Mergers, Acquistion by Ankush Vinod Singh

ANKUSH SINGH – 9702313357 (BOMBAY)
Merger And Acquisition

Reorganization
Closure
Insolvency
Merger & Acquisition,
Downsizing Externalization
Delocalization.
toankushsingh@rocketmail.com , toankushsingh@gmail.com
Q1-What is Restrucrting? and what are the objective of Restrucrting?

Or
Objective of mergers and acquisition (page 7,11,12)
Or
Q2.What are the triggers /rationale of restricting ?Explain each in details?
Or
Q3.What is the objective of Acquisition?and what are its objectives?Quote a case how
the objective is achived?
Sol1- Restructuring may include company reorganization, closure, insolvency, merger &
acquisition, downsizing, externalization and delocalization.
Restructuring is driven by several factors including a more open global economy, downturns
in economic growth, an ageing population, introduction of new technologies affecting ways
of working and the necessity to combat climate change and to reduce environmental impact.
Restructuring is the corporate management term for the act of reorganizing the legal,
ownership, operational, or other structures of a company for the purpose of making it more
profitable, or better organized for its present needs.
Alternate reasons for restructuring include a change of ownership or ownership structure,

demerger, or a response to a crisis or major change in the business such as bankruptcy,
repositioning, or buyout. Restructuring may also be described as corporate restructuring, debt
restructuring and financial restructuring ,Portfolio Restructring ,financial restricting
,organizational restricting.
Objective Of Restrucrting
A- EXPANSION
1) Growth-
2) Technology
3) Product Advantage and product differentiation
4) Govt Policy
5) Exchange rates
6) Political economic stability
7) Diffrential labour costs
8) Diversification
9) Economies of scale
B-CORPORATE CONTROL
1) Improving Levereging Ratios

2) Utilization of surplus cash
3) Enhancement of voting power
4) Preventing undervaluation
5) Anti takeover defence
C-CONTRACTION
1) Improving Performance
2) Booming Independence
3) Effort of unlearn
4) Strategic Adjustment
5) Increasing Value
D-CHANGE IN OWNERSHIP
1) Manoeuvring Leverage
2) Alteration in the control structure
3) Providing fairness to minority shareholders
E- Geographical Diversification- Tata motor acquires Daewoo of Korea in 2003.Infosys

buys Expert information limited of Australia.
Market share
Resorce transfer
Rationales for Making Acquisitions
Market Power
 Gain size to exploit core competencies.

 Usually a horizontal acquisition but may involve vertical or related acquisitions
(Disney – Fox Family Worldwide).
 Time-Warner merger, financial and banking industry consolidation
Overcome Entry Barriers
 Overcome barriers by acquiring firm in the industry.
 Whirlpool‘s acquisition of Phillips Electronics appliance business
Cost and speed of new product development and introduction
 Acquisitions can provide access to new products much more quickly and at a lower
cost than internal development of new products.
 Many firms in the pharmaceutical industry use acquisitions to enter markets quickly,
to overcome the high costs of developing products internally, and to increase the
predictability of returns on their investments.
Strategy Performance
- Poor strategy or - Poor or declining performance
implementation - Difference between desired and
- Overdiversification actual performance
- Leverage - Assets are undervalued
- Perceived threat of takeover
EXAMPLES
1) Tata-corus 3) Vodafone essar

2) Arcelor mittal 4) Ranbaxy-daaichi
Case how the objective is achived through acquisition
MERGER OF HUL WITH TATA OIL MILLS COMPANY(TOMCO)(415)

The ` 400 crore , 75 years old war horse from the TATA stable suffered a loss of `6 crore
for the six months ended by September 1992 and was expected in the year end to be `25
crore.TOMCO manufactures products like soap ,detergent and animal feeds .HUL also deals
in similar product line.Both company had their registered office at Bombay. TOMCO was
very good buy for the HUL on two very important counts ie.complementry brands and
manufacturing locations. Hamam , tomcos bestseller with 15% market share, moti soap.in the
detergent market levers did not have a mid priced bar ,tomcos super 501 plugged the
vaccum.in addition to it TOMCO had hair oil brands (lever was not represented here at that
time at all) and mid priced shampoos (lever had only one premium brand)In addition hul hul
took the advantage of manufacturing locations Following the merger hul network of stockist
could very well double from the 3000 , it had at that moment
Why Mergers and Acquisitions take place?

The common objective of both the parties in a M&A transaction is to seek
synergy in operating economies by combining their resources and efforts.
Now we shall see the reasons for M&A from the perspective of both, the
buyer company as well as the seller company.
What is the buyer looking for in a M&A transaction?
 An opportunity for achieving faster growth
 Obtaining tax concessions
 Eliminating competition
 Achieving diversification with minimum cost
 Improving corporate image and business value
 Gaining access to management or technical talent
Why Companies go for sale or offer themselves for sale?
 Declining earnings and profitability
 To raise funds for more promising lines of business
 Desire to maximize growth
 Give itself the benefit of image of larger company
 Lack of adequate management or technical skills
Q4-What is Bankruptcy and how does restructuring help to avoid it?

Sol4- Bankruptcy-A legal proceeding involving a person or business that is unable to repay
outstanding debts. The bankruptcy process begins with a petition filed by the debtor (most
common) or on behalf of creditors (less common). All of the debtor's assets are measured and
evaluated, whereupon the assets are used to repay a portion of outstanding debt. Upon the
successful completion of bankruptcy proceedings, the debtor is relieved of the debt
obligations incurred prior to filing for bankruptcy
Bankruptcy Explained
Bankruptcy offers an individual or business a chance to start fresh by forgiving debts that
simply can't be paid while offering creditors a chance to obtain some measure of repayment
based on what assets are available. In theory, the ability to file for bankruptcy can benefit an
overall economy by giving persons and businesses another chance and providing creditors
with a measure of debt repayment.
Bankruptcy filings in the United States can fall under one of several chapters of the
Bankruptcy Code, such as Chapter 7 (which involves liquidation of assets), Chapter 11

(company or individual "reorganizations") and Chapter 13 (debt repayment with lowered debt
covenants or payment plans). Bankruptcy filing specifications vary widely among different
countries, leading to higher and lower filing rates depending on how easily a person or
company can complete the process.
What Does Bankruptcy Risk Mean?
The risk that a company will be unable to meet its debt obligations. Often referred to as
"default" or "insolvency risk".
Bankruptcy Risk
This is a risk that both equity- and bondholders take when deciding to invest in a company.
Aside from looking at overall profitability, analyzing a company's debt obligations and ability
to repay, agencies like Moody's and Standard & Poor's attempt to determine this risk by
giving bond ratings.
What Does Chapter 11 Mean?
Named after the U.S. bankruptcy code 11, Chapter 11 is a form of bankruptcy that involves a
reorganization of a debtor's business affairs and assets. It is generally filed by corporations
which require time to restructure their debts.
Chapter 11 gives the debtor a fresh start, subject to the debtor's fulfillment of its obligations
under its plan of reorganization.
A Chapter 11 reorganization is the most complex of all bankruptcy cases and generally the
most expensive. It should be considered only after careful analysis and exploration of all
other alternatives.
Q5-List and explain classification of Mergers?

 Sol5- Horizontal merger - Two companies that are in direct competition and share
similar product lines and markets.
Examples of Horizontal Mergers

1) The formation of Brook Bond Lipton India Ltd. through the merger of Lipton
India and Brook Bond
2) The merger of Bank of Mathura with ICICI (Industrial Credit and Investment
Corporation of India) Bank
3) The merger of BSES (Bombay Suburban Electric Supply) Ltd. with Orissa Power
Supply Company
4) The merger of ACC (erstwhile Associated Cement Companies Ltd.) with
Damodar Cement
 Vertical merger - A customer and company or a supplier and company. Think of a

cone supplier merging with an ice cream maker.
Example of Vertical Merger

Vertical mergers can best be understood from examining real world deals. One such
merger occurred between Time Warner Incorporated, a major cable operation, and the
Turner Corporation, which produces CNN, TBS, and other programming. In this
merger, the Federal Trade Commission (FTC) was alarmed by the fact that such a
merger would allow Time Warner to monopolize much of the programming on
television. Ultimately, the FTC voted to allow the merger but stipulated that the
merger could not act in the interests of anti-competitiveness to the point at which the
public good was harmed.
 Market-extension merger - Two companies that sell the same products in different
markets.
EXAMPLES
1) Eagle Bancshares Inc by the RBC Centura-
A very good example of market extension merger is the acquisition of Eagle

Bancshares Inc by the RBC Centura. Eagle Bancshares is headquartered at Atlanta,
Georgia and has 283 workers. It has almost 90,000 accounts and looks after assets
worth US $1.1 billion.
Eagle Bancshares also holds the Tucker Federal Bank
which is one of the ten biggest banks in the metropolitan Atlanta region as far as
deposit market share is concerned. One of the major benefits of this acquisition is that
this acquisition enables the RBC to go ahead with its growth operations in the North
American market.
2)Takeover of Raasi Cements by India Cements (page 403)
 Product-extension merger - Two companies selling different but related products in

the same market.
EXAMPLES
The acquisition of Mobilink Telecom Inc. by Broadcom is a proper example of product
extension merger. Broadcom deals in the manufacturing Bluetooth personal area network
hardware systems and chips for IEEE 802.11b wireless LAN. Mobilink Telecom Inc. deals in
the manufacturing of product designs meant for handsets that are equipped with the Global
System for Mobile Communications technology. It is also in the process of being certified to
produce wireless networking chips that have high speed and General Packet Radio Service
technology. It is expected that the products of Mobilink Telecom Inc. would be
complementing the wireless products of Broadcom.
Conglomeration - Two companies that have no common business areas.
These mergers involve firms engaged in unrelated type of business activities i.e. the
business of two companies are not related to each other horizontally ( in the sense of
producing the same or competing products), nor vertically( in the sense of standing
towards each other n the relationship of buyer and supplier or potential buyer and
supplier). In a pure conglomerate, there are no important common factors between the
companies in production, marketing, research and development and technology. In
practice, however, there is some degree of overlap in one or more of this common
factors.
Conglomerate mergers are unification of different kinds of businesses under one
flagship company. The purpose of merger remains utilization of financial resources
2) L&T and Voltas Ltd are examples of such mergers.
3) Mahindra and mahindra and indian aluminuim limited
Q6- How can one measure the success or failure of merger? Explain with the help of
example?
Sol6-Success can also be measured when the following objectives of the merged entity is
achived (page 81)
1) Economies of Scale (Tata corus deal )

2) Increased revenue nad increased market share (dabur s balsara group acquisition)
3) Synergy
4) Taxes saving advantage
5) Geographical or other diversification (tata motor acquires Daewoo korea , Infosys
acquired export information service limited , austarlia)
6) Resource transfer (reliance acquires flag telecom of UK,)
7) Vertical intregation (Hindalco acquires 2 copper mines in australia ,ONGC acquires
Sakhalin oil in Russia)
8) Increased mkt share to increseased market power
Example of successful mergers
AIR INDIA AND INDIAN AIRLINES
HP AND COMPAQ
Failure can also be measured when the following objectives of the merged entity is
achived (89)
Statistics shows that half of the mergers are not successful

Though the M&As basically aim at enhancing the shareholders value or wealth, the results of
several empirical studies reveal that M&As consistently benefit the target company's
shareholders but not the acquirer company shareholders. A majority of corporate mergers fail.
Failure occurs on average, in every sense, acquiring firm stock prices likely to reduce when
mergers are announced; many acquired companies sold off; and profitability of the acquired
company is lower after the merger relative to comparable non-merged firms
1. Excessive premium
In a competitive bidding situation, a company may tend to pay more. Often highest bidder is
one who overestimates value out of ignorance.
2. Size Issues
A mismatch in the size between acquirer and target has been found to lead to poor acquisition
performance.
3. Lack of research
Acquisition requires gathering a lot of data and information and analyzing it. It requires
extensive research. A carelessly carried out research about the acquisition causes the
destruction of acquirer's wealth.
4. Diversification
Very few firms have the ability to successfully manage the diversified businesses. Unrelated
diversification has been associated with lower financial performance
5. Previous Acquisition Experience
While previous acquisition experience is not necessarily a requirement for future acquisition
success, many unsuccessful acquirers usually have little previous acquisition experience.
successful acquisitions.
6. Unwieldy and Inefficient
Conglomerate mergers proliferated in 1960s and 1970. Many conglomerates proved unwieldy
and inefficient and were wound up in 1980s and 1990s. The unmanageable conglomerates
contributed to the rise of various types of divestitures in the 1980s and 1990s.
11. Faulty evaluation
At times acquirers do not carry out the detailed diligence of the target company. They make a
wrong assessment of the benefits from the acquisition and land up paying a higher price.
12. Poorly Managed Integration
Integration of the companies requires a high quality management. Integration is very often
poorly managed with little planning and design. As a result implementation fails. The key
variable for success is managing the company better after the acquisition than it was managed
before. Even good deals fail if they are poorly managed after the merger.
13. Failure to Take Immediate Control
Control of the new unit should be taken immediately after signing of the agreement. ITC did
so when they took over the BILT unit even though the consideration was to be paid in 5
yearly installments.
14. Failure to Set the Pace for Integration
The important task in the merger is to integrate the target with acquiring company in every
respect. All function such as marketing, commercial; finance, production, design and
personnel should be put in place. In addition to the prominent persons of acquiring company
the key persons from the acquired company should be retained and given sufficient
prominence opportunities in the combined organization.
15. Incomplete and Inadequate Due Diligence
Lack of due diligence is lack of detailed analysis of all important features like finance,
management, capability, physical assets as well as intangible assets results in failure. ISPAT
Steel is a corporate acquirer that conducts M&A activities after elaborate due diligence.
16. Ego Clash
17. Merger between Equals
Merger between two equals may not work. The Dunlop Pirelli merger in 1964, which created
the world's second largest tier company, ended in an expensive divorce. Manufacturing plants
can be integrated easily, human beings cannot. Merger of equals may also create ego clash.
18. Over Leverage
Cash acquisitions results in the acquirer assuming too much debt. Future interest cost
consumes too great a portion of the acquired company's earnings (Business India 2005).
20. Limited Focus
If merging companies have entirely different products, markets systems and cultures, the
merger is doomed to failure. Added to that as core competencies are weakened and the focus
gets blurred the fallout on bourses can be dangerous. Purely financially motivated mergers
such as tax driven mergers on the advice of accountant can be hit by adverse business
consequences. The Tatas for example, sold their soaps business to Hindustan Lever.
21. Failure to Get Figures Audited
It would be serious mistake if the takeovers were concluded without a proper audit of
financial affairs of the target company.
22. Failure to Get an Objective Evaluation of the Target Company' Condition
Risk of failure will be minimized if there is a detailed evaluation of the target company's
business conditions carried out by the professionals in the line of business.
23. Failure of Top Management to Follow-Up
After signing the M&A agreement the top management should not sit back and let things
happen. First 100 days after the takeover determine the speed with which the process of
tackling the problems can be achieved. Top management follow-up is essential to go with a
clear road map of actions to be taken and set the pace for implementing once the control is
assumed.
24. Mergers between Lame Ducks
Merger between two weak companies does not succeed either. The example is the Stud
backer- Packard merger of 1955 when two ailing carmakers joined hands. By 1964 both
companies were closed down.
25. Lack of Proper Communication
Lack of proper communication after the announcement of M&As will create lot of
uncertainties.
26. Failure of Leadership Role
Some of the role leadership should take seriously are modeling, quantifying strategic benefits
and building a case for M&A activity and articulating and establishing high standard for
value creation. Walking the talk also becomes very important during M&As.
27. Inadequate Attention to People Issues
Not giving sufficient attention to people issues during due diligence process may prove costly
later on.
28. Strategic Alliance as an Alternative Strategy
Another feature of 1990s is the growth in strategic alliances as a cheaper, less risky route to a
strategic goal than takeovers.
30. Loss of Identity
Merger should not result in loss of identity, which is a major strength for the acquiring
company. Jaguar's car image dropped drastically after its merger with British Leyland.
31. Diverging from Core Activity
In some cases it reduces buyer's efficiency by diverting it from its core activity and too much
time is spent on new activity neglecting the core activity.
32. Expecting Results too quickly
Immediate results can never be expected except those recorded in red ink. Whirlpool ran up a
loss $100 million in its Philips white goods purchase. R.P.Goenk's takeovers of Gramaphone
Company and Manu Chhabria's takeover of Gordon Woodroffe and Dunlops fall under this
category.
Q7- What is the difference between M&A
Sol7-Although merger and acquisition are often used as synonymous terms, there is a subtle
difference between the two concepts.
1.In the case of a merger, two firms together form a new company. After the merger, the
separately owned companies become jointly owned and obtain a new single identity. When
two firms merge, stocks of both are surrendered and new stocks in the name of new company
are issued. Generally, mergers take place between two companies of more or less same size.
In these cases, the process is called Merger of Equals. merger happens when two
companies agree to operate together under the same ownership. Ideally, both companies
are of similar size. Both companies in this case surrender their shares and new shares
are issued.
2.However, with acquisition, one firm takes over another and establishes its power as the
single owner.Generally, the firm which takes over is the bigger and stronger one. The
relatively less powerful, smaller firm loses its existence, and the firm taking over, runs the
whole business with its own identity. Unlike the merger, stocks of the acquired firm are not
surrendered, but bought by the public prior to the acquisition, and continue to be traded in the
stock market. An acquisition happens when a company takes over a company and
establishes ownership over that company. Typically, the company which is acquired or
the target company ceases to exist as a separate entity. An example can be Corus which
ceased to exist when it was taken over by Tata Steel. Today the company operates as a
100% subsidiary of Tata Steel
3.Another difference is, when a deal is made between two companies in friendly terms, it is
typically proclaimed as a merger, regardless of whether it is a buy out. In an unfriendly deal,
where the stronger firm swallows the target firm, even when the target company is not willing
to be purchased, then the process is labeled as acquisition.
Merger through Absorption (ACQUISITION): An absorption is a combination of two or

more companies into an 'existing company'. All companies except one lose their identity in
such a merger. For example, absorption of Tata Fertilisers Ltd (TFL) by Tata Chemicals Ltd.
(TCL). TCL, an acquiring company (a buyer), survived after merger while TFL, an acquired
company (a seller), ceased to exist. TFL transferred its assets, liabilities and shares to TCL.
Merger through Consolidation(MERGER): A consolidation is a combination of two or

more companies into a 'new company'. In this form of merger, all companies are legally
dissolved and a new entity is created. Here, the acquired company transfers its assets,
liabilities and shares to the acquiring company for cash or exchange of shares. For example,
merger of Hindustan Computers Ltd, Hindustan Instruments Ltd, Indian Software Company
Ltd and Reprographics Ltd into an entirely new company called HCL Ltd.
Q8-What is the difference between spin-off and sell off?
Sol8- SPIN OFF-

Spinoffs are a way to get rid of underperforming or non-core business
divisions that can drag down profits.
Process of spin off
1. The company decides to spin off a business division.
2.The parent company files the necessary paperwork with theSecurities
and Exchange Board of India(SEBI).
3.The spinoff becomes a company of its own and must also file
paperwork with the SEBI.
4.Shares in the new company are distributed to parent company
shareholders.
5.The spinoff company goes public.
Notice that the spinoff shares are distributed to the parent company
shareholders. There are two reasons why this creates value:
1. Parent company shareholders rarely want anything to do with the new spinoff. After all, it's
an goes public. underperforming division that was cut off to improve the bottom line. As
a result, many new shareholders sell immediately after the new company
2.Large institutions are often forbidden to hold shares in spinoffs due to the smaller market
capitalization, increased risk, or poor financials of the new company. Therefore, many large
institutions automatically sell their shares immediately after the new company goes public.
Simple supply and demand logic tells us that such large number of shares on the market will
naturally decrease the price, even if it is not fundamentally justified. It is this temporary
mispricing that gives the enterprising investor an opportunity for profit.
There is no money transaction in spin-off. The transaction is treated as stock dividend & tax
free exchange.
For examples-Kotak Mahindra capital finance ltd formed a subsidiary known as kotak
Mahindra capital corporation
SELL OFF–
Selling a part or all of the firm by any one of means: sale, liquidation, spin-off & so on. or
General term for divestiture of part/all of a firm by any one of a no. of means: sale,
liquidation, spin-off and so on.
PARTIAL SELL-OFF
A partial sell-off/slump sale, involves the sale of a business unit or
plant of one firm to another.
It is the mirror image of a purchase of a business unit or plant.
From the seller‘s perspective, it is a form of contraction; from the
buyer‘s point of view it is a form of expansion.
For example: When Coromandal Fertilizers Limited sold its cement division to India Cement
Limited, the size of Coromandal Fertilizers contracted whereas the size of India Cements
Limited expanded
Q9 What are the various options available to shake off a hostile takeover?Quote a case
of successful shakeoff?
Sol9- Combating Hostile Takeovers
The two terms - ‗mergers‘ and ‗acquisition‘ represent the ways by strategies used by
companies to buy, sell and recombine businesses. In the present day when there exists cut
throat competition in every sphere, not all mergers and acquisitions are consensual and
peaceful.
The concept of takeovers without consent have, therefore been ideally termed ―hostile
takeovers‖. no consented The history of hostile takeovers can be traced to 1980‘s, with the
US Supreme Court for the first time sat in judgment over the anti-takeover provisions of the
Illinois Business Take-Over Act and pronounced them as invalid in their landmark ruling in
There was a time some 2 decades back when hostile acquirers struck terror in the hearts of
corporate boards.. If wealthy dealmakers wanted to take over a company in a hostile
acquisition, bite it into pieces, and then spin those pieces off for a profit, there wasn‘t much
that the board of a company could do to stop the massacre. It was at that time that ‗poison
pills‘ and other anti takeover strategies were conceptualized. The anti=take over strategies
developed during that era quickly transformed the takeover law and fortified the pre-emptive
defenses of companies.
Meaning
When an acquirer takes the control of a company by purchasing its shares without the
knowledge of the management it is termed as a hostile takeover. Thus, when an acquirer
silently and unilaterally, makes efforts to gain control of a company against the wishes of the
existing management, such act amounts to hostile takeover. Hostile takeover is an attempt by
outsider to wrest control away from an incumbent management.
Defenses against Hostile Takeovers-Shark Repellents

There are several ways to defend against a hostile takeover. The most effective methods are
those where there exist built-in defensive measures that make a company difficult to take
over. These methods are collectively referred to as "shark repellents".
 The classic „poison pill strategy‟ (the shareholders‟ rights plan) is the most popular
and effective defense to combat the hostile takeovers. Under this method the target
company gives existing shareholders the right to buy stock at a price lower than the
prevailing market price if a hostile acquirer purchases more than a predetermined amount
of the target company‘s stock.
The purpose of this move is to devalue the stock worth of the target company and dilute the
percentage of the target company equity owned by the hostile acquirer to an extent that
makes any further acquisition prohibitively expensive for him. „White Knight‟ is another
type of defense mechanism. In this case, a third company makes a friendly takeover
offer to the company facing a hostile takeover.(RIL BUYS 14.98% IN EIH HOTEL
GROUP TO HELP IT HOSTILE OPEN OFFER FROM ITC WHICH ALSO HOLD
SIMILAR PERCENTAGE OF SHARES IN EIH ) This is a common tactics in which the
target company finds another company to enter the scene and purchase them out and away
from the company making the hostile bid. The several reasons why the companies prefer to
be bought out by the third company could be -- better purchase terms, a better relationship or
better prospects for long-term success. At times these ‗white knight‘ companies only help the
target company improve the deal terms with the hostile bidder. A very good example is of
Severstal which acted as a ‗white knight‘ in the Arcelor-Mittal deal, and causing a 52.5 %
increase in the Mittal offer.
 Some other types of defenses which are available to the targeted company are:
Pac-Man Defense – wherein a target company thwarts a takeover bid by buying
stocks in the acquiring company, then taking the bidder company over.
 Staggered Board:-It is used generally in combination with ‗Shareholder‘s Rights‘
plan and is considered most effective. This method drags out the takeover process by
preventing the entire board from being replaced at the same time. The directors are
grouped into classes, each group stands for the election at each annual general
meeting. It prevents entire board from being replaced at one go.
 Golden Parachute is a tactics which works in the manner that it makes the
acquisition more expensive and less attractive. It is provision in a CEO's contract,
which is worded such that the CEO gets a large bonus in cash or stock if the company
is acquired.
Indian Legal and Regulatory Framework

Any takeover in India needs to comply with the provisions of SEBI (Substantial Acquisition
of Shares and Takeover) Regulations, 1997 (―Takeover Code‖). It is important to understand
the various terms associated with the takeover and there meaning explained in the Takeover
Code.
The term ‗Target company‘ refers to is a listed company, whose shares or voting rights are
acquired/being acquired or whose control is taken over/being taken over by an acquirer either
directly or by acquiring control of its holding company or a company which is controlling it,
which is not a listed company.
As per regulation 2(1)(b), the term ―acquirer‖ means any person who, directly or indirectly,
acquires or agrees to acquire control over the target company, , either by himself or with any
person acting in concert with the acquirer. The term acquirer has been given a wide meaning
as the definition takes into account not only substantial acquisition of shares by a person, but
also takeover of control of the company.
 As regards the term ―control‖, there is no exhaustive definition. It is dependent on the

circumstances of the case which determines who has control over the organization.
However the term control shall include:
1)The right to appoint majority of the directors or,
 2) To control the management or policy decisions exercisable by a person or persons
acting individually or in concert directly or indirectly, including by virtue of their
shareholding or management rights or shareholders agreements or voting agreements or
in any other manner.
An explanation was inserted in the definition of the term ―control‖ vide SEBI (Takeovers)
Second Amendment, Regulations, 2002. The explanation provides that transfer from joint
control to sole control over a company is not to be considered as change in control if it has
been effected in accordance with regulation 2(1)(e), i.e., through inter se transfer of shares
among promoters.
The Takeover Code makes it difficult for the hostile acquirer to just sneak up on the target
company. It forewarns the company about the advances of an acquirer by mandating that the
acquirer make a public disclosure of his shareholding or voting rights to the company if he
acquires shares or voting rights beyond a certain specified limit. However, the Takeover
Code does not present any insurmountable barrier to a determined hostile acquirer.
The Takeover Code, vide Regulation 23, also imposes a prohibition on the certain actions of
a target company during the offer period, such as transferring of assets or entering into
material contracts and even prohibits the issue of any authorized but unissued securities
during the offer period. However, these actions may be taken with approval from the general
body of shareholders.
However, the regulation provides for certain exceptions such as the right of the company to
issue shares carrying voting rights upon conversion of debentures already issued or upon
exercise of option against warrants, according to pre-determined terms of conversion or
exercise of option. It also allows the target company to issue shares pursuant to public or
rights issue in respect of which the offer document has already been filed with the Registrar
of Companies or stock exchanges, as the case may be.
However this may be of little respite as the debentures or warrants, contemplated earlier must
be issued prior to the offer period. Further the law does not permit the Board of Director, of
the target company to make such issues without the shareholders approval either prior to the
offer period or during the offer period as it is specifically prohibited under Regulation 23.
During a takeover bid, it may be critical for the Board to quickly adopt a defensive strategy to
help ward of the hostile acquirer or bring him to a negotiated position. In such a situation, it
may be time consuming and difficult to obtain the shareholders‘ approvals especially where
the management and the ownership of the company are independent of each other.
The Takeover Code is required to be read with the SEBI (Disclosure & Investor Protection)
Guidelines 2000 (―DIP Guidelines‖), which are the nodal regulations for the methods and
terms of issue of shares/warrants by a listed Indian company. They impose several
restrictions on the preferential allotment of shares and/or the issuance of share warrants by a
listed company. Under the DIP guidelines, issuing shares at a discount and warrants which
convert to shares at a discount is not possible as the minimum issue price is determined with
reference to the market price of the shares on the date of issue or upon the date of exercise of
the option against the warrants. This creates an impediment in the effectiveness of the
shareholders‘ rights plan which involves the preferential issue of shares at a discount to
existing shareholders.
The DIP guidelines also provide that the right to buy warrants needs to be exercised within a
period of eighteen months, after which they would automatically lapse. Thus, the target
company would then have to revert to the shareholders after the period of eighteen months to
renew the shareholders‘ rights plan.
Without the ability to allow its shareholders to purchase discounted shares/ options against
warrants, an Indian company would not be able to dilute the stake of the hostile acquirer,
thereby rendering the shareholders‘ rights plan futile as a takeover deterrent.
Also, the FDI policy and the FEMA Regulations have provisions which restrict non-
residents from acquiring listed shares of a company directly from the open market in
any sector, including sectors falling under automatic route. There also exist certain
restrictions with respect to private acquisition of shares by non-residents, under automatic
route, is permitted only if Press Note 1 of 2005 read with Press Note 18 of 1998 is not
applicable to the non-resident acquirer. This has practically sealed any hostile takeover of any
Indian company by any non-resident.
However, for the poison pill strategy to work best in the Indian corporate scenario certain
amendments and changes to the prevalent legal and regulatory framework are required.
Importantly, a mechanism must be permitted under the Takeover Code and the DIP
Guidelines which permit the issue of shares/warrants at a discount to the prevailing market
price. These amendments would need to balance the interests of the shareholders while
allowing the target companies to fend off hostile acquirers.
Possibilities in India
The DIP Guidelines do not stipulate any pricing restrictions on the issue of non-convertible
preference shares, non-convertible debentures, notes, bonds and certificates of deposit. Thus,
companies may consider structuring a poison pill in place whereby backend rights which
permit the shareholders to exchange the rights/shares held for senior securities with a
backend value as fixed by the Board, are issued to existing shareholders when the hostile
acquirer‘s shareholding crosses a predetermined threshold.
As most takeovers are carried out through borrowed funds, the use of backend rights reduces
the profitability of the takeover because of the mounting interest rates on borrowings; thus
deterring the hostile acquirer and more importantly sets the minimum takeover price, which is
the price at which the shares have been exchanged for senior securities.
Another method is where a company puts a provision in its Articles of Associations to the
effect that a hostile acquirer who succeeds in taking control of that company and/or its
subsidiaries is prohibited from using the company‘s established brand name. A live example
is of the Tata companies who have put in place a an arrangement with the Tata Sons
holding entity, whereby any hostile (or otherwise) acquirer of any of those entities is not
permitted to make use of the established “Tata” brand name.
As a consequence, the bidder might be able to take over the target Tata company but will be
shortchanged as it will not be entitled to a significant bite of its valuation — the valued brand
name!!
Hostility is usually perceived when an offer is made public that is aggressively rejected by
the target firm. Consequently, perceptions of hostility are closely linked with takeover
negotiations that are far from completion. Often firms engage in confidential negotiations
before there is a public announcement of a bid or an intention to bid. In some cases, the first
public announcement is of a successfully completed negotiation, which would be perceived
to be friendly, even if the early stage private negotiations would have seemed hostile if they
had been revealed to the public. In other cases, private negotiations break down and one of
the parties decides that public information about the potential bid would enhance its
bargaining position.
Example Of Hostile Take Over?
 The most famous recent proxy fight was Hewlett-Packard‘s takeover of Compaq. The
deal was valued at $25 billion, but Hewlett-Packard reportedly spent huge sums on
advertising to sway shareholders. HP wasn‘t fighting Compaq — they were fighting a
group of investors that included founding members of the company who opposed the
merge. About 51 percent of shareholders voted in favor of the merger. Despite attempts to
halt the deal on legal grounds, it went as planned.
 YAHOO MICROSOFT TAKEOVER

Conclusion
Indian companies need to shift from desperate defensive play to getting ready on the
offensive. The reason for utilizing the poison pill defense is to protect shareholder value and
interest while stalling entities such as asset strippers that do not have the best interest of the
company in mind or add any value to it. However, companies need to ensure that this defense
is not misused by errant management. The need today, obviously, seems not to do away with
poison pills, but a change in the attitude and approach of the management towards the poison
pills. Not all hostile takeovers are bad; so long as the shareholders reserve the power to
exercise the poison pills and take an informed decision, the pills and hostile takeovers can do
more good than harm.
Q10-What is brand?Give five examples of intellectual of the company?
Sol10- “ A brand is name, term, sign, symbol, or design, or a combination of them,

intended to identify the goods or services of one seller or group of sellers and to
differentiate them from those of competition.”
Intellectual Capital
 Relational capital: All relations a company entertains with external subjects, such as
suppliers, partners, clients (brands, ...), research centres, etc.;
 Human capital: The sum total of the useful knowledge of your employees and your
customers with more emphasis on knowledge and competences residing with the
company's employees;
 Organizational capital: Collective know-how, beyond the capabilities of individual
employees. E.g.: information systems; policies; intellectual property.
Intellectual
Capital
Human Relational Organisational

Capital Capital Capital
“Technological” “Sociological Intellectual Infrastructure

Skills and ” Skills and Property Capital
Competencies Capital 6
6
Organisational (structural) capital: examples of IP

 • patents
 • copyrights
 • design rights
 • trade secrets
 • trade marks
 • service marks
 • trade dress
 • utility models
 • plant & seed varieties
Why Value Intellectual Capital
1) Measurement of IC - enables a more efficient management of the company - i.e. to:
 understand where value lies in the company
 have a metric for assessing success and growth
 provide a basis for raising finance or loans
2) If borrowing can only be secured against tangible assets, then knowledge-based

companies will be disadvantaged in investment and growth.
Q11 –What is brand value and why it is measured?
 Sol1- Brand equity refers to the marketing effects or outcomes that accrue to a
product with its brand name compared with those that would accrue if the same
product did not have the brand name. And, at the root of these marketing effects is
consumers' knowledge. In other words, consumers' knowledge about a brand makes
manufacturers/advertisers respond differently or adopt appropriately adept measures
for the marketing of the brand. The study of brand equity is increasingly popular as
some marketing researchers have concluded that brands are one of the most valuable
assets that a company has.
Good examples of companies with strong brand equity are corporations such as Nike and
Coca-Cola, whose corporate logos are recognized worldwide.
Methods used for valuing brands

 A number of authors and consulting firms have proposed different methods for brand
valuation. The different methods consider that a brand‘s value is:
1. The market value of the company‘s shares.
2. The difference between the market value and the book value of the company‘s
shares (market value added). Other firms quantify the brand‘s value as the difference
between the shares‘ market value and their adjusted book value or adjusted net worth
(this difference is called goodwill).
3. The difference between the market value and the book value of the company‘s
 Company  2002  Brand  2001
brand contribution to Brand
value($ market Value
bn)  capitalization of ($bn)
parent company
(%)
 Coca-Cola  69.6  51  69.0
 Microsoft  64.1  21  65.1
 IBM  51.2  39  52.8
 GE  41.3  14  42.4
 Intel  30.9  22  34.7
 Nokia  30.0  51  35.0
 Disney  29.3  68  32.6
 McDonald‘s  26.4  71  25.3
 Marlboro  24.2  20  22.1
 Mercedes-Benz  21.0  47  21.7
 shares minus the management team‘s managerial expertise (intellectual capital).
4. The brand‟s replacement value
4.1. Present value of the historic investment in marketing and promotions.
4.2. Estimation of the advertising investment required to achieve the present level of
brand recognition.
5. The difference between the value of the branded company and that of another
similar company that sells unbranded products (generic products or private
labels). To quantify this difference, several authors and consulting firms propose
different methods:
5.1. Present value of the price premium (with respect to a private label) paid by
customers for that brand
5.2. Present value of the extra volume (with respect to a private label) due to the brand
5.3. The sum of the above two values
5.4. The above sum less all differential, brand-specific expenses and investments.
This is the most correct method, from a conceptual viewpoint. However, it is very
difficult to reliably define the differential parameters between the branded and
unbranded product, that is, the
differential price, volume, product costs, overhead expenses, investments, sales and
advertising activities, etc.
5.5. The difference between the [price/sales] ratios of the branded company and the
unbranded company multiplied by the company‘s sales. This method is used by
Damodaran to value the Kellogg‘s and Coca-Cola brands.
5.6. Differential earnings (between the branded company and the unbranded
company) multiplied by a multiple. As we shall see further on, this is the method used
by the consulting firm Interbrand.
6. The present value of the company‘s free cash flow minus the assets employed
multiplied by the required return. This is the method used by the firm Houlihan
Valuation Advisors.
7. The options of selling at a higher price and/or higher volume and the options of
growing through new distribution channels, new countries, new products, new
formats … due to the brand‘s existence
Q12-Explain the financial approach to the valuation?
Sol12- Financially driven approaches

Cost-based approaches define the value of a brand as the aggregation of all historic costs
incurred or replacement costs required in bringing the brand to its current state: that is, the
sum of the development costs, marketing costs, advertising and other communication costs,
and so on.
These approaches fail because there is no direct correlation between the financial investment
made and the value added by a brand. Financial investment is an important component in
building brand value, provided it is effectively targeted. If it isn‘t, it may not make a bean of
difference. The investment needs to go beyond the obvious advertising and promotion and
include R&D, employee training, packaging and product design, retail design, and so on.
Comparables. Another approach is to arrive at a value for a brand on the basis of something
comparable.
But comparability is difficult in the case of brands as by definition they should be

differentiated and thus not comparable.
Furthermore, the value creation of brands in the same category can be very different, even if
most other aspects of the underlying business such as target groups, advertising spend, price
promotions and distribution channel are similar or identical.
Comparables can provide an interesting cross-check, however, even though they should never
be relied on solely for valuing brands.
Premium price. In the premium price method, the value is calculated as the net present value
of future price premiums that a branded product would command over an unbranded or
generic equivalent.
However, the primary purpose of many brands is not necessarily to obtain a price premium
but rather to secure the highest level of future demand.
The value generation of these brands lies in securing future volumes rather than securing a
premium price. This is true for many durable and non-durable consumer goods categories.
This method is flawed because there are rarely generic equivalents to which the premium
price of a branded product can be compared. Today, almost everything is branded, and in
some cases store brands can be as strong as producer brands charging the same or similar
prices. The price difference between a brand and competing products can be an indicator of
its strength, but it does not represent the only and most important value contribution a brand
makes to the underlying business.
Economic use. Approaches that are driven exclusively by brand equity measures or financial
measures lack either the financial or the marketing component to provide a complete and
robust assessment of the economic value of brands. The economic use approach, which was
developed in 1988, combines brand equity and financial measures, and has become the most
widely recognized and accepted methodology for brand valuation. It has been used in more
than 3,500 brand valuations worldwide. The economic use approach is based on fundamental
marketing and financial principles:
 The marketing principle relates to the commercial function that brands perform within
businesses. First, brands help to generate customer demand. Customers can be individual
consumers as well as corporate consumers depending on the nature of the business and the
purchase situation. Customer demand translates into revenues through purchase volume, price
and frequency. Second, brands secure customer demand for the long term through repurchase
and loyalty.
 The financial principle relates to the net present value of future expected earnings, a
concept widely used in business. The brand‘s future earnings are identified and then
discounted to a net present value using a discount rate that reflects the risk of those earnings
being realized.
To capture the complex value creation of a brand, take the following five steps:
1. Market segmentation. Brands influence customer choice, but the influence varies
depending on the market in which the brand operates.
Split the brand‘s markets into non-overlapping and homogeneous groups of consumers
according to applicable criteria such as product or service, distribution channels, consumption
patterns, purchase sophistication, geography, existing and new customers, and so on. The
brand is valued in each segment and the sum of the segment valuations constitutes the total
value of the brand.
2. Financial analysis. Identify and forecast revenues and earnings from intangibles generated
by the brand for each of the distinct segments determined in Step 1. Intangible earnings are
defined as brand revenue less operating costs, applicable taxes and a charge for the capital
employed. The concept is similar to the notion of economic profit.
3. Demand analysis. Assess the role that the brand plays in driving demand for products and
services in the markets in which it operates, and determine what proportion of intangible
earnings is attributable to the brand measured by an indicator referred to as the ―role of
branding index.‖ This is done by first identifying the various drivers of demand for the
branded business, then determining the degree to which each driver is directly influenced by
the brand. The role of branding index represents the percentage of intangible earnings that are
generated by the brand. Brand earnings are calculated by multiplying the role of branding
index by intangible earnings.
4. Competitive benchmarking. Determine the competitive strengths and weaknesses of the

brand to derive the specific brand discount rate that reflects the risk profile of its expected
future earnings (this is measured by an indicator referred to as the ―brand strength score‖).
This comprises extensive competitive benchmarking and a structured evaluation of the
brand‘s market, stability, leadership position, growth trend, support, geographic footprint and
legal protectability.
5. Brand value calculation. Brand value is the net present value (NPV) of the forecast brand
earnings, discounted by the brand discount rate. The NPV calculation comprises both the
forecast period and the period beyond, reflecting the ability of brands to continue generating
future earnings
Q13- NMERICAL PROBLEM
Q14-Explain the importance of due diligence with examples and illustration checklist
for PATENT , TRADEMARK AND COPYWRIGHT?
Sol14- Due dilligence is a process of gathering information,
 assessing the merits, issues,
 And risks associated with a business transactions
When is it necessary?
 New ventures
 Mergers
 Acquisitions
 Licenses
 IPO
Importance of IP in Due Diligence
1. Polaroid vs. Kodak Case
2. Least priority is given to IP. DD Starts with Property and Fixed Assets
3. Who does not have IP assets?
a. Software Company
b. Bio technology
c. Manufacturer
d. Publisher (Newspaper/Television broadcasting channel)
The Importance Of Due Diligence In An Enterprise Restructuring Programme
1. The term, Due Diligence, is usually associated with contracts or investment decisions
and, in general, means that proper efforts will be made in investigations or
examinations of information provided in a given transaction. Specifically, the Due
Diligence report is a thorough examination of the enterprise in all its aspects.
2. The Financial Due Diligence can be compared to an Audit of the particular enterprise
to determine its financial situation including a very detailed listing of all its assets and
of liabilities by category such as operating expenses, loan debts and so on.
3. The Legal Due Diligence encompasses a review of the legislation establishing the
enterprise and the provisions for its governance, and any other laws affecting the
enterprise. It also includes a review of current contractual obligations both short-term
and long-term. Also included are pending cases involving the enterprise.
4. The Human Resources Due Diligence is a detailed examination of the employee

complement of the enterprise at all levels together with analysis of their terms of
reference, deployment, qualifications, and other relevant details. This exercise
culminates with an assessment of whether there is a need for right-sizing of the staff
complement. In most sectors there are indicative ratios of staff to key performance
criteria which are used to determine the adequacy or otherwise of staff qualifications
and numbers.
5. International and local consultants on behalf of the Privatisation Unit normally carry
out the Due Diligence study. In the case of Telecom Lesotho, Due Diligence studies
were carried out by PriceWaterhouseCoopers (Financial and HR), Clifford Chance
(Regulatory and Competition) and Edward Nathan & Friedland (Legal). These studies
were then incorporated into the Information Memorandum for potential investors.
6. If the Privatisation Scheme is approved by Cabinet, it is then advertised, and serious

bidders are allowed unrestricted access into the enterprise, and accorded the right to
scrutinise in detail all the operations and records of the enterprise. In other words, the
bidders conduct their own Due Diligence so that they may prepare realistic bids and
verify information provided by the Government in its Information Memorandum..
Checklist for Patent DD
1. Obtain a complete list of the company‘s Indian, U.S., international, foreign patents
and patent applications.
2. Obtain technical description of products, including formulations & manufacturing

processes.
3. Determine whether the procedures are followed and are appropriate and effective.
4. Obtain confirmation that the company has recorded assignments (where applicable)
for all U.S. and foreign patents and patent applications.
5. Whether the company has assigned or granted security interests.
6. Patent maintenance and annuity fee records.
7. Pending issues of infringement including correspondence to that effect.
8. Actual or threatened litigation/claims against the company, such as cease and desist
letters. Current status of litigation. Study copies of settlements.
9. Search for patents and patent applications in the names of key personnel, consultants,
and principal clinical trial investigators
Q15- What r the steps involved in the amalgamation of comp in India?
Sol15- The procedure for the amalgamation of two companies has to be viewed from the
Transferor and Transferee Company. Therefore, the procedure has been divided into two
parts i.e. procedure to followed by the transferor company and the transferee company
respectively.
Steps To Be Followed By Transferee Company

1. Memorandum Of Association (M/A)
The Memorandum of Association must provide the power to amalgamate in its objects
clause. It M/A is silent, amendment in M/A must take place.
2. Board Meeting
A Board Meeting shall be convened to consider and pass the following requisite resolutions:
- approve the draft scheme of amalgamation;
- to authorise filing of application to the court for directions to convene a general meeting;
- to file a petition for confirmation of scheme by the High Court.
3. Application To The Court

An application shall be made to the court for directions to convene a general meeting by way
of Judge's summons supported by an affidavit. The proposed scheme of amalgamation must
be attached to such affidavit.
The summons should be accompained by:

" A certified copy of the M&A of both companies
" A certified true copy of the latest audited B/S and P&L A/c of transferee company
4. Copy To Regional Director
A copy of application made to concerned H.C. shall also be sent to the R.D. of the region.
Although, such notice is supposed to be sent by the H.C., usually the company sends it
without waiting for the H.C. to send it.
5. Order Of High Court
On hearing of the summons, the H.C. shall pass the necessary orders which shall include:
" Time and place of the meeting

" Chairman of the meeting
" Fixing the quorum
" Procedure to be followed in the meeting for voting by the proxy
" Advertisement of notice of the meeting
" Time limit for the chairman to submit the report to the court regarding the result of the
meeting
6. Notice Of The Meeting
The notice of the meeting shall be sent to the creditors and/or the shareholders individually
by the chairman so appointed by registered post enclosing:
" A statement setting forth the following:

- Terms of amalgamation and its effects
- Any material interests of the director, MDs or Manager, in any capacity
- Effect of the arrangement on those interests.
" A copy of the proposed scheme of amalgamation

" A form of proxy
" Attendance slip
" Notice of the resolution for authorizing issue of shares to persons other than existing
shareholders
7. Advertisement Of Notice Of Meeting
The notice of the meeting shall be advertised in an English and Hindi N/P as the court may
direct.
8. Notice To Stock Exchange
In case of the listed company, 3 copies of the notice of the general meeting alongwith
enclosures shall be sent to the Stock Exchange where the company is listed.
9. Filing Of Affidavit For The Compliance

An affidavit not les than 7 days before the meeting shall be filed by the Chairman of the
meeting with the Court showing that the directions regarding the issue of notices and advt.
Have been duly complied with.
10. General Meeting

The General Meeting shall be held to pass the following resolutions:
" Approving the scheme of amalgamation by ¾th majority
" Special Resolution authorizing allotment of shares to persons other than existing
shareholders or an ordinary resolution be passed subject to getting Central Government's
approval for the allotment as per the provisions of Section 81(1A) of the Companies Act,
1956.
" The resolution to empower directors to dispose of the shares not taken up by the
dissenting shareholders at their discretion.
" An ordinary/special resolution shall be passed to increase the Authorised share capital, if
the proposed issue of shares exceeds the present authorised capital.
The decision of the meeting shall be ascertained only by taking a poll on resolutions.
11. Reporting Of Result Of The Meeting
The Chairman of the meeting shall report the result of the meeting to the court within the
time fixed by the judge or within 7 days, as the case may be. A copy of proceedings of the
meeting shall also be sent to the concerned Stock Exchange.
12. Formalities With Roc
The following documents shall be filed with ROC alongwith the requisite filing fees:
" Form No. 23 of Companies General Rules & Forms + copy of Special Resolution
" Resolution approving the scheme of amalgamation
" Special resolution passed for the issue of shares to persons other than existing
shareholders
13. Petition
For approval of the scheme of amalgamation, a petition shall be made to the H.C. within 7
days of the filing of report by the chairman.
Note:
" If the Regd. Offices of the companies are in same state - then both the companies may
move jointly to the High Court.
" If the Regd. Offices of the companies are in different states - then each company shall
move the petition in respective High Court for directions
14. Sanction Of The Scheme
The Court shall sanction the scheme on being satisfied that:
" The whole scheme is annexed to the notice for convening meeting. This provision is
mandatory in nature
" The scheme should have been approved by the company by means of ¾th majority of
the members present.
" The scheme should be genuine and bona fide and should not be against the interests of
the creditors, the company and the public interest.
After satisfying itself, the court shall pass orders in the requisite form
15. Stamp Duty

A scheme sanctioned by the court is an instrument liable to stamp duty.
16. Filing With Roc

The following documents shall be filed with ROC within 30 days of order:
" A certified true copy of Court's Order
" Form No. 21 of Companies General Rules & Forms
17. Copy Of Order To Be Annexed

A copy of court's order shall be annexed to every copy of the Memorandum of Association
issued after the certified copy of the order has been filed with as aforesaid.
18. Allotment Of Shares

A Board Resolution shall be passed for the allotment of shares to the shareholders in
exchange of shares held in the transferor-company and to fix the record date for this
purpose.
Steps To Be Followed By Transferor Company
The procedure as given above shall be followed by the transferor company.
The only exception is that - there is no need for the transferor company to pass a special
resolution for offering shares to the persons other than the existing shareholders and to file
Form No. 23 of the Companies General Rules and Forms with the Registrar of Companies.
Q16-Exchange ratio determination where the P/E ratio is to be maintained in case of
mergers of listed companies in india?
Sol------------Numerical Problem
Q17-What is demerger and how it is different from spin-off?
Sol17- Notes
Q18-What are the motives of buyout?List some forms of buyouts?
Sol18- Features of any „buy out‟ (BO)
 Public-private transaction: involves offer for entire share capital of listed firm,
subsequent re-registration as a private company
 Most involve significant increase in leverage
 Shareholders are usually managers and private equity funds
 LBO usually refers to a public-private transaction with increase in leverage
Some forms of „buy-outs‟
1. Management buyout (MBO): when incumbent management team takes over firm
2. Management buying (MBI): when outside management team acquires firm and takes
it private
3. Institutional buyout (IBO): new owners of delisted firm are solely institutional
investors or private equity firms
Version of above through difference procedure
1. Is MBO if management gained equity through being in bidding group
2. Is IBO if management gained equity as component of remuneration package. They

don‘t negotiate on behalf of bidding group.
3. Reverse LBO: secondary initial public offering (SIPO) for a previous LBO
Motives
 Tax benefits
o Tax shield from debt
 Managerial incentive realignment
 Control hypothesis
o More concentrated ownership, so more incentives to monitor
 Free cash flow
 Wealth transfer (from bondholders to shareholders)
o Unexpected increase in risk of investment projects
o Dividend payments
o Unexpected issue of debt of higher or equal seniority
Q19-What is leveraged buyout?On what theorem it is based and what are its
advantages & weakness?
Sol19- A LBO is a company acquisition method by which a business can seek to takeover
another company or at least gain a controlling interest in that company. Special about
leveraged buy-outs is that the corporation that is buying the other business borrows a
significant amount of money to pay for (the majority of) the purchase price (usually over
70% or more of the total purchase price).
 The debt which has been incurred is secured against the assets of the business being
purchased.
 Interest payments on the loan will be paid from the future cash-flow of the acquired
company.
A leveraged buyout (or LBO, or highly-leveraged transaction (HLT), or "bootstrap"

transaction) occurs when a financial sponsor acquires a controlling interest in a
company's equity and where a significant percentage of the purchase price is
financed through leverage (borrowing). The assets of the acquired company are
used as collateral for the borrowed capital, sometimes with assets of the acquiring
company. The bonds or other paper issued for leveraged buyouts are commonly
considered not to be investment grade because of the significant risks involved.
BASED ON Modigliani-Miller theorem
Advantages of LBO
1. Low capital or cash requirement for the acquiring entity
2. Synergy gains, by expanding operations outside own industry or business,
3. Efficiency gains by eliminating the value-destroying effects of excessive

diversification,
4. Improved Leadership and Management. Takeovers weed out or discipline rogue

managers.
5. Leveraging: as the debt ratio increases, the equity portion of the acquisition financing
shrinks to a level at which a private equity firm can acquire a company by putting up
anywhere from 20-40% of the total purchase price.
Weakness of LBO
1. Exploiting wealth of third party
2. Interest payments are tax deductible so Government looses on revenue
3. Risk of management and shareholder confrontation will impair the success of the
LBO.
4. Risk is effectively transferred to the Financer who has only interest compensation for
the risk; making the equation unfair.
5. Most of the LBOs were for asset stripping which is frowned upon by mature
corporate.
6. Structuring a LBO document for a financer is difficult in the Indian Legal

Environment.
Q20 Explain the importance of modi guilani miller theorem
The total return of an asset to its owners, all else being equal and within strict restrictive
assumptions, is unaffected by the structure of its financing. As the debt in an LBO has a
relatively fixed, albeit high, cost of capital, any returns in excess of this cost of capital flow
through to the equity.

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ANKUSH SINGH – 9702313357 (BOMBAY)

Merger And Acquisition

Q1-What is Restrucrting? and what are the objective of Restrucrting?

Alternate reasons for restructuring include a change of ownership or ownership structure,

1) Improving Levereging Ratios

5) Anti takeover defence

E- Geographical Diversification- Tata motor acquires Daewoo of Korea in 2003.Infosys

Rationales for Making Acquisitions

 Gain size to exploit core competencies.

Overcome Entry Barriers

 Overcome barriers by acquiring firm in the industry.

 Whirlpool‘s acquisition of Phillips Electronics appliance business

Cost and speed of new product development and introduction

1) Tata-corus 3) Vodafone essar

Case how the objective is achived through acquisition

MERGER OF HUL WITH TATA OIL MILLS COMPANY(TOMCO)(415)

Why Mergers and Acquisitions take place?

Q4-What is Bankruptcy and how does restructuring help to avoid it?

Bankruptcy Code, such as Chapter 7 (which involves liquidation of assets), Chapter 11

Q5-List and explain classification of Mergers?

Examples of Horizontal Mergers

 Vertical merger - A customer and company or a supplier and company. Think of a

Example of Vertical Merger

A very good example of market extension merger is the acquisition of Eagle

Eagle Bancshares also holds the Tucker Federal Bank

2)Takeover of Raasi Cements by India Cements (page 403)

 Product-extension merger - Two companies selling different but related products in

Conglomeration - Two companies that have no common business areas.

1) Economies of Scale (Tata corus deal )

Example of successful mergers

AIR INDIA AND INDIAN AIRLINES

Statistics shows that half of the mergers are not successful

5. Previous Acquisition Experience

6. Unwieldy and Inefficient

11. Faulty evaluation

12. Poorly Managed Integration

13. Failure to Take Immediate Control

14. Failure to Set the Pace for Integration

15. Incomplete and Inadequate Due Diligence

16. Ego Clash

17. Merger between Equals

18. Over Leverage

20. Limited Focus

21. Failure to Get Figures Audited

22. Failure to Get an Objective Evaluation of the Target Company' Condition

23. Failure of Top Management to Follow-Up

24. Mergers between Lame Ducks

25. Lack of Proper Communication

26. Failure of Leadership Role

27. Inadequate Attention to People Issues

28. Strategic Alliance as an Alternative Strategy

30. Loss of Identity

31. Diverging from Core Activity

32. Expecting Results too quickly

Q7- What is the difference between M&A

Merger through Absorption (ACQUISITION): An absorption is a combination of two or

Merger through Consolidation(MERGER): A consolidation is a combination of two or

Q8-What is the difference between spin-off and sell off?

Sol8- SPIN OFF-

Sol9- Combating Hostile Takeovers

Defenses against Hostile Takeovers-Shark Repellents

Indian Legal and Regulatory Framework