use Antitrust laws to prohibit such mergers.
Eg: Bank of Rajasthan merger with ICICI Bank
Cont…
29
Conglomerate Merger:
Lines of business have nothing to do with one another
Eg: Indo Gulf and Birla Global Finance merging into Indian Rayon. New Co rechristened Aditya Birla Nuvo
30
Difference between Merger & Acquisition
Merger
?
Acquisition
?
Consideration discharged by issue of shares of transferee co. Shareholders of merging co. will become shareholders of Merged co. Usually by negotiations.
Consideration may be by cash or shares.
?
?
Acquirer company shareholders have controlling interest. May be friendly or hostile.
?
?
31
Drivers for Merger
? ? ? ? ? ? ?
?
Synergy of operations and economies of scale. Diversification. Capital restructuring. To increase the market share and to reduce the competition. Benefit of carry forward losses. Drop Down Effect of Global Restructuring Reduce the number of Companies in Group Backwards & Forward Integration
32
Due Diligence by parties Agreement on Appointed Date Valuation Fairness opinion by category I Merchant Banker ? Scheme of Arrangement ? Approval by the Board of Directors ? Stock Exchange approval for listed Companies ? Meeting of Shareholders/ Creditors ? Registrar of Companies approval ? NOC from Liquidator ? High Court approval ? Filing of High Court Order with ROC
? ? ? ?
33
?
Definitions:
? ? ? ? ?
Appointed Date, Effective Capital Undertaking Transferor Company Transferee Company
? ?
Share Capital Transfer & Vesting of Undertaking of Transferor Company (Assets & Liabilities)
Cont…
34
? Conduct of Business during Interim Period ? Transfer of Employees, Legal Proceedings, Contracts and
Deeds ? Consideration ? Accounting Treatment ? Modifications to the Scheme ? Conditions for Effecting the Scheme ? Cost relating to Scheme
35
?Clause 24 of the Listing Agreement
? ? ? ?
Filing of the Scheme at least one month before filing with the court for approval Pre and Post restructuring shareholding pattern to be intimated Filing of the notice, Explanatory Statement, etc. with the Stock Exchange Undertaking that the Scheme is in conformity with the Laws
36
?High Court under whose jurisdiction the Registered
office of the companies are situated ?Merger of WOS in the Holding Company - Application by Holding Company can suffice ?Direction of convening meeting of shareholders & creditors
37
?Publication of Advertisement
? Notice of the Meeting
? ? ?
At least 21 days clear notice To be sent under certificate of posting Explanatory Statements, Scheme & Proxy Form to be attached to the notice Voting by polls Scrutinizers
? Conducting Meeting
? ?
Cont…
38
?Approval of Scheme at the Meeting
? ?
Majority in number and ¾ th in Value
?Results of the meeting to be reported to the High
Court
39
? Petition for the Approval of the
Scheme ? Approval of the Regional Director ? Approval of Official Liquidator (OL) ? Appeals Against High Court’s Order Possible
40
?Order to be filed with the ROC within 30 days of receipt
of the order of High Court ? Obtain RBI approval, if required
41
?Payment of Stamp Duty
? Fixing Record Date for Allotment of Shares ? Arrangement for Listing of Newly Issued Shares
42
The following factors should be kept in mind during merger:
?Accounting
?Income Tax
?Stamp Duty ?Sales Tax
?Excise
43
? Came into ? Deals with: ?
effect from April 1,1995
Accounting for Amalgamation & ? Treatment of any resultant Goodwill or Reserves ? Applicable only to company form of Organisation ? Does not deal with Acquisition of the whole or part of a company by another ? In Amalgamation, one company loses its Identity; In Acquisition, identity of companies are maintained
Cont…
44
Amalgamation means an amalgamation as per the provision of Companies Act, 1956 or any other law applicable to Companies, sections 391 to 394 of Companies Act, 1956 governs the provisions of amalgamation
In the nature of MERGER
In the nature of PURCHASE
45
?Conditions for Amalgamation in the nature of Merger:
? ?
?
? ?
All Assets & Liabilities are transferred At least 90% Share holders of transferor co. become share holders of transferee co Consideration for Amalgamation to be discharged by issue of Equity shares Business of the transferor co. is intended to be carried on No Adjustments are intended to be made to the book value of assets and liabilities of transferor co
Cont…
46
?All
the above simultaneously
conditions
should
be
satisfied
? If any of the above conditions are not fulfilled it would be
termed as Amalgamation in the nature of Purchase
47
Amalgamation in the nature of MERGER
Pooling of Interest Method
Amalgamation in the nature of PURCHASE Purchase Method
48
? ? ? ?
All Assets, Liabilities & Reserves of Transferor company are taken over at their existing carrying values Identity of Reserves is preserved Uniform Accounting Policy to be adopted Difference between the Consideration and Share Capital of transferor company shall be adjusted in Reserves of the Merged company
49
?Assets
taken either at existing carrying value or fair value, value can also be assigned to non existent assets/liabilities ?The identity of the reserves, other than the statutory reserves is not preserved ?In case of Statutory Reserves, ”Amalgamation Adjustment a/c” of a Corresponding amount needs to be created which shall be reversed when separate identity of statutory reserve is no longer required ?Difference between Net Assets and Consideration: ? If Positive – Capital Reserve ? If Negative - Goodwill
50
MERGER OF A LTD. INTO B LTD. LIABILITITES Share Capital (See assumption i) General Reserve Profit & Loss A/c Debenture Redemption Reserve Capital Reserve Loans Current Liabilities & Provisions TOTAL
Co A 40 7 5 21 12 85
Co B
ASSETS
(Rs. in '000) Co A Co B 23 22 34 6 112 40 80 -
75 Fixed Assets 65 Investments Current Assets, Loans & 15 Advances - Profit & loss A/c (Dr. bal) 25 52 232 TOTAL
85
232
51
Assumptions
i) The share exchange ratio for the merger of A Ltd. into B Ltd. is: "For every 2 equity shares of Rs. 10 each fully paid up of A Ltd., 1 equity share of Rs. 10 each fully paid up of B Ltd."; which means that B Ltd. will issue equity share capital of Rs. 20 to the shareholders of A Ltd. 120 25
ii) Market Value of Fixed Assets of A Ltd is Rs iii) Market Value of Investments of A Ltd is Rs
52
LIABILITITES Share Capital (See assumption i) General Reserve Profit & Loss A/c Debenture Redemption Reserve Amalgamation Reserve Loans Current Liabilities & Provisions TOTAL
Co A Co B Merged 40 7 5 21 12 85 75 65 15 25 52 232
ASSETS
(Rs. in '000) Co A Co B Merged 23 22 34 6 112 40 80 135 62 114 -
95 Fixed Assets 72 Investments Current Assets, Loans & 9 Advances 5 Profit & loss A/c (Dr. bal) 20 46 64 311 TOTAL
85
232
311
53
?For Amalgamation under Pooling of Interest Method
? ?
Exchange ratio, description and number of shares Difference between consideration and net identifiable assets acquired and treatment of the same
54
LIABILITITES Share Capital (See assumption i) General Reserve Profit & Loss A/c Debenture Redemption Reserve Capital Reserve Loans Current Liabilities & Provisions TOTAL
Co A Co B Merged 40 7 5 21 12 75 65 15 25 52 95 65 15 5
ASSETS
(Rs. in '000) Co A Co B Merged 23 112 22 40 34 80 6 232 65 114 5
Fixed Assets Investments Current Assets, Loans & Advances Profit & loss A/c (Dr. bal) Amalgamation Adjustment A/c 126 (created against DRR) 46 64 416 TOTAL
85 232
85 232
416
55
?For Amalgamation under Purchase Method
? ?
Consideration for amalgamation and its description Difference between consideration and net identifiable assets acquired and treatment thereof including the period of amortisation of any goodwill arising on amalgamation.
56
For all Amalgamations ?Name and general nature of the companies ?Effective date of amalgamation ?Method of accounting used ?Particulars of the scheme sanctioned under a statute
57
Special treatment for Restructuring under Income Tax Act. Salient Features are: ? Definitions/ Qualifying Conditions ? Capital Gains ? Carry Forward & Set-off of Losses ? Others
Cont…
58
Income Tax
?Definition
(cont.)
2(1B)
?
of Amalgamation / Merger – Section
All the properties and liabilities to be transferred
?
Shareholders holding not less than 75% of value of shares to become shareholders of Transferee Co.
Cont…
59
Income Tax
(Cont.)
?Capital Gain Tax – Sec 47(vi) & 47(vii)
Not a transfer - no liability for capital gains tax in the hands of the Transferor Co. as well as for shareholders
?Cost
of acquisition of shares of Transferee Co. in the hands of Shareholders
COA of shares of Transferor Co. = COA of shares of Transferee Co.
Cont…
60
Income Tax
?
(Cont.)
?Depreciation on the Assets being transferred
?
Transferee Company will be entitled to Depreciation on the written down value (WDV) of the block of assets transferred which will be the same as in the case of Transferor Company had it continued to hold such assets Depreciation to transferor company and transferee company in the year of merger shall be apportioned in the ratio of the number of days for which the assets were used.
Cont…
61
Income Tax
? ?
(Cont.)
? ?
Carry Forward & Set-off of Losses of Transferor Co – Sec 72A Qualifying Companies ? Companies Owning ? Industrial Undertaking or ? Ship or Hotel ? Banking Companies ? Public Sector Companies engaged in business of operation of aircraft Business Losses – 8 Years (Fresh Life) Unabsorbed Depreciation – Unlimited Period
Cont…
62
Income Tax
?Conditions
(Cont.)
?Transferor Company ? Engaged in Business for at least three years to which the loss or Unabsorbed depreciation relates ? Holds ¾th of the book value of fixed assets held by it 2 years prior to the date of merger
Cont…
63
Income Tax
(Cont.)
Transferee company ? Holds for at least 5 years ¾th of book value of fixed assets of transferor Co. ? Continues business of transferor Co. for at least 5 years Rule 9 C ? Achieve 50% level of installed production capacity of undertaking of transferor co. before 4 years, and continue till 5th year
Cont…
64
Income Tax
?Closely held Co.- Section 79
? ?
(Cont.)
Carry forward Business loss would lapse if shareholding pattern changes by more than 49 % Applies only to Business loss and not to unabsorbed depreciation
65
?Stamp Duty Payable in the states
of Rajasthan, Maharashtra, Gujarat & Karnataka is on Court Order
?Other States - Duty Payable on
Immovable Properties & Movable Properties as per applicable rates
Cont…
66
Stamp Duty
?Rates for Maharashtra
?
(Cont.)
Schedule 1 to the Bombay Stamp Act, 1958 under Article 25(2)(da) relating to Conveyance
10% of market value of shares allotted in exchange and consideration if any paid but not exceeding the higher of: (i) 5% of Market Value of the immovable property in Maharashtra or (ii) 0.7% of Market Value of shares allotted in exchange and consideration if any paid
High Court order under section 394 of the Companies Act, in respect of amalgamation or reconstruction of companies
67 of 55
67
Market Capital of XYZ ltd is Rs 1,000 lacs, Where as Immovable property transferred amounts to Rs 500 lacs. In the above case Stamp Duty will be calculated as follows:
Market value of Shares Immovable Property
1000 10% of market Value of Shares = 100 lacs 500 Not exceeding higher of:
- 5% of Market Value of Immovable Property = 25 lacs
- 0.7% of market value of Shares = 7 lacs
Therefore the Stamp duty payable will be Rs. 25 Lacs
68
?On Transfer of Business
? ? ? ? ?
Sales tax payable is on sale of goods. ‘Business’ does not fall under the purview of ‘goods’ under the Sales tax Act. Transfer of business on a going concern basis. No sale of goods – No Sales Tax However, this view is not free from doubt
?Incentive / Deferment Loan – Available to Transferee
Co
69
?Excise Law
? ?
New Registration No. CENVAT Credit available
? Raw Material ? Capital Goods
70
DEMERGER
71
? Demerger contemplates hiving off a division/unit/business of
a company into a new/existing company.
? Demerger involves a vertical split of company, whereby
business is transferred on a going concern basis to a new/existing company.
? This division may either: ? form a new company and operate separately from the original
?
one or may get merged into another existing co.
Cont…
72
Demerger - Introduction
PRE
Shareholders
(cont.)
POST
Shareholders
Undertaking A
AB Ltd
Undertaking B
Undertaking A
AB Ltd
Undertaking B
B Ltd
73
?Unlocking Shareholder value
?Streamlining business
segments
?To make financial and managerial resources available
for developing other more profitable opportunities as a restructuring strategy parts in the business
?Selling unwanted and surplus
74
Demerger - Examples
Examples of Demerger
? Demerger of Ferro Alloys Division of Utkal Manufacturing and Services Limited into Indian Metal and Ferro Alloys Limited. ? Demerger of Tobacco Undertaking of Golden Tobacco Limited into Golden Realty & Infrastructure Limited.
75
DEMERGED COMPANY PARTICULARS
Share Capital
Reserves & Surplus Loan Funds Total Liabilities Fixed Assets Net Current Assets
Before
100
600 300 1,000 600 400
After
100
350 200 650 400 250
RESULTING COMPANY
40
210 100 350 200 150
Total Assets
1,000
650
350
76
Reliance Demerger Date : January 18, 2006 (in Mn) Name of Company Pre- Demerger Market price No. of shares Market Cap 912.90 1,39,35,08,041 12,72,133 Post- Demerger Market price No. of shares Market Cap 708.46 289.00 43.84 22.61 1,39,35,08,041 1,39,35,08,041 1,39,35,08,041 1,39,35,08,041 9,87,245 4,02,724 61,091 31,507 27,480 15,10,047 18.70%
RIL Reliance Communications ventures Ltd Reliance Energy Ventures Ltd Reliance Capital Ventures Ltd Reliance Natural Resources Limited Total % Increase/(decrease)
19.72 1,39,35,08,041 12,72,133
77
? Agreement on Appointed Date ? Scheme of Arrangement ? Convening a Board meeting ? Approval by the Board of Directors ? Petition to the Court ? Valuation ? Fairness opinion by category I
Merchant Banker ? Stock Exchange approval for listed Companies ? Meeting of Shareholders/ Creditors ? Registrar of Companies approval ? High Court approval ? Filing of High Court Order with ROC
78
Demerger – Conditions
? Definition of Demerger
– Section 2(19AA)
? ? ? ?
All the properties and liabilities of the demerged undertaking to be transferred on going concern basis Properties and liabilities are transferred at book value The resulting company issues shares to shareholders of demerged company on a proportionate basis Shareholders holding minimum 75% of the value of shares become shareholders of resulting company
79
Demerger – Tax aspects
?
?
?
Capital Gain Tax – Sec 47(vid) ? Not a transfer - no liability for capital gains tax in the hands of shareholders of Transferee Co. Deemed Dividend – Sec 2(22)(v) ? Not treated as Deemed dividend. Hence no tax liability for shareholders Amortisation of expense – Sec 35DD ? Where an assessee, being an Indian company, incurs any expenditure, on or after the 1st day of April, 1999, for the purposes of amalgamation or demerger, the assessee shall be allowed a deduction equal to one-fifth of such expenditure for five successive previous years.
TAX BENEFITS
Cont…
80
Demerger – Tax aspects (cont..)
? Cost of Acquisition– Sec 49(2C) & 49(2D) ?
?
Cost of acquisition of shares of the transferee/resulting company will be the amount which bears to the cost of acquisition of shares of the transferor/demerged company, the same proportion as the net book value of assets transferred bears to the net worth of the demerged company immediately before demerger. Cost of acquisition of shares of the Demerged Co will be the original cost of shares of Demerged Co after reducing the cost of shares of the Resulting Co as computed above
Cont…
81
Demerger – Tax aspects (cont.)
? Depreciation
on
the
Assets
being
transferred
? WDV in the hands of the demerged company shall be the WDV of the block of assets before demerger less WDV of the assets transferred to the transferee company.
? Depreciation to transferor company and transferee company in the year of demerger shall be apportioned in the ratio of the number of days for which the assets were used
Cont…
82
Tax Aspects
Demerger – Tax aspects (cont.)
? Carry
Forward & Set-off Losses– Sec 72A(4) & 72A(5) ? Business Losses ? Brought forward loss of Demerged undertaking to be carried forward and set off in hands of Resulting company ? Allowed to be carried forward for set off in the hands of the resulting company for the unexpired period ? Unabsorbed Depreciation – Unlimited Period
83
SUBSIDARISATION
84
Subsidiarisation means transferring the business to a wholly owned subsidiary. ? The transfer can be made either at book value or at fair value. ? Companies resort to Subsidiarisation when the undertaking needs to be sold but there is no buyer ready to buy all the assets at a given point of time. ? Under this option business gets transferred to a subsidiary and the parent company continues to hold 100% equity stake in the subsidiary. ? This option facilitates the process of disinvestment, as only the shares of subsidiary company will have to be handed over when the suitable buyer is found out. ? This option shifts the control of business from the shareholders to the holding company. Example: Grasim Industries Limited transferred its Cement Division to a wholly owned subsidiary, namely Samruddhi Cement Limited
?
85
In the books of Holding Co.
PARTICULARS Share Capital Reserves & Surplus Loan Funds Total Liabilities BEFORE 50 150 300 500 PARTICULARS Share Capital Reserves & Surplus Loan Funds Total Liabilities Fixed Assets Net Current Assets AFTER 50 150 200 400 90 250 60 400
(Rs in Cr)
(Rs in Cr)
Fixed Assets
Net Current Assets Total Assets
100
400 500
Investment in subsidiary
Total Assets
The Division with a Net Book value of 60 crores is transferred to WOS. Cont… 86
In the books of Subsidiary Co.
AFTER 60 100
PARTICULARS Share Capital Loan Funds
(Rs in Cr)
Total Liabilities
160
Fixed Assets Net Current Assets Total Assets
10 150 160
87
CAPITAL REDUCTION
88
It is the process of decreasing a company’s shareholder equity through share cancellations and share repurchases. ? The reduction of capital is done by companies for numerous reasons such as:
?
? increasing shareholder value ? producing a more efficient capital structure
After a capital reduction, the number of shares in the company decrease by the reduction amount. ? In some situations, shareholders receive a cash payment for shares cancelled – but mostly, there is minimal impact on shareholders. Example: KMC Speciality Hospitals announced reduction in face value of equity shares from Rs. 10 per share to Re. 1 per share.
?
Cont…
89
?Reduction of share capital may be effected in the
following ways:
? In respect of share capital not paid-up, extinguishing or reducing the liability on any of its shares; ? Cancel any paid-up share capital, which is lost, or is not represented by available assets. This may be done either with or without extinguishing or reducing liability on any of its Shares; or ? Pay off the paid-up share capital, which is in excess of the needs of the company. This may be achieved either with or without extinguishing or reducing liability on any of its shares.
Cont…
90
?Situations in which a Co. may reduce its capital: ? Where the capital is unrepresented by assets; ? Where substantial trading losses have accumulated; ? Where there are extensive capital losses requiring revaluation of the assets; ? To return excess cash to its shareholders where there is no likelihood of the cash ever being required for the business
91
PARTICULARS
(Rs. in Cr.)
BEFORE
(Rs. in Cr.)
AFTER
(Face Value Rs. 10)
(Face Value Rs.5)
Share Capital
Reserves & Surplus Loan Funds
100
500 400 1,000
50
500 400 950
Fixed Assets Net Current Assets Profit & Loss
600 350 50
600 350 -
1,000
950
92
BUY BACK OF SHARES
93
? In common parlance, "Buyback is acquiring its own shares
from the existing shareholders by the company.” ? It means that a company reduces its paid-up capital by buying back its shares held by the shareholders. ? The company’s decision to buyback is influenced by a host of factors such as: ? the company’s growth opportunities ? sourcing of funds ? optimum allocation of the funds generated
Example: Binani Cement Ltd has announced a buyback of shares at a price of Rs. 90 per share
94
?
After passing of the special/Board resolution, make a public announcement at the place of the registered office.
?
The public announcement shall specify a date, which shall be "specified date" for the purpose of determining the names of shareholders to whom the letter of offer has to be sent.
Give a public notice containing disclosures as specified in Schedule I of the SEBI regulations. A draft letter of offer shall be filed with SEBI through a merchant Banker. The letter of offer shall then be dispatched to the members of the company.
? ?
Cont…
95
?
A copy of the Board resolution authorising the buy back shall be filed with the SEBI and stock exchanges. The date of opening of the offer shall not be earlier than seven days or later than 30 days after the specified date. The buy back offer shall remain open for a period of not less than 15 days and not more than 30 days. A company opting for buy back through the public offer or tender offer shall open an escrow Account.
?
?
?
96
? Reasons for buy back include:
? ? ? ? ?
putting unused cash to use raising earnings per share helping capital restructuring by way of capital reduction reduced equity base strengthens management control obtaining stock for employee stock option plans or pension plans ? increasing the value of shares (reducing supply) ? eliminating any threats by shareholders looking for a controlling stake
97
PARTICULARS
BEFORE BUYBACK (Rs. In Crores)
(Face Value Rs.10)
ADJUSTMENTS (Rs. In Crores)
AFTER BUYBACK (Rs. In Crores)
(Face Value Rs.10)
Share Capital Free Reserves Capital Redemption Reserve Loans & Advances Total Liabilities Fixed Assets Net Current Assets Total Assets
100 300 600 1,000 650 350 1,000
(10) (60) 10 (60) (60) (60)
90 240 10 600 940 650 290 940
1 crores Shares bought back at Rs. 50 premium.
98
VALUATION
99
What is Valuation ?
? Valuation means assigning a value to underlying assets ? The value should be a fair value ? Valuation is not a science; more of an art ? Valuation is largely influenced by Valuer’s judgment,
knowledge of business, analysis and interpretation and the use of different methods ? Valuation varies with purpose ? Valuation is time sensitive
100
? Determining the consideration for Acquisition/ Sale of
Business or for Purchase/Sale of equity stake ? Determining the swap ratio for Merger/Demerger ? Corporate Restructuring ? Sale/Purchase of Intangible Assets including brands, patents, copyrights, trademarks, rights ? Determining the value of family owned business and assets in case of Family Separation ? Determining the Fair Value of shares for issuing ESOP as per the ESOP guidelines
Cont…
101
?Determining the fair value of shares for Listing on the
Stock Exchange ?Determining the Portfolio Value of Investments by Venture Funds or Private Equity Funds ?Liquidation of a Company ?Other Corporate Decisions
102
? Asset Based Approach ? Book Value ? Replacement Value/Realisable Value ? Earning Based Approach ? Capitalisation of Maintainable Earnings ? Discounted Cash Flow Method ? Market Approach ? Market Price ? Market Comparables
103
Case Laws
It is fair to use combination of three well known methods - asset value, yield value & market value
Hindustan Lever Employees ‘ Union Vs. HLL (1995) 83 Com. Case 30 SC
Valuation job can be entrusted to people who know the Company rather than giving to outsiders who will start from scratch
Consolidated Coffee V/s Arun Kumar Agrawal (1999) 21 SCL 11 (Kar)
Cont…
104
Case Laws
(Cont.)
Exchange Ratio not disturbed by Courts unless objected and found grossly unfair
Miheer H. Mafatlal Vs. Mafatlal Industries (1996) 87 Com Cases 792 Dinesh v. Lakhani Vs. Parke-Davis (India) Ltd.. (2003) 47 SCL 80 (Bom)
Brands of a company are part of goodwill, cannot be separately valued
Brooke Bond Lipton India Limited (1998) 15 SCL 81 (Cal)
105
DUE DILIGENCE REVIEW
106
?Dictionary meaning of ‘Due’ is ‘Sufficient’ & ‘Diligence’
is ‘Persistent effort or work’ ?It is an investigation into the affairs of an entity prior to its acquisition, flotation, restructuring or other similar transaction ?Due Diligence Review is a process whereby an individual, or an organization, seeks sufficient information about a business entity to reach an informed judgement as to its value for a specific purpose
107
? Business/Market Due Diligence ? Technical Due Diligence ? Human Resource Due Diligence ? Legal Due Diligence ? Environmental Due Diligence
? System Due Diligence
? Financial Due Diligence ? Accounting Due Diligence ? Tax Due Diligence
108
FINANCING FOR RESTRUCTURING
109
?Stock Financing Route: ? Acquirer issues the stock of his firm ? As compared to Debt, cost being dividend does not increase the fixed cost ? Dilution of EPS ? Risk as well as Synergies will be shared by the share holders of both the firms Example: Gitanjali Gems Limited acquired a majority stake in Samuels Jewelers, Inc by allotting 1,554,050 equity shares of Rs. 10 each at an issue price of Rs. 290 per share.
Cont…
110
? Cash Financing ? Entail heavy out flow of cash upfront (PSU disinvestment) ? Synergetic benefit pay for interest cost. Example: ? Acquisition of Parkway by Fortis
Cont…
111
?
Leveraged Buy-Outs (LBO)
Creation of Debt using the target’s stock as security ? Characteristics: ? Stable Cash Flow ? Room for significant cost reduction ? Equity interest of owners
?
Example: The Tata-Corus (the Anglo-Dutch steelmaker) $12.1billion mega-acquisition
112
The following factors should be kept in mind during restructuring: 1. Regulatory Considerations a) Companies Act b) SEBI & Other Capital Market Regulations c) FEMA Guidelines 2. Accounting 3. Income Tax 4. Stamp Duty 5. Sales Tax
Cont…
113
6. Excise Duty 7. Other Laws a) Competition Act b) Rent Act – if valuable tenanted property c) IPR Legislation d) Labour Laws
114
Buyer
Seller
? Do not Sign any confidential
documents without consulting advisors
?Conduct your own Due Diligence ?Have a thoughtful communication
plan on when and how will you inform your Employees, regulators, and customers.
?Consider the structure of your
acquisition
?Conduct a thorough Due – Diligence
of the Seller
?Determine when you should place
the enterprise on market
?Base your price on Economics and
not Emotions
?Retain Legal & Financial Advisors
as soon as possible
?Retain Legal & Financial Advisors as
soon as possible
115
Intermediaries Involved
? ? ? ? ? ? Merchant Bankers Lawyers Chartered Accountants Company Secretaries Technical Valuers Bankers, etc.
116
Reasons why M & A may fail: ? Cultural Clash ? Wrong/Improper estimates ? Contractual limitations ? Synergies not well understood ? Loss of Key talent ? Inability to sustain financial performance
117
THANK YOU
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