MAT – Its Relevance in Corporate Restructuring
“Whenever you see a successful business, someone once made a courageous decision” –Peter F Drucker
In today’s world of growing economies and fast paced globalization , major companies across the globe, both domestic and international, struggle to achieve the optimum market share possible and the most popular way to achieve growth and dominance on the global front is through mergers and acquisitions.
Mergers, acquisitions and takeovers have been a part of the business world for centuries. In today’s dynamic world of commerce, companies are often faced with decisions concerning options to maximize shareholder value. To develop a competitive advantage and thus ultimately increase shareholder value, mergers and acquisitions are the best avenue. Mergers, Acquisitions and Takeovers are that aspect of corporate strategy, corporate finance and management dealing with buying, selling, and combining of different companies that can aid, finance, or help a growing company in a particular industry to grow rapidly without having to create another business entity.
Mergers & Acquisitions (M&A) are part of corporate restructuring exercise. Corporate restructuring aims at the re-allocation of corporate resources to optimize its value either by adding the related or divesting the unrelated businesses. Capital restructuring has two dimensions. Firstly, restructuring of assets side of the business which commonly known as business restructuring or asset restructuring. Secondly, restructuring of liability side which is known as financial restructuring. The latter aims at optimizing on capital structure of the company without disturbing the businesses the company is in. The ultimate aim of all these exercises is to optimize corporate value given the assets and liabilities of the company.
Corporate restructuring is a necessity when the company has grown to the point that the original structure can no longer efficiently manage the output and general interests of the company. The general idea of corporate restructuring is to allow the company to continue functioning in some manner or the other. Corporate restructuring is thus 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.
Mergers or amalgamation, result in the combination of two or more companies into one, wherein the merging entities lose their identities. No fresh investment is made through this process. However, an exchange of shares takes place between the entities involved in such a process. Generally, the company that survives is the buyer which retains its identity and the seller company is extinguished.
In common parlance, fusion of more than one entities leads to transactions of mergers and acquisitions. Mergers, commonly take two forms. One, in case of amalgamation, two entities combined together and forms a new entity extinguishing both the existing entities. Second, in case of absorption, one entity get absorbs into another. The latter does not lose its entity. Thus, in any type of merger, at least one entity loses its entity. While acquisitions is more general term enveloping in itself range of acquisition transactions. It could be acquisition of control leading to takeover of company. It could be acquisition of tangible assets, intangible assets, rights and other kind of obligations. They could be independent transactions and may not lead to any kind of takeovers or mergers.
Mergers and Acquisitions in India
Mergers and Acquisitions indicate a robust economy. Since the world economy is in the recovery stage, with the effects of the economic crisis tapering out, companies in India have been looking for opportunities for growth through mergers and acquisitions across industries. Investors, big companies, industrial houses view the Indian market in a growing and proliferating phase, whereby returns on capital and the shareholder returns are high. Both the inbound and outbound mergers and acquisitions have increased dramatically.
In the Indian markets, M&As (including inbound and outbound transactions) totaled to about 267 deals amounting to a little over $ 10 billion, for the calendar year 2009. However, on account of the ongoing global recovery of financial markets, a stunning jump is expected in the number of M&A deals in the year 2010.
Legal Procedures for Merger, Acquisitions and Take-overs
The basic law related to mergers is codified in the Indian Companies Act, 1956 which works in tandem with various regulatory policies. The general law relating to mergers, amalgamations and reconstruction is embodied in sections 391 to 396 of the Companies Act, 1956 which jointly deal with the compromise and arrangement with creditors and members of a company needed for a merger. Section 391 gives the Tribunal the power to sanction a compromise or arrangement between a company and its creditors/ members subject to certain conditions. Section 392 gives the power to the Tribunal to enforce and/ or supervise such compromises or arrangements with creditors and members. Section 393 provides for the availability of the information required by the creditors and members of the concerned company when acceding to such an arrangement. Section 394 makes provisions for facilitating reconstruction and amalgamation of companies, by making an appropriate application to the Tribunal. Section 395 gives power and duty to acquire the shares of shareholders dissenting from the scheme or contract approved by the majority. And Section 396 deals with the power of the central government to provide for an amalgamation of companies in the national interest. In any scheme of amalgamation, both the amalgamating company or companies and the amalgamated company should comply with the requirements specified in sections 391 to 394 and submit details of all the formalities for consideration of the Tribunal.
Indian competition law grants a maximum time period of 210 days for the determination of the combination, which comprises acquisitions, mergers, amalgamations and the like. One needs to take note of the fact that this stated time frame is clearly distinct from the minimum compulsory wait period for applicants. As per the law, the compulsory period of waiting for applicants can either be 210 days starting from the day of notice filing or receipt of the Commission's order, whichever occurs earlier.
The Competition Act, 2002 has undergone a recent amendment. This has replaced the voluntary notification regime with a mandatory regime. Of the total number of 106 countries, which possess competition laws only 9 are thought to be credited with a voluntary notification regime. Voluntary notification regimes are generally associated with business uncertainties.
Indian Income Tax Act has provision for tax concessions for mergers/demergers between two Indian companies. These mergers/demergers need to satisfy the conditions pertaining to section 2(19AA) and section 2(1B) of the Indian Income Tax Act as per the applicable situation. In case of an Indian merger when transfer of shares occur for a company they are entitled to a specific exemption from the capital gains tax under the “Indian I-T tax Act”. These companies can either be of Indian origin or foreign ones.
A different set of rules is however applicable for the 'foreign company mergers'. It is a situation where an Indian company owns the new company formed out of the merger of two foreign companies. It can be noted that for foreign company mergers the share allotment in the merged foreign company in place of shares surrendered by the amalgamating foreign company would be termed as a transfer, which would be taxable under the Indian tax law. Also as per conditions set under section 5(1), the 'Indian I-T Act' states that, global income accruing to an Indian company would also be included under the head of 'scope of income' for the Indian company.
Advantages of M&A’s in Corporate Restructuring
The general advantage behind mergers and acquisition is that it provides a productive platform for the companies to grow, though much of it depends on the way the deal is implemented. It is a way to increase market penetration in a particular area with the help of an established base. Mergers and Acquisitions are advantageous to the process of restructuring of a corporate entity in the following ways:
· Accessing new markets
· Maintaining Growth momentum
· Acquiring international brands and clientele
· Buying cutting edge technology instead of importing it
· Taking on global competition
· Improving operating margins and efficiency
· Developing new product mixes to suit the new markets
Statistics show that one of the major reasons for failure of M&As is the human resources aspect. Companies which have failed to acknowledge the importance of human resources in their organizations and their role in the success of an integration, have failed to reach the pinnacle of success which was so near... and yet so far. When a decision is taken to merge or acquire, a company analyses the feasibility of the business on financial and legal fronts, but fails to recognize the importance attached to the human resources of the firms involved. Organizations fail to realize that people have the capability to make or break an alliance.
Despite negative studies and resistance from the economists, M&A’s continue to be an important tool behind growth of a company.
The rationale behind mergers and acquisitions is that the two companies are more valuable, profitable than individual companies and that the shareholder value is also over and above that of the sum of the two companies.
India has seen a growth of outbound cross-border M&A deals in the recent past, including Tata Steel’s acquisition of Corus, UK, Tata Motors’ acquisition of Jaguar and Land Rover, Hindalco’s acquisition of Novelis, etc. Further, Bharti Telecom’s unsuccessful bid to acquire the telecom major MTN of South Africa, its proposed acquisition of Zain Telecom’ s African assets and Reliance Industries’ attempt to acquire a majority stake in Lyondell Basell, show that Indian entrepreneurs have been aggressive like never before in their bid to grow internationally. Therefore, it is ripe time for business houses and corporate to watch the Indian market, and grab the opportunity.
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