1. Mergers and Acquisitions

2. • The terms Mergers and Amalgamations
treated synonymously.
• The terms Takeovers and Acquisitions treated
synonymously.

3. Mergers and Amalgamations
• Joining of two or more firms to form a new
entity or absorption of one/more firms with
another.
• The amalgamating firm loses its identity and
its shareholders become shareholders of the
amalgamated firm.

4. Mergers and Amalgamations
• Although the Mergers/Amalgamations of
firms in India is governed by the provisions of
the Companies Act, 1956, it does not define
these terms.
• The Income Tax Act, 1961, stipulates two
prerequisites for any amalgamation in order
to benefit from provisions of the Income Tax
Act.

5. First Condition
• All the properties and liabilities of the
amalgamated company/companies
immediately before amalgamation should vest
with/become the liabilities of the
amalgamated company.

6. Second Condition
• The shareholders holding at least 90 per cent
of shares/voting power in the amalgamating
company should become shareholders in the
amalgamated company by virtue of
amalgamation.

7. Scheme of Merger/Amalgamation
• Whenever two companies agree to merge
with each other, they have to prepare a
scheme of amalgamation.
• The scheme is generally prepared in
consultation with its merchant
bankers/financial consultants.

8. Contents of a model scheme
• Description of the transfer, transferee
company and the business of the transferor.
• Their authorized, issued and paid up capital.
• Change of name, object clause and accounting
year.
• Protection of employment.
• Dividend position and prospects.

9. Contents of a model scheme
• Management: Board of Directors, their number
and participation of transferee company’s
directors on the board.
• Application under sections 391 and 394 of the
companies Act, 1956, to obtain High Court
approval.
• Expenses of Amalgamation.
• Conditions of the scheme to become effective
and operative, effective date of amalgamation.

10. Essential features of the Scheme of
Amalgamation

11. Determination of Transfer
Date( Appointed Date)
• Fixing of the cut off date from which all
properties are sought to be transferred from
the amalgamating company to the
amalgamated company.

12. Determination of Effective date.
• The scheme would normally contain the
conditions to be satisfied for the scheme to be
effective.
• The effective date is the date by which all the
required approvals under various statutes
would be obtained.

13. Companies Act
• Governed by the provisions of Section 391-
394 of the Companies Act.

14. Approvals
• Under Section 391 of the Companies Act,
shareholders of both amalgamated and
amalgamating companies should hold their
respective meetings under the directions of
the respective high courts and consider the
scheme of amalgamation.

15. Approvals
• Further, under Section 81(1A) of the
Companies Act, the shareholders of the
amalgamated are required to pass a special
resolution for issue of shares to the
shareholders of the amalgamating company in
terms of the scheme of amalgamation.

16. Approvals Creditors, FIs and Banks
• Under their respective agreements with each
of the companies.

17. Approval from respective High Courts
• Approval from various courts in terms of
Section 391-394.
• The court issues orders for dissolving the
amalgamating company without winding up.

18. Step by Step Procedure

19. Object Cluse
• The first step is to examine the objects clause
of the Memorandum of Association of the
transferor and transferee companies so as to
ascertain whether the power of amalgamation
exists or not.
• If not, it is necessary to amend the objects
clause.

20. Step II
• The preparation of a scheme of
amalgamation.

21. Meetings
• Meetings of the Board of Directors of both the
companies to
• Decide the effective and appointed date.
• To approve the scheme of amalgamation and
the exchange ratio.
• To authorize the directors/officers to make
applications to the appropriate High Court for
necessary action.

22. Informations
• Inform the stock exchanges concerned about
the proposed amalgamation immediately
after the board meeting.
• The shareholders to be informed.
• Bankers/FIs/debenture trustees etc to be
informed at least 45 days before the board
meeting so that their approval for the
proposed amalgamation is available at the
time of the board meeting.

23. Application for Amalgamation
• Application under Section 191 to the
respective High Courts.
• The procedure for making application to the
High Court has been laid down under the
companies (court) rules, 1959.

24. Passing the resolution
• Hold separate meetings of the shareholders
and creditors to seek approval of the scheme.
• The resolution approving the scheme needs to
be passed by them.

25. Report of Chairman to the Court
• The chairman of the meeting must report the
results of the meeting to the court within the
time fixed by the court or if no time is fixed,
then within 7 days of the date of the meeting.

26. Presenting a petition before the Court
• Within seven days of filing the report by the
chairman, the company must present a
petition to the court for confirmation of the
arrangement.

27. Application for Direction
• An application may be made to the court to
provide for direction on all or any matters
indicated in Section 194(1).

28. Court Order
• The Court would pass an order.

29. Certificate
• A certified copy of the order of the court
dissolving the amalgamating company or
giving approval to the scheme of merger,
should be filed with the Registrar of
Companies concerned within 30 days of the
court order.

30. • A copy of the court’s should also be also be
attached to the memorandum and articles of
association of the transferee company.

31. Financial Framework

32. Determining the Firm’s Value
Relate to
1.The value of the firm’s assets
2.The earnings of the firm

33. Book Value
• By dividing the Net Worth by the number of
shares outstanding.
• Net worth is a stockholder's equity, it consist
of equity share capital plus reserve and
surplus.
• In other words its a difference between total
assest and total liabilities.
• Based on historical costs of the assets.

34. Appraisal Value
• Acquired from an independent appraisal
agency.
• Normally based on the replacement cost of
the assets.

35. Market Value
• As reflected in the stock market quotations.

36. Earnings per Share
• Whether the acquisition will have a positive
impact on the earnings per share after the
merger or it will result in the dilution of the
EPS.

37. Merger as a Capital Budgeting
Decision
• The target firm should be valued in terms of
its potential to create future cash flows.
• Free cash flows are equal to after tax
operating earnings plus non cash expenses
such as depreciation and amortization, less
additional investments expected to be made
in the long term assets and working capital of
the acquired firm.

38. • The present value of the expected benefits are
compared with the cost of acquisition of the
target firm.

39. Steps to evaluate merger decisions

40. Determination of Incremental Cash
Flows to Firm
After Tax operating earnings
• Plus: Non Cash expenses such as depreciation
and Amortization
• Less: Investment in Long Term Assets
• Less: Investment in Net working capital

41. Determination of Terminal Value
• Terminal Value (TV) is the present value of the
FCFF, after the Forecast period.
• You take the FCFF for the first year after the
forecast period.
• You divide this by (Discount rate – Perpetual
growth rate.
• Find out the PV of the result at Present by
discounting it.

42. • The sum of the PV of the forecast period FCFF
and the PV of the terminal value will give you
the enterprise value.
• You subtract the debt from the EV to arrive at
the Equity Value.
• Divide it by the number of shares to arrive at
the share valuation.

43. Discount Rate
• The discount rate used is normally the
Weighted Average Cost of Capital.
• The weighted average cost of capital (WACC)
is the rate that a company is expected to pay
on average to all its security holders to finance
its assets.

44. Cost of Equity using CAPM

45. NPV Approach
• Here we calculate the PV of the cash flows
during the forecast period and add the PV of
the terminal Value to arrive at the NPV of the
firm.

46. Adjusted Present Value
• Same as capital budgeting approach except
that you add the PV of tax shield.
• i.e tax savings on interest payments.

47. Tax Aspects of Amalgamation,
Mergers and Demergers
• Carry Forward and Set off of Business Losses
and Unabsorbed Depreciation provided
certain conditions are satisfied.

48. • Certain capital expenditures incurred by the
amalgamating company like on Scientific
Research, acquisition of patents or copyrights,
know, for obtaining license to operate
Telecommunication Services, bad debts etc
are allowed in the hands of the amalgamated
company.

49. • Free of Capital Gains tax – Transfer of capital
asset by an amalgamating company to an
amalgamated company.
• Would not be regarded as Capital Gains in the
hands of the shareholder.

50. Acquisitions and Takeovers
1. Negotiated/Friendly
2. Open Market/Hostile
3. Bail out

51. • Generally understood to imply the acquisition
of shares carrying voting rights in a company
• With a view to gaining control over the
company.
• Governed by the SEBI Takeover Code.

52. Questions for Revision
• What is a Merger? How is it different from an
Acquisition?
• What is meant by a Scheme of Merger?
Describe its key elements.
• Describe the process of Merger?
• Describe the NPV method for evaluating and
Acquisition? How is it different from the
Adjusted Present Value Method?

53. • How is the concept of EPS used to evaluate
the effect of a merger?
• What is the tax definition of the term
‘amalgamation’ ? Describe some of the
Income tax concessions in case of an
amalgamation?

54. The End