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Published : September 04, 2013 | Author : vishalcnlu
Category : Company Law | Total Views : 4881 | Rating :

  
vishalcnlu
LL.M from CNLU
 

Mergers and Acquisitions

In corporate capital scheme, there are two ways for a company to raise its capital, through loan and equity. A company can raise its capital by issuing shares on the stock market as the quickest and easiest ways to finance its operation. And second is take loan from banks or any other sources to raise capital of his company. With this initial reason and based on economic perspectives further, the concept of merger and acquisitions is developed.

M&As, in the context of corporate strategy, is an integration of two companies with a certain mechanism in particular business area that ultimately result in a large capitalization in the market economy. It is very easiest way to raise capital of company or reconstruction of his company, simply combining two entities to increase opportunities in the given market. Theoretically, there are three primary methods of M&As; those were merger, sale of assets, and tender offer. Merger and Acquisitions are usually simply referred to as merger, the condition or process in which a company buys “another company”.

Every merger or acquisition involves one or more methods of obtaining control of a public or private company, and the legal aspects of these transactions include issues relating to due-diligence, defining the party’s contractual obligations, structuring exit options, and the like. Due to the positive as well as negative impact cross border M&As may have on the economy, every legal system seeks to regulate it. Interestingly, while regulating cross border M&As, the government has to be cautious to avoid any kind of over regulation, as the same may be fatal for the economic development and may result in discouraging foreign investors as well as domestic investors, seeking to acquire foreign companies.

Merger is defined as combination of two or more companies into a single company where one survives and the other lose their corporate existence. The survivor acquires the assets as well as liabilities of the merged company or companies. Generally, the company, which survives, is the buyer, which retains its identity and the seller company is extinguished.

Merger is the fusion of two or more existing companies or absorption of one company into another. All assets, liabilities and stock of one company stand transferred to transferee Company in consideration of payment in the form of equity shares of transferee Company or debentures or cash or a mix of the two or three modes.

A merger sought to effect for a variety of reasons: - it is an inexpensive way to entering into a new activity or a new market,

1. it gives the opportunity way of entering into a new activity or a new market, and
2. it gives opportunity to use the spare capacity in the acquiring company with the assets of the other company, where the companies are under the control of same group.

Types of Mergers and Acquisitions
Merger or acquisition depends upon the purpose of the offeror company it wants to achieve. Based on the offeror’s objectives profile, combinations could be vertical, horizontal, circular and conglomeratic as precisely described below with reference to the propose in view of the offeror company.

Vertical Merger – A vertical merger is a merger in which the company expands forward in the direction of the customer and backwards towards the source of raw material. A vertical merger is one between enterprises in different stages of production or supplies, viz a manufacturer and a supplier of a component or raw material.

In a vertical merger, two or more companies which are complementary which are complementary to each other join together. For instance, in a vertical merger, the two companies, out of which one is engaged in the manufacture of a particular product and the other company is established and expert in the marketing of that product or is engaged in the production of raw material, can merge together.

Imagine a cricket bat company merging with a wood production company. This would be an example of merging with the raw material supplier. The acquisition of Flag Telecom by Indian Giant Reliance Communications Ltd. is an example of such vertical merger. Flag Telecom was the provider of optical fiber lines. Its acquisition marked the presence of Reliance Communications on the global map.

Horizontal Merger – A merger is horizontal if it involves the merger of two or more companies which are producing or rendering essentially the same products or services, or products or services which compete directly with each other. For e.g. sugar and artificial sweetenes.

Horizontal mergers involve two firms that operate and compete in a similar kind of business. It is supposed to provide economies of scale due to a larger combined unit. These are the most common types of mergers and take place more frequently as compared to Vertical mergers. India has witnessed many such mergers in the Cement industry – Birla with L&T, Liquor industry - United Breweries with Shaw Wallace, Aviation industry – Jet Airlines with Air Sahara. And most recent is Vodafone acquisition on HEL. Both are telecommunication industry.

Conglomerate Merger – A conglomerate merger is between enterprises is unrelated business. This type of merger involves coming together of two or more companies engaged in different industries or services.

A conglomerate merger is a merger that is neither horizontal nor vertical. This merger deals with merger of two companies that are engaged in unrelated industries. According to the U.S. Supreme Court a Conglomerate Merger is one in which there are no economic relations between the acquiring and the acquired company. The basic purpose witnessed for this type of merger is either Tax incentives, utilization of financial resources or enlarged debt capacity.

Within stream Mergers - Such merges take place when subsidiary company merges with parent company or parent company merges with subsidiary company. The former arrangement is called “down-stream” merger whereas the latter is called “up-stream” merger.
For example, the ICICI Ltd. A parent company has merged with its subsidiary ICICI Bank signifying down-stream merges. Another instance of upstream merge is the merger of Bhadrachalam Paper Board, subsidiary company with the ITC Ltd.

Cash Merger- A merger in which certain shareholders are required to accept cash for their shares while other shareholders receive shares in the continuing enterprise.

Reverse Merger- Reverse merger take place when a healthy company amalgamates with a financially weak company. In the context of the provisions of Companies Act 1956, there is no difference between regular merger and reverse merger. It is like any other merger and amalgamations.

Cross-Border Merger and Acquisition
A company in one country can be acquired by an entity (another company) from other countries. The local company can be private, public, or state-owned company. In the event of the merger or acquisition by foreign investors referred to as cross-border merger and acquisitions will result in the transfer of control and authority in operating the merged or acquired company. Assets and liabilities of the two companies from two different countries are combined into a new legal entity in terms of the merger, while in terms of acquisition, there is a transformation process of assets and liabilities of local company to foreign company (foreign investor), and automatically, the local company will be affiliated.

Since the cross border M&As involving two countries, according to the applicable legal terminology, the state where the origin of the companies that make an acquisition (the acquiring company) in other countries refer to as the Home Country, while countries where the target company is situated refers to as the Host Country.

In corporate merger, the headquarter of the new company can be in two states, for instance, on the merger between the Dutch Royal Shell, where the company's headquarters are in The Hague, Netherlands, with its registered office at the Shell Centre in London, United Kingdom. The headquarter can also be in a state of Home country, such as the merger between Daimler-Benz AG with the American automobile manufacturer Chrysler Corporation, now so called Daimler AG on October 5th , 2007, where the company headquarter is in Stuttgart, Germany. However, the merger is failed due to any reason and Daimler AG sells his equity shares in Chrysler to private equity house in New York, US. Recently, Chrysler has announced his agreement with the Italian Fiat Auto Group to create a global partnership in the production and distribution of automobiles and other motor vehicles.

This is not actually a different type of merger. A Cross-border merger a merger involves two companies, both situated and/or operating in different countries. In a study conducted in 2000 by Lehman Brothers, it was found that, on average, large M&A deals cause the domestic currency of the target corporation to appreciate by 1% relative to the acquirer's.

A cross-border merger is a transaction in which the assets and operation of two firms or to companies belonging to or registered in two different countries are combined to establish a new legal entity. In a cross-border acquisition, the control of assets and operations is transferred from a local to a foreign company. And In short we can say that cross-border M&As means cooperative agreements between two or more companies from different national backgrounds, which are intended to benefit all partners.

Cross-Border Merger & Acquisition activity has become a major strategic tool for corporate growth, especially for multinational corporations. Although similar in nature, a cross-border merger differs from a Cross-Border Acquisitions. A cross-border merger is a transaction in which two firms with their home operations in different countries agree to an integration of the companies on a relatively equal basis. Driving the decision on blend operations on an equal basis is the fact that the two companies have capabilities that, when combined, are expected to create competitive advantage that will contribute to success in the global marketplace. A cross-border acquisition is a transaction in which an expanding firm buys either a controlling interest or all of an existing company in a foreign country. Often, the acquired firm becomes a business unit within the acquiring firm’s portfolio of businesses.

A company in one country can be acquired by an entity (another company) from other countries. The local company can be private, public, or state-owned company. In the event of the merger or acquisition by foreign investors referred to as cross-border merger and acquisitions will result in the transfer of control and authority in operating the merged or acquired company. Assets and liabilities of the two companies from two different countries are combined into a new legal entity in terms of the merger, while in terms of acquisition, there is a transformation process of assets and liabilities of local company to foreign company (foreign investor), and automatically, the local company will be affiliated.

Due to the complicated nature of cross border M&A, the vast majority of cross border actions have unsuccessful results. Cross border intermediation has many more levels of complexity to it than regular intermediation seeing as corporate governance, the power of the average employee, company regulations, political factors customer expectations, and countries' culture are all crucial factors that could spoil the transaction. Because of such complications, many business brokers are finding the International Corporate Finance Group and organizations like it to be a necessity in M&A today.

Why companies are Crossing Borders?
Why Multinational companies go for Cross-Border Mergers and Acquisitions. People always talk about the Cross-Border Mergers and Acquisitions but never talks about the strategy behind this Mergers and Acquisitions. Just look at the business history, people easily can see at least four types of growth strategies adopted by the Multinational National Companies.
In first stage company began to start his business in domestic market and try to establish his business in domestic market. After successfully establishment in domestic market in next stage company try to export his goods in foreign market. After successfully export his goods in foreign markets in next stage that company try to establish his subsidiaries in overseas market. And after successfully establish his business in foreign market company finally started the acquiring the companies or any other firms.

So it can be say that any Cross-Border Mergers and Acquisitions is the fourth stage of any company. And this Cross-Border Mergers and Acquisitions are strategy and nothing. Any company who want to establish his company in International market than the company should go for Cross-Border Mergers and Acquisitions. And foreign direct investment plays an important role in cross-Border Mergers and Acquisitions. The increasing magnitude of investment through cross-border mergers and acquisitions and its emergence as a major component of FDI even in the case of developing countries such as India.
Companies engage in merger and acquisition deals for a number of reasons. These reasons could be either operational or financial. For instance, when it comes to growth; a company cannot expect to enhance rapid growth by engaging in internal expansion only. It hence becomes more sensible to embrace business combinations so as to guarantee the balanced growth of a firm. Further, companies pursuing business combination see the same as less risky as well as more cost effective. The reasoning here is that a going concern eliminates a number of risks coupled with costs when it comes to expansion. All in all, the acquisition of or merging with another firm essentially means that companies can attain their planed growth rate at least cost and risk.

There is also the issue of tax shield utilization. This is mostly in the case of a company that is consistently making losses where it becomes in its own interest to merge with another profit making entity so as to make use of its tax shields. A company that makes losses cannot setoff losses against its profits in future as it is not making any profits. It therefore follows that the merger of such a unit with another profit making entity shall mean that the losses which have been accumulated over time for the loss making entity shall be set off against the profits made in future by the profit making entity. It is the tax benefits that accrue in this case that make companies to favor business combinations.
Further, it is important to note that once firms merge, their value increases, that is, the value of the combined unit becomes essentially more than a summation of the entities before the merger deal takes place. This is yet another reason for merger deals.

Motives for Cross-Border M&As
Cross-border acquisitions can provide benefits to acquiring firms that might not be fully realized by their shareholders through cross-country portfolio diversification. Therefore, cross-border acquisitions may increase the value of a firm. From the perspective of FDI, the source of wealth creation of cross-border M&As lies in the advantages of international production. Investment by acquiring foreign assets enables transnational companies to take advantage of the imperfections in factor markets as well as in the international financial markets. Imperfections in the host country’s capital market may allow a multinational acquiring firm to dig out monopolistic returns.

Basically there are two motives for which company are going for Mergers or Acquisitions:-
1. Foreign Direct Investment Motive
2. Financial Motive
The Cross-Border Mergers & Acquisition Process
The process of acquiring an enterprise anywhere in the world has three common elements:
1) Identification and valuation of the target,
2) Completion of the ownership change transaction-the tender,
3) and management of the post acquisition transition
~~~~~~~~~~~~~
# Dr. J.C. Verma, Corporate Mergers Amalgamations & Takeovers, 6th Edition, Bharat Law House, New Delhi, 2009, Page no. 61.
# Dr. J.C. Verma, Corporate Mergers Amalgamations & Takeovers, 6th Edition, Bharat Law House, New Delhi, 2009, Page no. 61.
# T. Ramappa, Competition Law in India- Policy, Issues, and Developments, Oxford University Press, New Delhi, 2006.
# Dr. J.C. Verma, Corporate Mergers Amalgamations & Takeovers, 6th Edition, Bharat Law House, New Delhi, 2009, Page no. 190
# Sangeet Kedia, Corporate Restructuring & Insolvency, published by Pooja Law Publishing Co., New Delhi, 2011, Page no. 14.
# Sangeet Kedia, Corporate Restructuring & Insolvency, published by Pooja Law Publishing Co., New Delhi, 2011, Page no. 14.
# Sangeet Kedia, Corporate Restructuring & Insolvency, published by Pooja Law Publishing Co., New Delhi, 2011, Page no. 13.
# Dr. J.C. Verma, Corporate Mergers Amalgamations & Takeovers, 6th Edition, Bharat Law House, New Delhi, 2009, Page no. 61.
# Sangeet Kedia, Corporate Restructuring & Insolvency, published by Pooja Law Publishing Co., New Delhi, 2011, Page no. 14.
# Dr. J.C. Verma, Corporate Mergers Amalgamations & Takeovers, 6th Edition, Bharat Law House, New Delhi, 2009, Page no. 73.
# Sangeet Kedia, Corporate Restructuring & Insolvency, published by Pooja Law Publishing Co., New Delhi, 2011, Page no. 14.
# Sangeet Kedia, Corporate Restructuring & Insolvency, published by Pooja Law Publishing Co., New Delhi, 2011, Page no. 14.
# Ravindhar Vadapali, Mergers, acquisitions and Business Valuation, excel Books, new delhi, 2010, page no. 77.
# Ravindhar Vadapali, Mergers, acquisitions and Business Valuation, excel Books, new delhi, 2010, page no. 77.
# Ravindhar Vadapali, Mergers, acquisitions and Business Valuation, excel Books, new delhi, 2010, page no. 77.




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