CHAPTER 1: CONCEPTUAL FRAMEWORK
1.1 Definition of Mergers and Acquisitions
Mergers and Acquisitions have always played a
vital role in corporate history, ranging from ‘greed is good’ corporate raiders
buying companies in a hostile manner and breaking them apart, to today’s trend
to use mergers and acquisition for external and industry consolidation (Sherman
& Hart, 2006). The terms mergers and acquisition are often used
interchangeably but it is important to understand the differences between the
two. In the academic literature, there are number of authors, who define merger,
acquisition and takeover differently. According to Sudarsanam (1995), a merger
takes place when two or more corporations come together to combine and share
their resources to achieve common objectives. The shareholders of the combining
firms often remain as joint owners of the combined entity. But according to
Sherman and Hart (2006), a merger is a combination of two or more companies in
which the assets and liabilities of the selling firms are absorbed by the
buying firm. According to Gaughan (2002), a merger is a process in which two
corporations combines and only one survives and the merged corporation ceases
to exist. Sometimes there is a combination of two companies where both the
companies cease to exist and an entirely new company is created.
An acquisition on the other hand, is the
purchase of an asset such as a plant, a division or an entire company.
Sudarsanam (1995) defines acquisition as an ‘arms- length deal’, where one
company purchases the shares of another company and the acquired company is no
longer the owner of the firm.
The
term ‘takeover’ is sometimes used to refer a hostile situation. According to
Gaughan (2002), this happens when one company tried to acquire another company
against the will of the company’s management. But according to Sudarsanam
(1995), a takeover is similar to an acquisition and also implies that the
acquirer is much larger than the acquired.
According
to Gaughan (2002), mergers and acquisition are friendly transactions in which
the senior management of the companies negotiates the terms of the deal and the
terms are then put in front of the shareholders of the target company for their
approval. Whereas in a takeover, a different set of communication takes place
between the target and the bidder, which involves attorney and courts. Bidders
here try to appeal directly to the shareholders often against the r
recommendations of the management. According to Sudarsanam (1995), the
differences between merging and acquiring are very important to consider
valuing, negotiating and structuring the client’s transactions.
‘In
line with common practice’ (Chiplin and Wright, 1988) , terms ‘mergers’ ,
‘acquisitions’ and ‘takeovers’ will be used synonymously in this dissertation.
According to Sherman and Hart (2006), at the end, the differences in the
meaning may not really matter since the result of these processes is often the
same i.e. two companies that had separate ownership are operating under the
same roof, usually to obtain some strategic and financial objective.
1.2 Types of Mergers and
Acquisitions
Brealey and Myers (2004) and Gaughan (2002) in
respect with the economic theory classify mergers and acquisition into three
categories:
1.2.1 Horizontal Merger and
Acquisitions
This
is the combination of two corporations in similar lines of business or between
two competitors. The main reason for merging and acquiring similar business is
with the aim to obtain synergy between the two business units. Apart from this,
other reasons for horizontal M&A’s are to increase the market power,
exploit economies of scale, to diversify through separate markets and provide
different services.
The
level competition in an industry is affected by the increased horizontal
M&A’s and according to the economic theory consumer’s benefit from the increased
competition. Some of the examples of horizontal M & A are JP Morgan and
Chase Bank and Vodafone’s acquisition of Mannesmann.
1.2.2 Vertical Merger and
Acquisitions
These
are combination between companies in same lines of business but different aspects
of production. Vertical M&A may be of two types:
When
a producer acquires a supplier of the raw material in the chain of production,
with the aim of reducing cost of production, it is called backward vertical
integration. When a company buys its vendor, in the direction of its consumer
to reduce marketing and delivering costs, it is called a forward M&A. Some
examples of vertical M&A are acquisition of Kalon Group by Total and Walt
Disney’s acquisition of ABC television network Conglomerate Merger and Acquisitions.
This is a combination of companies with different or unrelated fields of
business. These companies neither are related nor they are competitors The main
motives for conglomerate M&A are efficient capital allocation and the
reluctance to distribute cash flows to the company’s shareholders Companies
also seek diversification of risks and entry to a new emerging market through
this type of acquisition (Marks and Mirvis , 1998). Some examples of
conglomerate M&A are acquisition of General Foods by Philip Morris and the
acquisition of NCR by AT&T’s. Cartwright and Cooper (1992) make a
distinction of one more category called the concentric merger, which is
acquisition of the dissimilar but associated field of business in which the
buying company looks forward to expansion.
1.3 Mergers: Key Corporate and
Securities Laws Considerations.
A.
COMPANIES ACT, 1956.
Sections
390 to 394 (the “Merger Provisions”) of the Companies Act govern a merger of
two or more companies (the provisions of Sections 390-394 are set out in
Annexure 1 for reference) under Indian law. The Merger Provisions are in fact
worded so widely, that they would provide for and regulate all kinds of
corporate restructuring that a company may possibly undertake; such as mergers,
amalgamations, demergers, spin-off hive off, and every other compromise,
settlement, agreement or arrangement between a company and its members and/or
its creditors. Since a merger essentially involves an arrangement between the
merging companies and their respective shareholders, each of the companies
proposing to merge with the other(s) must make an application to the Company
Court (the ‘ Court’) having jurisdiction over such company for calling meetings
of its respective shareholders and/ or creditors. The Court may then order a
meeting of the creditors/shareholders of the company. If the majority in number
representing 3/4th in value of the creditors/shareholders present
and voting at such meeting agrees to the merger, then the merger, if sanctioned
by the Court, is binding on all creditors/shareholders of the company. The
Court will not approve a merger or any other corporate restructuring, unless it
is satisfied that all material facts have been disclosed by the company. The
order of the Court approving a merger does not take effect until a certified
copy of the same is filed by the company with the Registrar of Companies. The
Merger Provisions constitute a comprehensive co de in themselves, and under
these provisions Courts have full power to sanction any alterations in the
corporate structure of a company that may be necessary to affect the corporate
restructuring that is proposed. For example, in ordinary circumstances a
company must seek the approval of the Court for effecting a reduction of its
share capital. However, if a reduction of share capital forms part of the
corporate restructuring proposed by the company under the Merger Provisions,
then the Court has the power to approve and sanction such reduction in share
capital and separate proceedings for reduction of share capital would not be
necessary. Section 394 vests the Court with certain powers to facilitate the
reconstruction or amalgamation of companies, i.e. in cases where an application
is made for sanctioning an arrangement that is: for the reconstruction of any
company or companies or the amalgamation of any two or more companies; and
under the scheme the whole or part of the undertaking, property or liabilities
of any company concerned in the scheme (referred to as the ‘transferor company’
) is to be transferred to another company (referred to as the transferee
company’). Section 394 (4) (b) makes it clear that: a ‘transferor company’
would mean any body corporate, whether or not a company registered under the
Companies Act (i.e. an Indian company), implying that a foreign company could
also be a transferor, and a ‘transferee company’ would only mean an Indian
company. Therefore, the Merger Provisions recognize and permit a
merger/reconstruction where a foreign company merges into an Indian company.
But the reverse is not permitted, and an Indian company cannot merge into a
foreign company.
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