ONGC VIDESH LIMITED

MERGERS AND ACQUISITIONS

Sunanda Pandey
Course- BA Llb(h) Year- 1st year College- Amity Law School, Delhi

7/31/2013

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ACKNOWLEDGMENT

I would like to express my deepest appreciation to all those who provided me the possibility to complete this project. A special gratitude I give to Mr. Priyank Srivastava (DLA) and Ms. Karishma Chanana (ALD), whose contribution in stimulating suggestions and encouragement, helped me to coordinate my project especially in writing this project. Furthermore I would also like to acknowledge with much appreciation the crucial role of Mr. V.N. Singh (GM, legal) and Mr. Y.C. Pandey (DGM, legal), who gave the permission to use all required material to complete the project Mergers and Acquisitions. I would like to thank my parents, who have supported me throughout entire process, both by keeping me harmonious and helping me putting pieces together.

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TABLE OF CONTENTS
TOPIC 1) INTRODUCTION AND DEFINITION 2)COMPARISON & TYPES OF M&A DEALS (differences and then types) 3) ADVANTAGES OF M&A 4)DISADVANTAGES OF M&A 5)LAWS REGULATING M&A DEALS 6)CASE STUDY 7)RISK ANALYSIS 8) DUE DILIGENCE-IMPORTANCE OF M&A 9)OVERSEAS PERSPECTIVE 10)COMMENTS AND CONCLUSION 10 11 13 19 23 27 32 34 PAGE NUMBER 3 5

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INTRODUCTION
One plus one makes three thats the equation used for M&A. The main idea is to purchase a company to create shareholder value over and above that of the sum of the two companies. Two companies together are more valuable than two separate companies, thats the key principle behind M&A. This rationale is particularly alluring to companies when times are tough. Strong companies will act to buy other companies to create a more competitive, cost-efficient company. The companies will come together hoping to gain a greater market share or achieve greater efficiency. Because if these potential benefits, target companies will agree to be purchased when they know they cannot survive alone. The term merger is not defined under the Companies Act, 1956 (the Companies Act), the Income Tax Act, 1961 (the ITA) or any other Indian law. Simply put, a merger is a combination of two or more distinct entities into one; the desired effect being not just the accumulation of assets and liabilities of the distinct entities, but to achieve several other benefits such as, economies of scale, acquisition of cutting edge technologies, obtaining access into sectors / markets with established players etc. Generally, in a merger, the merging entities would cease to be in existence and would merge into a single surviving entity. While the Companies Act does not define a merger or amalgamation, Sections 390 to 394 of the Companies Act deal with the analogous concept of schemes of arrangement or compromise between a company, it shareholders and/or its creditors. A merger of a company A with another company B would involve two schemes of arrangements, one between A and its shareholders and the other between B and its shareholders. Merger is the fusion of two or more existing companies. All assets, liabilities and the stock of one company stand transferred to Transferee Company in consideration of payment in the form of: (i) Equity shares in the transferee company, (ii) Debentures in the transferee company, (iii) Cash, or (iv) A mix of the above mode

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On the other hand an acquisition or takeover is the purchase by one company of controlling interest in the share capital, or all or substantially all of the assets and/or liabilities, of another company. A takeover may be friendly or hostile, depending on the offeror companys approach, and may be affected through agreements between the offeror and the majority shareholders, purchase of shares from the open market, or by making an offer for acquisition of the offerees shares to the entire body of shareholders.

#Demergers
When a demerger occurs a company divides up (demerges) its business and sets up the demerged parts as a completely separate company or companies. A demerger allows management to concentrate on the core business, reducing levels of hierarchy and reducing diseconomies of scale. Also demergers can have the effect of increasing the value of the total business as the sum of the demerged parts ends up being more highly valued by the stock market than the original firm.

Motives behind Merger of a Company

(i) Economies of Scale: This generally refers to a method in which the average cost per unit is decreased through increased production. (ii) Increased revenue /Increased Market Share: This motive assumes that the company will be
absorbing the major competitor and thus increase its to set prices. (iii) Cross selling: For example, a bank buying a stock broker could then sell its banking products to the stock brokers customers, while the broker can sign up the bank customers for brokerage account.

(iv) Corporate Synergy: Better use of complimentary resources. It may take the form of revenue
enhancement and cost savings.

(v) Taxes: A profitable can buy a loss maker to use the targets tax right off i.e. wherein a sick company
is bought by giants.

(vi)Geographical or other diversification: This is designed to smooth the earning results of a company, which over the long term smoothens the stock price of the company giving conservative investors more confidence in investing in the company. However, this does not always deliver value to shareholders.

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Comparison &TYPES OF M&A DEALS

These two terms, merger and acquisition are frequently used as though they are synonyms, but have different implications. The main difference between a merger and an acquisition is their mode of finance.

A merger takes place when two companies, usually of around the same size, decide to become one new firm instead of being separately owned and operated. This type of action is more exact referred to as a merger of equal value. Both companies' stocks are given up and new stocks are distributed in its place.

However, real mergers of equal value don't often occur, normally, one of the companies will purchase the other and as a portion of the contracts' conditions, merely permit the attained company to declare that the deed is a merger of equals, although it's officially an acquisition. To be purchased very so often bears negative connotations, nonetheless, by describing the transaction as a merger, contract makers as well as the chief managers try to make the buyout more acceptable.

A securing contract can as well be known as a merger if the two CEO's be in agreement that joining together is in the paramount attention of the two organizations. But if the contract is not acceptable, that is when the aim organization doesn't want to be bought, it is at all time considered as an acquisition.

For a purchase to be viewed as a merger or an acquisition actually depends upon whether the purchase is a pleasant one or unreceptive and the way it is announced. The actual difference however, is in how the purchase is articulated to and accepted by the target organization's top managers, the workers, and the owners.

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An acquisition is a bit different from a merger, in fact, it might just be the name that differs. In the same way as a merger, an acquisition is an action by which organizations seek out bargains of weight, effectiveness as well as improved market connectivity. The only difference between mergers and acquisitions include one organization buying the other, they don't have to exchange reserves or alliance as a new organization.

An acquisition is very so often agreeable, and all the parties involved feel more satisfied with the deal. Another kind of acquisition is a reverse merger, a deal which allows a private organization to get openly listed in a very limited period of time. A reverse merger happens as a private organization with strong prognosis is keen to increase its investment purchases an openly registered organization, normally one without a business and with very limited assets.

# Types of Mergers
From the perspective of business structures, there is a whole host of different mergers. Here are a few types, distinguished by the relationship between the two companies that are merging:
Horizontal merger Two companies that are in direct competition and share the same

product lines and markets. A horizontal merger takes a company a step closer towards monopoly by eliminating a competitor and establishing a stronger presence in the market. The other benefits of this form of merger are the advantages of economies of scale and economies of scope. Example:- Mumbai - Glaxo India Limited and Smith Kline Beecham Pharmaceuticals (India) Limited have legally merged to form GlaxoSmithKline Pharmaceuticals Limited in India (GSK). A merger would let them pool their research & development funds and would give the merged company a bigger sales and marketing force.
Vertical merger- This kind of a merger generally involves a customer and company or a

supplier and company. It refers to the combination of two entities at different stages of the industrial or production process. For example, the merger of a company engaged in the construction business with a company engaged in production of brick or steel would

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lead to vertical integration. Companies stand to gain on account of lower transaction costs and synchronization of demand and supply. Moreover, vertical integration helps a company move towards greater independence and self-sufficiency. The downside of a vertical merger involves large investments in technology in order to compete effectively. Example:- Indian Rayons acquisition of Madura Garments along with brand rights

Conglomeration - A conglomerate merger is a merger two companies that have no

common business areas. The principal reason for a conglomerate merger is utilization of financial resources, enlargement of debt capacity, and increase in the value of outstanding shares by increased leverage and earnings per share, and by lowering the average cost of capital. A merger with a diverse business also helps the company to foray into varied businesses without having to incur large start-up costs normally associated with a new business.

Cross-border Mergers & Acquisitions - Cross-border M & A refer to M & A across national boundaries and involving substantial cash flow into other countries. It seems that cross-border M & A have an increasing trend over the past few years due to the globalization and the development of the internet. With the advent of globalization companies prefer to seek a competitive area that is worldwide in scale in order to have customers worldwide through cross- border M & A. The typical example is the biggest cross-border M & A at the beginning of 21st century -Vodafone (UK) acquired Mannesmann AG (Germany) and it has a record of worth $203 billion.

#TYPES OF ACQUISITIONS A Takeover is the acquisition of one business or company by another, either on an agreed or hostile basis. The susceptibility of a company to takeover depends on who controls the majority of shares in issue and which shares have the voting rights, the value of the shares, and the performance of the firm. Often takeovers in certain industries come into fashion, and then there is a huge upsurge in take-over activity in that particular industry. The following are the kinds of takeovers:-

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Friendly takeover: Also commonly referred to as negotiated takeover, a friendly takeover involves an acquisition of the target company through negotiations between the existing promoters and prospective investors. This kind of takeover is resorted to further some common objectives of both the parties.

Hostile Takeover: A hostile takeover can happen by way of any of the following actions: if the board rejects the offer, but the bidder continues to pursue it or the bidder makes the offer without informing the board beforehand. The recently consummated Arcelor Mittal deal is an example of hostile takeover, where the LN Mittal group acquired management control of Arcelor against the wishes of the Arcelor management.

Leveraged Buyouts: These are a form of takeovers where the acquisition is funded by borrowed money. Often the assets of the target company are used as collateral for the loan. This is a common structure when acquirers wish to make large acquisitions without having to commit too much capital, and hope to make the acquired business service the debt so raised. Bailout Takeovers1: Takeover of a financially weak or a sick company by a profit earning company to bail out the former is known as bail out takeover. Such takeovers normally take place in pursuance to a scheme of rehabilitation approved by the financial institution or the scheduled bank, who have lent money to the sick company. In bail out takeovers, the financial institution apprises the financially weak company, which is a sick industrial company, taking into account its financial viability, the requirement of funds for revival and draws up a rehabilitation package on the principle of protection of interests of minority shareholders, good management, effective revival and transparency. The rehabilitation scheme should provide the details of any change in the management and may provide for the acquisition of shares in the financially weak company as follows: 1. An outright purchase of shares or 2. An exchange of shares or 3. A combination of both
1

The acquisition of Satyam Computers by Tech Mahindra is an example of bail out takeover

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An acquirer may also acquire a target by other contractual means without the acquisition of shares, such as agreements providing the acquirer with voting rights or board rights. It is also possible for an acquirer to acquire a greater degree of control in the target than what would be associated with the acquirers stake in the target, e.g., the acquirer may hold 26% of the shares of the target but may enjoy disproportionate voting rights, management rights or veto rights in the target.

However, regardless of which type of M & A, the main goal is to create the value of the combined companies greater than the value of the two single entities and the success relies on the synergy effect of the new company

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ADVANTAGES AND DISADVANTAGES OF M&A DEALS

Advantages and disadvantages of mergers and acquisitions (M&A) are determined by the shortterm and long-term company strategic outlook of the new and acquiring companies. This is due to a host of factors including market conditions, differences in business culture, acquisition costs and changes to financial strength surrounding the corporate takeover

# ADVANTAGES OF M&A
Merger and acquisition has become the most prominent process in the corporate world. The key factor contributing to the explosion of this innovative form of restructuring is the massive number of advantages it offers to the business world. Following are some of the known advantages of merger and acquisition: The very first advantage of M&A is synergy that offers a surplus power that enables enhanced performance and cost efficiency. When two or more companies get together and are supported by each other, the resulting business is sure to gain tremendous profit in terms of financial gains and work performance. Cost efficiency is another beneficial aspect of merger and acquisition. This is because any kind of merger actually improves the purchasing power as there is more negotiation with bulk orders. Apart from that staff reduction also helps a great deal in cutting cost and increasing profit margins of the company. Apart from this increase in volume of production results in reduced cost of production per unit that eventually leads to raised economies of scale. With a merger it is easy to maintain the competitive edge because there are many issues and strategies that can be well understood and acquired by combining the resources and talents of two or more companies. A combination of two companies or two businesses certainly enhances and strengthens the business network by improving market reach. This offers new sales opportunities and new areas to explore the possibility of their business.

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With all these benefits, a merger and acquisition deal increases the market power of the company which in turn limits the severity of the tough market competition. This enables the merged firm to take advantage of hi-tech technological advancement against obsolescence and price wars.

#DISADVANTAGES OF M&A
There are plenty of mergers which havent worked. Those who advocate mergers will argue that the merger will cut costs or boost revenues by more than enough to justify the price premium. It can sound so simple: just combine computer systems, merge a few departments, use sheer size to force down the price of supplies and the merged giant should be more profitable than its parts. In theory, 1+1 = 3 sounds great, but in practice, things can go awry. Historical trends show that roughly two thirds of big mergers will disappoint on their own terms, which means they will lose value on the stock market. The motivations that drive mergers can be flawed and efficiencies from economies of scale may prove elusive. In many cases, the problems associated with trying to make merged companies work are all too concrete. Deals done with highly rated stock as currency are easy and cheap, but the strategic thinking behind them may be easy and cheap too. Also, mergers are often attempt to imitate: somebody else has done a big merger, which prompts other top executives to follow suit. A merger may often have more to do with glory-seeking than business strategy. The executive ego, which is boosted by buying the competition, is a major force in M&A, especially when combined with the influences from the bankers, lawyers and other assorted advisers who can earn big fees from clients engaged in mergers. On the other hand, mergers can be driven by generalized fear. Globalization, the arrival of new technological developments or a fast-changing economic landscape that makes the outlook uncertain are all factors that can create a strong incentive for defensive mergers. Sometimes the management team feels they have no choice and must acquire a rival before being acquired. The idea is that only big players will survive a more competitive world. Coping with a merger can make top managers spread their time too thinly and neglect their core business, spelling doom. Too often, potential difficulties seem trivial to managers caught up in the thrill of the big deal. The chances for success are further hampered if

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the corporate cultures of the companies are very different. When a company is acquired, the decision is typically based on product or market synergies, but cultural differences are often ignored. It's a mistake to assume that personnel issues are easily overcome. For example, employees at a target company might be accustomed to easy access to top management, flexible work schedules or even a relaxed dress code. These aspects of a working environment may not seem significant, but if new management removes them, the result can be resentment and shrinking productivity. Also companies often focus too intently on cutting costs following mergers, while revenues and profits suffer. Merging companies can focus on integration and cost cutting so much that they neglect day-to-day business, thereby prompting nervous customers to flee. This loss of revenue momentum is one reason so many mergers fail to create value for shareholders. But, not all mergers fail. Size and global reach can be advantageous, and strong managers can often squeeze greater efficiency out of badly run rivals. Nevertheless, the promises made by deal makers demand the careful scrutiny of investors. The success of mergers depends on how realistic the deal makers are and how well they can integrate two companies while maintaining day-to-day operations.

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LAWS REGULATING M&A DEALS

(I) The Companies Act, 1956 Section 391 to 394 contains major provisions for mergers and acquisitions. The provisions also deal with the compromise or arrangement with or without merger. Presently High court enjoys the power of sanctioning amalgamation matters under sec. 394. Any company, creditor or class of creditors or member or class of the members can file application seeking sanction of scheme of compromise or arrangement, but due to its very nature the scheme for amalgamation is normally presented by the company. The following procedure shall be followed: The procedure to be followed while getting the scheme of amalgamation and the important points, are as follows:-

(1) Any company, creditors of the company, class of them, members or the class of members 2can file an application under section 391 seeking sanction of any scheme of compromise or arrangement. However, by its very nature it can be understood that the scheme of amalgamation is normally presented by the company. While filing an application either under section 391 or section 394, the applicant is supposed to disclose all material particulars in accordance with the provisions of the Act. (2) Upon satisfying that the scheme is prima facie workable and fair, the Tribunal order for the meeting of the members, class of members, creditors or the class of creditors. The scope of conduct of meeting with such class of members or the shareholders is wider in case of amalgamation than where a scheme of compromise or arrangement is sought for under section 391
2

Sovereign Life Insurance Company v Dodd, [1982] 2 QB 573: Members whose shares are paid up in advance constitute a different class from those whose shares are not so paid up. It seems plain that such a meaning should be given to the term class so as to prevent the weaker section being so worked as to result in confiscation and injustice and that it must be confined to those persons whose rights are not so dissimilar as to make it impossible for them to consult together with a view to their common interest.

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(3) The scheme must get approved3 by the majority of the stake holders viz., the members, class of members, creditors or such class of creditors4. (4) There should be due notice disclosing all material particulars and annexing the copy of the scheme as the case may be while calling the meeting.5 (5) In a case where amalgamation of two companies is sought for, before approving the scheme of amalgamation, a report is to be received form the registrar of companies that the approval of scheme will not prejudice the interests of the shareholders. (6) The Central Government is also required to file its report in an application seeking approval of compromise, arrangement or the amalgamation as the case may be under section 394A. (7) After complying with all the requirements, if the scheme is approved, then, the certified copy of the order is to be filed with the concerned authorities. (II) The Competition Act, 2002 Competition Act 2002 was enacted to ensure free and fair competition in the market by prohibiting anti-competitive agreements, abuse of dominant position and combinations likely to have appreciable adverse effects on competition within the relevant market in India. Competition act also keep watch on the mergers and acquisitions by the Indian companies. Following provisions of the Competition Act, 2002 deals with mergers of the company:(1) Section 5 of the Competition Act, 2002 deals with Combinations which defines combination by reference to assets and turnover (a) exclusively in India and

Premier Motors (P) Ltd. V. Ashok Tandon: - The scheme should be fair and equitable. The approval of the scheme by the majority is a strong evidence of its reasonableness. If the scheme is otherwise fair, the court will not go into its commercial merits. But if the scheme is illusory, the court may refuse its sanction even if it has ben approved by the requisite majority. 4 Majority representing three- fourths in value of the creditors or members, as the case may be, then it may be sanctioned by the court. 5 Manekchowk & Ahmedabad Mfg. Co, Re, (1970) 40 Comp Cas 819 Guj: Where the requisite meetings of shareholders and creditors was not called and the latest financial position of the company was not laid before the court, sanction to the proposed amalgamation was refused.

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(b) in India and outside India. (2) Section 6 of the Competition Act, 2002 states that, no person or enterprise shall enter into a combination which causes or is likely to cause an appreciable adverse effect on competition within the relevant market in India and such a combination shall be void. (III) Foreign Exchange Management Act, 1999 The foreign exchange laws relating to issuance and allotment of shares to foreign entities are contained in The Foreign Exchange Management (Transfer or Issue of Security by a person residing out of India) Regulation, 2000 issued by RBI vide GSR no. 406(E) dated 3rd May, 2000. These regulations provide general guidelines on issuance of shares or securities by an Indian entity to a person residing outside India or recording in its books any transfer of security from or to such person. RBI has issued detailed guidelines on foreign investment in India vide Foreign Direct Investment Scheme contained in Schedule 1 of said regulation.

(IV) SEBI Takeover Code, 1994 SEBI Takeover Regulations permit consolidation of shares or voting rights beyond 15% up to 55%, provided the acquirer does not acquire more than 5% of shares or voting rights of the target company in any financial year. [Regulation 11(1) of the SEBI Takeover Regulations] However, acquisition of shares or voting rights beyond 26% would apparently attract the notification procedure under the Act. It should be clarified that notification to CCI will not be required for consolidation of shares or voting rights permitted under the SEBI Takeover Regulations. Similarly the acquirer who has already acquired control of a company (say a listed company), after adhering to all requirements of SEBI Takeover Regulations and also the Act, should be exempted from the Act for further acquisition of shares or voting rights in the same company.

P a g e | 16 (V) SEBI Takeover Code, 1997

The objective of the Takeover code is to regulate in an organized manner the substantial acquisition of shares and takeover of a company whose shares are quoted on a stock exchange i.e. listed company. In a limited sense these regulations also apply to certain unlisted companies including a body corporate incorporated outside India to an extent where the acquisition results in the control of a listed company by the acquirer. (VI) The Indian Income Tax Act (ITA), 1961 Merger has not been defined under the ITA but has been covered under the term 'amalgamation' as defined in section 2(1B) of the Act. To encourage restructuring, merger and demerger has been given a special treatment in the Income-tax Act since the beginning. The Finance Act, 1999 clarified many issues relating to Business Reorganizations thereby facilitating and making business restructuring tax neutral. As per Finance Minister this has been done to accelerate internal liberalization. Certain provisions applicable to mergers/demergers are as under: Definition of Amalgamation/Merger Section 2(1B). Amalgamation means merger of either one or more companies with another company or merger of two or more companies to form one company in such a manner that: (1) All the properties and liabilities of the transferor company/companies become the properties and liabilities of Transferee Company. (2) Shareholders holding not less than 75% of the value of shares in the transferor company (other than shares which are held by, or by a nominee for, the transferee company or its subsidiaries) become shareholders of the transferee company. The following provisions would be applicable to merger only if the conditions laid down in section 2(1B) relating to merger are fulfilled:

(1) Taxability in the hands of Transferee Company Section 47(vi) & section 47 (a) The transfer of shares by the shareholders of the transferor company in lieu of shares of the

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transferee company on merger is not regarded as transfer and hence gains arising from the same are not chargeable to tax in the hands of the shareholders of the transferee company. 6

(b) In case of merger, cost of acquisition of shares of the transferee company, which were acquired in pursuant to merger will be the cost incurred for acquiring the shares of the transferor company.7 (VII) Mandatory permission by the courts Any scheme for mergers has to be sanctioned by the courts of the country. The company act provides that the high court of the respective states where the transferor and the transferee companies have their respective registered offices have the necessary jurisdiction to direct the winding up or regulate the merger of the companies registered in or outside India. The high courts can also supervise any arrangements or modifications in the arrangements after having sanctioned the scheme of mergers as per the section 392 of the Company Act. Thereafter the courts would issue the necessary sanctions for the scheme of mergers after dealing with the application for the merger if they are convinced that the impending merger is fair and reasonable. The courts also have a certain limit to their powers to exercise their jurisdiction which have essentially evolved from their own rulings. For example, the courts will not allow the merger to come through the intervention of the courts, if the same can be effected through some other provisions of the Companies Act; further, the courts cannot allow for the merger to proceed if there was something that the parties themselves could not agree to; also, if the merger, if allowed, would be in contravention of certain conditions laid down by the law, such a merger also cannot be permitted. The courts have no special jurisdiction with regard to the issuance of writs to entertain an appeal over a matter that is otherwise final, conclusive and binding as per the section 391 of the Company act.

6 7

Section 47(vii), Income Tax Act, 1961 Section 49(2), Income Tax Act, 1951

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(VIII) Stamp duty Stamp act varies from state to State. As per Bombay Stamp Act, conveyance includes an order in respect of amalgamation; by which property is transferred to or vested in any other person. As per this Act, rate of stamp duty is 10 per cent.

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CASE STUDY
Ranbaxy-Daiichii Sankyo Deal
Indian pharma industry registered its first biggest in 2008 M&A deal through the acquisition of Japanese pharmaceutical company Daiichi Sankyo by Indian major Ranbaxy for $4.5 billion.

Reliance-BP Deal
The much talked about Reliance BP deal finally came through in July 2011 after a 5 month wait. Reliance Industries signed a 7.2 billion dollar deal with UK energy giant BP, with 30 percent stake in 21 oil and gas blocks operated in India. Although the Indian governments approval on two oil blocks still remains pending, this still makes it one of the biggest FDI deals to come through in India Inc in 2011-1231.

Bank of Rajasthan and ICICI merger

The Bank of Rajasthan Ltd. was incorporated on May 7, 1943 as a Company defined under the Companies Act, 1956 and has its Registered Office at Raj Bank Bhawan, Clock Tower, Udaipur, Rajasthan. The Bank of Rajasthan had a network of 463 branches and 111 automated teller machines (ATMs) as of March 31, 2009. The primary object of the Transferor Bank was banking business as set out in its Memorandum of Association. For over 67 years, the Bank of Rajasthan had served the nations 24 states with 463 branches as a profitable and well-capitalized Bank. The ICICI Bank Ltd. was incorporated on January 5, 1994 under the Companies Act, 1956 and has its Registered Office at Landmark, Race Course Circle, Vadodara, and Gujarat. The Transferee Bank, as of May 21, 2010, has a network of 2,000 branches and extension counters and has over 5,300 automated teller machines (ATMs). The amalgamation of the Transferor Bank with the Transferee Bank was in accordance with the provisions of the Scheme formulated pursuant to Section 44A of the Banking Regulation Act, 1949, Reserve Bank of Indias guidelines for merger/amalgamation of private sector banks dated May 11,

P a g e | 20 2005, and in accordance with the applicable provisions of the Companies Act, 1956, and the Memorandum and Articles of Association of the Transferor Bank and the Transferee Bank and other applicable provisions of laws. The objectives and benefits of this merger are clearly mentioned in the scheme of this merger by ICICI Bank its customer centric strategy that places branches as the focal points of relationship management, sales, and service in geographical micro markets. As it is evident that the BoR had deep penetration with huge brand value in the State of Rajasthan where it had 294 branches with a market share of 9.3% in total deposits of scheduled commercial banks it was presumed that the merger of BoR in ICICI Bank will place the Transferee Bank among the top three banks in Rajasthan in terms of total deposits and significantly augment the Transferee Banks presence and customer base in Rajasthan and it would add 463 branches in branch network of ICICI Bank along with increase in retail deposit base. Consequently, ICICI Bank would get sustainable competitive advantage over its competitors in Indian Banking.

HP and Compaq merger

The failure of the merger between two leading competitors in the global computer industry, HewlettPackard Company (HP) and Compaq Computer Corporation (Compaq) failed as the synergies identified prior to the merger did not materialize. HP bought Compaq for US$ 24 billion in stock. This was the largest ever deal in the history of the computer industry. The deal meant combined operations in more than 160 countries and more than 145,000 employees. HP-Compaq would offer the most complete set of products and services in the computer industry. The motivation behind a HP-Compaq merger (whether it made economic sense) and the problems encountered in merging operations is an interesting discussion as the stock prices of both HP and Compaq fell within two days of the merger announcement. An estimated 13 billion dollars was lost (in terms of market capitalization) in this time frame. Shares fell further as industry analysts failed to understand the benefits HP would derive by acquiring Compaq. HP was a market leader in the high margin printers business and Compaq, a low-margin personal computer (PC) manufacturer. Moreover, established players like direct marketer, Dell and leading IT service consulting company like IBM would give fierce competition even if economies of scale were to be achieved.

P a g e | 21 With the stock price of HPs shares stabilizing at a level much below than before the merger and the PC & other hardware businesses not making much profits, the merger was ruled a failure. Industry experts felt that HPs printer business should be spun off into a separate entity.

Swaraj Paul- Escorts/ DCM

In 1980s London-based NRI Swaraj Paul sought to control the management of two Indian companies, Escorts Limited and DCM (Delhi Cloth Mills) Limited by picking up their shares from the stock market. Though Swaraj Paul failed to fulfill his dream of controlling Escorts and DCM, but was successful in highlighting how particular families were able to exercise managerial control over large corporate entities despite holding a minuscule proportion of the concerned company's shares. Paul finally retracted his bid. While he was ultimately unsuccessful, Pauls hostile threat sent shockwaves through the otherwise complacent Indian business world.

Raasi Cements-India Cements-Sri Vishnu Cement Ltd.

India Cements Limited ("ICL") in its hostile bid for Raasi Cements Limited ("RCL") made an open offer for RCL shares at Rs. 300 per share at the time when the share price on the Stock Exchange, Mumbai ("BSE") was around Rs. 100.The tendency of the Indian FIs has till recently always been to protect the existing promoters in case of a hostile takeover bid. However, in this case they felt cheated as the promoters themselves sold out their stake to the acquirer leaving little room for them to tender their stake to the acquirer during the open offer. However, ICL also bought out the FIs in the open offer and thereby increased their holding in RCL to 85%. There was another interesting twist to this deal, which made matters more complicated. Raju transferred 39.5% stake of Shri Vishnu Cement Limited (SVCL), which was an subsidiary of RCL, to nine investment companies owned by Raju and his family barely days after the purchase by ICL of Rajus shares in RCL. This was in violation of Regulation 23(1) (g) of the Takeover Code, which prohibits a target company from transferring its significant assets after a public announcement has been made by the acquirer to make an open offer for purchase of shares from the public. Since SVCL was the crown jewel of RCL, and in fact the primary reason for ICLs interest in RCL, the matter was taken to SEBI, which held that the transfer was not valid. The

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matter was ultimately sorted out through a negotiated deal by which Rajus associates sold their shares of SVCL to ICL.

Gesco Corporation
In October 2000 Abhishek Dalmia, made an open offer to acquire 45% of the share capital in Gesco Corporation.at Rs. 23 per share at a total. This transaction entered in to a drama of hostile takeover until the promoters of Gesco Corporation and the Dalmia group announced to have reached an amicable settlement in the battle for Gesco, with the former buying out Dalmias' 10.5% stake at Rs 54 per share for a total consideration of Rs 16 crore. The Gesco Corporation takeover drama showed that a bidder with admittedly poor financial resources could talk up a share only to exit later with a huge profit via a negotiated deal.

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RISK ANALYSIS
Many advisory and consulting firms have been conducting research that should characterize risk factors connected with mergers and acquisitions. The research was carried out by Goldsmith Agio Helms on the representative sample of American private equity funds. The difference in management styles of both companies is one of the most important risk factors in M&A transactions. Such risk concerns primarily the international connections where the mentality and culture of transactions participants can be different. The purchase of a biotechnological company Hyberitech by one of the largest pharmaceutical firms - the Eli Lilly in 1986 was an example of an acquisition which failed due to different management styles. There was an informal style of management in Hyberitech as opposed to an authoritarian style applied in Eli Lilly. As a result of misunderstandings, many managers of Hyberitech left their jobs. Eli Lilly sold the Hyberitech for less than 5% price of purchase in 1995 (Hooke, 1997). The second important risk factor is due diligence analysis. This results from the fact that due diligence is often limited only to the verification of the financial reports of the acquired company. While it is a very important element of the whole assessment of the company, the managers cannot forget about strategic analysis which takes into consideration not only the financial results but also the logic of the planned acquisition and potential profits for the buyer. The example of the transaction which failed as a result of excessively optimistic expectations and inaccuracy in due diligence analysis was the acquisition of Siemens Mobile by BenQ in June 2005. Managers of BenQ wanted to strengthen the market position of the brand. This strategy, however, did not produce the desired effect, because the acquired company, Siemens Mobile, was in a very difficult financial situation. The transaction proved unsuccessful and the new company BenQ-Siemens announced the bankruptcy of its factories in Europe and changes in company strategy. The next factor that is crucial for the success of mergers and acquisitions is the legal system in different countries, especially in the field of antimonopolistic legislation. The risk in mergers and acquisitions processes can also be divided into three basic groups: a) operating risk

P a g e | 24 b) financial risk and c) overpaying risk Operating risk concerns the fact that the new company may not generate the expected results, which will be responsible for low advantages of scale. That can be connected with unsuccessful restructuring, entering new areas of business activity or job resignations on the part of the highly qualified managers of the acquired company. The risk is smaller when the acquiring company broadens its product range or increases the market share only. An example of low operating risk was the merger of Vistula S.A. and Wlczanka S. A. in 2006. Before the merger the two companies did not compete against each other but produced complementary goods, so the merger resulted in a wider range of products. The financial risk is connected with the method of financing the transaction. Companies usually use borrowed capital in financing. Apart from that, they have to take over the liabilities and debts of the candidate to purchase. Using the loan capital in the transaction can result in better profitability and better financial ratios for shareholders, but on the other hand, the general debt of the company grows, and consequently, the financial costs and the changeability of net profit grow as well. A transaction connected with a high financial risk is exemplified by the acquisition of Brewpole B.V. with the dependent companies (Leajsk Ltd, Elbrewery Ltd, Warka Ltd) by the ywiec Group S.A.1. Before the connection ywiec Group S.A. was characterized by a stable financial situation. Brewpole BV and the dependent companies, on the other hand, were characterized by a high degree of financial leverage and liquidity problems. In 1999, less than twelve months after the acquisition, the financial costs of the whole group increased from 8 million to 120 million, and in 2001 they grew to nearly 200 million (Zywiec Group, 1998-2006). The consistent restructuring activity contributed to the improvement of the financial situation and decrease in the financial risk for the ywiec Group. The risk of overpaying is connected with the price which the acquiring company has to pay to the stockholders of the acquired company. Sometimes the synergy effect and the increase in revenues are estimated too optimistically by the buyer. The estimation of synergy effects before the completion of the transaction is very difficult or sometimes even impossible. When the bonus is too high, the costs may exceed the advantages resulting from the transaction and lead to a failure. The management of acquiring companies tend to forget that the cost of a transaction is not only the real price paid to the shareholders of the acquired company, but also many other costs connected with the transaction. High bonuses for the control are not common on the Polish capital market due to its lower competitiveness.

P a g e | 25 On the Warsaw Stock Exchange several companies seldom compete to acquire the same enterprise. One of the most interesting examples of a fight on the Warsaw Stock Exchange were the attempts to acquire Polfa Kutno S. A. by an Italian concern Recordati and American Ivax Corporation in 2004. When Italian Recordati noticed the call of Polfa Kutno S.A. shares, the managers of Ivax Corporation raised their offer by about 10%. The price of Polfa Kutno shares grew by over 40% when both firms tried to buy it. Finally, the company was acquired by Ivax Corporation and replaced on the Stock Exchange by the buyer. It also happens that the bonus for control does not exist. Such a situation takes place when the buyer already has the majority of shares in the acquired company. Failure may also have its roots in the motives themselves. There are three basic doubtful premises of M&A processes: building of empire; aspirations for short-term enlargement of profits; incorrect conception of diversification - building the conglomerates. The first cause is connected with lack of suitable preparation and analysis prior to the completion of the transaction. This happens when ambitious enterprise owners purchase another enterprise with no strategic reason. One example of this solution is Vivendi Universal which started acquiring various companies in December 2001. Because of those acquisitions, it became the second media concern in the world. The debts of the company exceeded 25 billion at the end of 2003. In order to save the company from bankruptcy a decision was made at the beginning of 2004 to sell up parts of the newly purchased enterprises. Another example is the merger of Daimler - Benz AG (Germanys) and Chrysler Corporation (USA) in 1998 resulting in a new connected company: DaimlerChrysler AG. The new corporation was supposed to become a global motor concern. However, a number of acquisitions proved to be misconceived and economically groundless. In 2004 the market value of the whole company was over half lower than the accumulated value of both companies before the merger. As a result, after a few years experience, a decision was made to divide the company again. The second doubtful premise is the pressure on the part of the stockholders who are interested in quick return on the invested capital. If the motivational system for managers is misconstructed, they can make

P a g e | 26 decisions which will prove unfavorable for the company in the long term while at the same time generating short-term profits and consequently bonuses for the management. The third inappropriate reason for mergers and acquisitions which can contribute to their failure is the acceleration of growth and the diversification of risk at all costs. Entering new areas of activity can cause clear damages for the companys brand, which is exemplified by the acquisitions made by Walt Disney Company (McMurdy, 1995). As a result of those acquisitions a diversified entertainment oligopoly was created, which led to a decrease in brand loyalty and in profitability. It was only the connection with Pixar, a smaller company from the same sector, which improved the image of the whole company.

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DUE DILIGENCE- IMPORTANCE OF M&A

Due diligence is of key importance as it enables the buyer to fully understand the risks and rewards before finally striking a deal. Companies that are planning an acquisition or merger should plan to devote sufficient time and resources to discover potential problems with the seller. A failure to carefully review may result in a determination that the buyer is not reasonable in relying on the statements of the seller, and the buyer may be precluded from bringing an action against the seller if fraud is discovered after the sale is consummated. Undisclosed potential liabilities may negate any value of the acquisition and result in financial ruin for the acquirer. Due diligence is conducted by specialized consultants, who analyze various aspect of the business and assign importance and value to each to arrive at a holistic valuation of the target company. There are six types of six types namely financial, legal, forensic, tax organizational, and vendor due diligence. Financial due diligence It is the most important aspect of the diligence process where the health of the target company is determined by looking at its assets and liabilities in the short, medium and long term. It is done by analyzing the financial information to spot any misappropriation of governing issues.

Legal due diligence The aim is to find out legal risks, if any. This due diligence helps improve the buyer's bargaining position and ensures that necessary precautions are taken in relation to the proposed transaction.

Forensic due diligence It is done to focus on the softer aspects of the business -- the company and promoter's goodwill and general image in the industry. It looks at the background of the promoters,

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their affiliations with political parties, pending personal legal cases and their image in the society. Though such softer issues might not have direct impact of valuations, they can be determining in an M&A deal.

Tax due diligence This examination helps the purchaser determine the past, present and future tax liabilities of the target entity, including disclosed, undisclosed, realized and unrealized tax liabilities. This helps establish the purchase price and the type of tax warranties and indemnities included in the sale agreement.

Organizational due diligence The world is waking up to a need of due diligence to ensure there is no post-acquisition fallout. Any deal can have a profound impact on integration. This due diligence studies the target company to understand the target company's strategy, culture, leadership, competencies, organizational structure and processes.

Vendor due diligence This due diligence is done by the seller to provide critical information to provide critical information about the company, verified by third-party independent consultants, to the prospective bidders in an auction kind of situation. Though this diligence may not replace the need for a buyer due diligence, it certainly reduces the time and effort required during a deal. Also, it helps protect leaking of critical business details to buyer who might then become competitors at later stage.

Due diligence is routinely time consuming and often complex. However, the process can be manageable and cost-effective if a party spends time in advance creating a due diligence plan and forming a due diligence team. The process is as follows:-

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Protecting confidential information The typical first step in the diligence process is for the parties to enter into a nondisclosure agreement (NDA) if they do not have an appropriate one in place already. An NDA attempts to protect the subsequent disclosure of information that will be provided to a buyer or seller in connection with the due diligence review of the other party. A well-drafted NDA accomplishes the following:

sets the ground rules concerning the disclosure and use of any provided information; defines the scope of the documents and materials that will be reviewed (e.g., certain competitive or sensitive information may be excluded initially from disclosure until the parties progress further in negotiations, or may be subject to further explicit screening procedures);

may include prohibitions on the solicitation of employees of the other party and other "standstill" provisions; and

addresses the processes and ongoing obligations of the parties (including the return or destruction of confidential information) in case the deal falls through during the due diligence stage.

Assembling the due diligence working group and getting up to speed The next step is to assemble a due diligence working group and educate such individuals so that they understand the context of the proposed review and the transaction's structure, economics and business purpose. By ensuring all diligence team members have a general understanding of the deal's key features, the working group can prioritize its review and structure the campaign accordingly. Some of the specific deal aspects about which teammates should be briefed include its scope, review periods, common industry materiality thresholds and the expected timing of the transaction.

Requesting and reviewing the due diligence material In this step, the parties should broadly identify the scope of the documents they would like to review and prepare a list of the requested documents and information (commonly referred to as a due diligence request list). This list creates a mechanism for identifying and cataloguing both the information requested and the information received and is

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usually very broad in the beginning of the due diligence process. Upon finalizing the list of initial documents that the reviewing party would like to receive, the due diligence request list is presented to the other side, which then begins to compile, index and copy the requested materials. Because due diligence is an evolutionary process, the review of one document may prompt an additional line of inquiry or a need for additional documents on the same subject (e.g., supplemental due diligence requests concerning intellectual property, export, governmental contract, and environmental information matters). These supplemental due diligence requests are common and an important part of the process. Once the materials have been prepared and organized, the disclosing party distributes the documents and materials to the reviewing party's due diligence team. Historically, this distribution was made in person by delivering the documents to a "data" or "war" room at the offices of the disclosing party's counsel. In such cases, the reviewing party's due diligence team would perform its due diligence review in those offices. More recently, however, parties have begun to copy and mail (or email) due diligence documents to the reviewing party's due diligence team and even post the materials to secure online data rooms. Online data rooms allow the reviewing party's due diligence team to review the documents in the comfort of their own offices, which generally has the effect of decreasing the cost of the due diligence review (i.e., there is no need to travel to remote locations to carry out the review and the cost of duplication can often be eliminated entirely). However, convenience and potential cost reduction must be balanced against any issues that may result from the broader dissemination of sensitive information.

Results of the review Once the diligence materials have been made available, the diligence teams may spend hours, days or even weeks reviewing such materials and compiling appropriate work product to memorialize their findings. As we will discuss in a later post, the results of the due diligence review will ripple through all aspects of a proposed M&A transaction - and often drive changes to the business and economic terms of the deal in order to appropriately allocate newly identified risks and liabilities.

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Due diligence is an integral aspect of a merger and acquisition transaction. Integrating principles and techniques used in the management of risk can significantly enhance the effectiveness of due diligence by changing the focus from merely verifying facts to understanding the risk profile of the constituent institutions and the issues that can arise from efforts to integrate their businesses. A deeper understanding of those issues and the means for their resolution can lead to better and more efficient planning and execution of the integration process.

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OVERSEAS PERSPECTIVE
Cross-border mergers and acquisitions (M&As), i.e. those taking place between firms of different national origin or home countries, have grown rapidly in the 1990s. A merger and acquisition, strictly defined, occurs when an operating enterprise acquires control over the whole or a part of the business of another enterprise. The share of cross-border M&As in overall M&As has increased dramatically in the1990s. While there has long been many M&As targeting SMEs, the 1990s have seen an explosion in, and geographical widening of, the number and value of mega-mergers among well-known multinationals. Recent examples include the British Petroleum-Amoco and Exxon-Mobil mergers in the petroleum industry, the DaimlerBenz-Chrysler and Renault-Nissan unions in the automotive industry, the Astra AB and Zeneca Group merger in pharmaceuticals, and the Vodafone Group and Airtouch Communications merger in telecommunications. Cross-border M&As can be either inward or outward. Inward cross-border M&As incur an inward capital movement through the sale of domestic firms to foreign investors (M&A sales), while outward cross-border M&As incur an outward capital movement through the purchase of all or parts of foreign firms (M&A purchases). However, inward and outward cross-border M&As are closely related, since M&A transactions involve both sales and purchases. Trends in cross-border M&A differ among developed and developing countries The volume of cross-border acquisitions has been growing worldwide. Conceptually, crossborder mergers occur for the same reasons as domestic ones: two firms will merge when combining them increases the value (or utility) from the perception of the acquiring firms managers. However, national borders add an extra element to the calculus of domestic mergers, because they are associated with an additional set of frictions that can impede or facilitate mergers. For example, cultural or geographic differences can increase the costs of combining two firms. Governance-related differences across countries can motivate a merger if the combined firm has better protection for target-firm shareholders because of higher governance standards in the country of the acquiring one. Finally, and perhaps most importantly, imperfect integration of capital markets across countries can lead to a merger, in which a higher-valued

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acquirer purchases a relatively inexpensive target following changes in exchange rates or stock market valuations in local currency. The analysis focuses on factors that potentially affect cross-border mergers but are not present to the same extent in domestic mergers, such as cultural differences, geographic differences, country-level governance differences, and international tax effects. Some of the international factors that affect the cross-sectional pattern of mergers such as geographical factor are of great importance. Holding other things constant, the shorter the distance between two countries, the more likely there are acquisitions between the two countries. In addition, mergers are likely to occur between firms of 2 countries that trade more commonly with one another, since they are more likely to have synergies and also a common cultural background. Countries have their own cultural identities. People in different countries often speak different languages, have different religions, and sometimes have longstanding feuds, all of which increase the contracting costs associated with combining two firms across borders. Corporate governance considerations can also affect cross-border mergers. If merging can increase the legal protection of the minority shareholders in target firms by providing them some of the rights of acquiring firms shareholders, then value can be created through the acquisition. In general, corporate governance arguments predict that firms in countries that promote governance through better legal or accounting standards will tend to acquire firms in countries with lower-quality governance. The level of development of the markets is another factor that could affect cross-border mergers. In particular, developed-market acquirers are likely to benefit more from weaker contracting environments in emerging markets. Cross-border M&As are appearing in many high-technology sectors in order to pool resources and abilities to remain competitive and innovative. They are particularly characteristic of service sectors which, as a result of regulatory reform, privatization and liberalization of trade and investment regimes, are now able to restructure more freely at both the national and international levels. Unlike previous decades, these mergers are motivated by the desire to consolidate capacities to serve global markets and fully benefit from scale economies. The concentration of resources on core competencies and the full utilization of intangible assets are the key to the competitive strategies of multinational firms. These are aims that may be better achieved through cross border M&As than through other types of foreign investment.

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COMMENTS AND CONCLUSION

Mergers and acquisitions (M&As) are considered as corporate events which helps an organization to create synergy and provide sustainable competitive advantage. They are no more limited to one particular type of business. The list of past and anticipated mergers covers every size and variety of business -- mergers are on the increase over the whole marketplace, providing platforms for the small companies being acquired by bigger ones. The basic reason behind mergers and acquisitions is that organizations merge and form a single entity to achieve economies of scale, widen their reach, acquire strategic skills, and gain competitive advantage. In simple terminology, mergers are considered as an important tool by companies for purpose of expanding their operation and increasing their profits, which in faade depends on the kind of companies being merged. Indian markets have witnessed burgeoning trend in mergers which may be due to business consolidation by large industrial houses, consolidation of business by multinationals operating in India, increasing competition against imports and acquisition activities.