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COMPARATIVE ANALYSIS OF MERGER AND ACQUISITION

By Anushri Maskara on May 22, 2020

Corporate Restructuring

Prof. Ian Giddy (NYU Stern School of Business) defined corporate restructuring as any fundamental change in a company’s business or financial structure, designed to increase the company’s value to shareholders or creditor. In practice, the factors driving restructuring have extended to technology and market as well.

A restructuring may be organic, i.e., revising and adopting internal strategies within an organization without altering the form of a corporate entity (for example – restructuring the debt-equity ratio of a company), or inorganic, i.e., undergoing change via merger, acquisition, joint venture (“JV”), strategic alliance, etc., and encompasses change in the corporate entity (for example – Flipkart-Myntra merger, Uber acquiring Careem, Vistara Airlines that is a JV between Tata and Singapore Airlines).

A Way of Life for Corporations

Corporate Restructuring (“restructuring”) has become a lifestyle for corporations across the globe to survive and grow in a market which practices “survival of the fittest”. Till date, the Vodafone-Mannesman merger worth USD 180.95 billion, executed in 2000, prevails to be the largest deal.

In 2019, the United Technologies-Raytheon merger, for the value of approximately USD 88.9 billion, was not only largest merger deal of the year, but also resulted in the biggest defence sector merger. The acquisition of Worldpay by FIS, in 2019, for USD 35 billion has been declared to be the largest amalgamation of the year.

According to the reports of Mergermarket, 2019 had already observed a decline in the M&A activity by 6.9% when compared to the exceptional 2018. Unfortunately, the novel coronavirus has, along with battering the world economy, slammed the merger and acquisition (“M&A”) market further in 2020. Baker McKenzie issued its fifth annual Global Transactions Forecast, jointly prepared with Oxford Economics, which depicted a decline in the M&A deal value by USD 700 billion. With all the sectors witnessing a bearish trend, COVID-19 has turned the spotlight on the healthcare industry which is experiencing a surge in the investor support and deal-making so much so that the industry is outperforming the broader market.

But what makes the companies go for corporate restructuring, especially a merger or an acquisition? Generally speaking, the ultimate objective of pursuing either is geographical expansion, diversification, economies of scale and enhanced profits. In the longer run, the ultimate decision hinges upon their vision, the benefits they intend to derive from such restructuring andthe form of deal structure the participating entities are inclined to forge.

Despite umpteen mergers and acquisitions, we have often seen the terms ‘merger’ and ‘acquisition’ being used interchangeably. Legally speaking, they are two distinct inorganic corporate restructuring strategies with distinct governing laws, requisites and implications.

Definition

Merger

Acquisition

Merger is a form of restructuring in which two or more entities merge into an existing entity or form a new entity.

In the former, the merging entities undergo dissolution without winding up and all the properties, liabilities and undertaking are transferred to the resulting entity.

In the latter, all the entities under dissolution without winding up and their properties, liabilities and undertaking are transferred to the new entity.

Acquisition is a form of restructuring wherein a company acquires control over the management over the target company.

The two companies continue to have their individual legal existence as they did prior to the acquisition, with the only difference that the management of the target company is under the influence of that of the acquiror company.

Parties

Merger

Acquisition

In a merger, at least two parties are involved:

An entity that is absorbed into another is known as Transferor Company.

An entity that absorbs the transferor companyis known as Transferee Company. It is the resulting entity.

Generally speaking, the transferor company is a weaker company whereas the transferee company is the stronger one.

In an acquisition, there are two parties involved in a transaction:

An entity that is acquired by another is known as Target Company.

An entity that acquires the target company is known as Acquiror.

Post acquisition, the management of the Acquiror exercises control over that of the Target Company.

Types

Merger

Acquisition

  • Common Industry

Horizontal Merger:

Merger between two or more competing entities, i.e., the parties to the merger are producing the same products or rendering the same services. (HP and Compaq)

Vertical Merger:

Merger between two or more complementary companies that are operating in the same industry, but at different level in the supply chain.

It may be Forward Integration (merger with the distribution or marketing channels, e.g. – Yash Raj Films and Yash Raj Music) or Backward Integration (merger with the supplier of raw materials, e.g. – Kirloskar Brothers and Kirloskar Ferrous)

Cogeneric Merger:

Merger between companies that are in same industry but do not offer same products. (e.g. – Citigroup and Travelers Insurance- USA)

  • Different Industry (a.k.a. Conglomerate Merger):

Merger between unrelated entities, i.e., those functioning in different industries. (Reliance Industries Limited and Network 18)

Friendly Takeover:

Takeover by acquiror with the consent of the target company (Facebook acquiring WhatsApp - USA),

Hostile Takeover:

Takeover by the acquiror by directly approaching the shareholders of the target company without putting forth any proposal to its management (KKR acquiring RJR Nabisco - USA).

Bail Out Takeover:

Takeover of a financially sick company by a profit earning company (PNC Financial acquiring National CityCorp to bail the latter from a potential bankruptcy - USA).

 

Purpose

Merger

Acquisition

  • Financial management
  • Technological benefits
  • Strong brand name
  • Managerial expertise
  • Legal compliance – For example, if an NBFC is finding it difficult to comply with the minimum net-worth requirements within the prescribed time period, such a company may merge with another NBFC to adhere by the regulations.
  • No gestation period
  • Diversification and globalization
  • Market Leadership
  • Economies of scale
  • Synergy
  • Enhanced market share of the target company
  • Improving the target company’s performance
  • Diversification
  • Technological benefits
  • Geographical expansion
  • Economies of scale
  • Synergy

 

Compliance

Merger

Acquisition

  • Companies Act, 2013
  • Companies (Compromises, Arrangements and Amalgamations) Rules, 2016
  • Competition Act, 2002 and Combination Regulations
  • Income Tax Act, 1961
  • Stamp Duty Act

In addition to above, where one of the entities involved in merger is a listed company, it shall comply with the following legislations and regulations:

  • SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015
  • SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011
  • SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2009

In case the resulting entity is to be delisted, SEBI (Delisting of Equity Shares) Regulations, 2009 shall be applicable.

In case cross border mergers, the provisions of the following regulations shall apply:

  • Foreign Exchange Management (Cross Border Merger) Regulations, 2018
  • Foreign Exchange Management (Transfer or Issue of Security by a Person resident outside India) Regulations, 2017
  • Foreign Exchange Management (Transfer or Issue of any Foreign Security) Regulations, 2004

In case the merger is between entities functioning in a particular sector, the provisions of the regulations governing that particular sector shall also be applicable, for example Insurance Regulatory and Development Authority of India Act, 1999, Telecom Regulatory Act of India, 1997, etc.

  • Companies Act, 2013
  • Companies (Compromises, Arrangements and Amalgamations) Rules, 2016
  • Competition Act, 2002
  • Income Tax Act, 1961
  • Stamp Duty Act

In addition to above, where the target company is listed on a stock exchange, the acquisition shall comply with the following legislations and regulations:

  • SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011.
  • SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015

 

 

Approvals 

Merger

Acquisition

  • Board of Directors and Shareholders of the entities involved in the transaction.
  • National Company Law Tribunal
  • Competition Commission of India
  • Income Tax Department
  • Stamping authority

In addition to above, a listed company requires the approval of following authorities:

  • Securities and Exchange Board of India
  • Stock Exchange (where the entity is listed)

In case of cross border merger, the merger shall be approved by Reserve Bank of India.

In case the merger is between entities functioning in a particular sector, the merger shall be approved by respective sectoral authorities, for example Insurance Regulatory and Development Authority, Telecom Regulatory Act of India, etc.

  • Board of Directors and Shareholders of the entities involved in the transaction.
  • National Company Law Tribunal
  • Competition Commission of India
  • Income Tax Department
  • Stamping authority

In addition to above, a listed company requires the approval of following authorities:

  • Securities and Exchange Board of India
  • Stock Exchange (where the entity is listed)

 

Procedure

Merger

Acquisition

Section 232 of the Companies Act, 2013

Where one or more transferor companies are transferred to an existing company, it is merger by absorption whereas where two or more companies merge to form a new company, it is merger by formation of a new company.

For a merger transaction, an application, specifying that the scheme involves a merger, shall be made to the Tribunal.

Upon receipt of such application, the Tribunal may order a meeting of the creditors or members or any class thereof, which shall be conducted as per the directions of the Tribunal.

For the purpose of the meeting, the merging companies shall circulate:

  • the draft terms and conditions (as approved by the Board of Directors) of the proposed scheme
  • the confirmation that a copy of draft scheme has been filed with the Registrar of Companies
  • a report explaining the effect of the scheme on each class of shareholders, promoters, etc.
  • a valuation report
  • a supplementary accounting statement.

The notice, along with the aforementioned documents, of such a meeting shall be issued to creditors, members or any class thereof and debenture-holders of the company. At such a meeting, persons representing not less that three-fourths of the value of creditors or members or class thereof shall approve such an arrangement.

A copy of such notice, to seek representations, shall also be sent tothe regulatory authorities such as the Central Government, the Reserve Bank of India, the Competition Commission, etc. likely to be affected by the transaction.

On compliance with the disclosure requirements, the Tribunal may sanction the arrangement along with certain directions, such as legal proceedings, dissolution of the transferor company, provisions for dissenting persons, etc., as it may deem fit.

The transfer of the assets, property and liability shall take place as per the Tribunal order.

A certified copy of the Tribunal order shall be filed for registration with the Registrar of Companies within 30 days of the receipt of order. The scheme shall be effective from the appointed date as indicated in it.

 

 

Takeover in case of a closely held company:

Section 235 of the Companies Act, 2013

For an acquiror to acquire the shares of the dissenting shareholders under a scheme / contract, approved by the majority,following are the requisites:

  1. The scheme must be approved by at least 90% of shareholders of the target company in value, excluding the shares already held by the acquiror.
  2. A notice, expressing the intent to acquire their shares, shall be issued to the dissenting shareholders.

Upon issuance, the acquiror is entitled to acquire the shares of the dissenting shareholders in conformity with the terms as the shares of the approving shareholders had been acquired.

If the dissenting shareholders file an application to the Tribunal for setting aside the scheme, and the Tribunal has not ordered to the contrary, the acquiror shall issue a copy of notice, together with the instrument of transfer and consideration payable to the dissenting shareholders. Upon receipt, the target company shall register the acquiror as the holder of its shares and inform the dissenting shareholders about the transfer and receipt of consideration.

The target company shall transfer the consideration received in a separate bank account and disburse the same to the respective dissenting shareholders within 60 days of such receipt.

Takeover in case of a listed company

  1. Theacquirorshall appoint a Manager to the Open Offer (“Manager”) before making PA of the open offer.
  2. On crossing the threshold limits, the Manager, on behalf of acquiror, shall make two announcements, PA and Detailed Public Statement (“DPS”), for the open offer to the shareholders of the target company.
  3. The acquiror shall, at least two days before the DPS, open an escrow account to serve as a security for the performance of the obligations to carry out the takeover.
  4. Within five working days form the date of issuing DPS, the acquiror, through the Manager, shall file with SEBI a draft Letter of Offer (“LoO”).
  5. The acquiror shall dispatch, within seven working days from, either the receipt of comments from SEBI or where no comments has been received, expiry of fifteen working days from the date of receipt of the draft LoO by SEBI, the LoO to the shareholders.
  6. Tendering period shall commence within twelve working days from either the date of receipt of comments from SEBI, or where no comments has been received, the expiry of fifteen working days from the date of receipt of the draft LoO by SEBI.
  7. Within ten working days from the expiry of tendering period, the acquiror shall pay the consideration to the shareholders, who have accepted the offer, through the escrow.
  8. The acquiror shall issue a post-offer advertisement in the newspapers in which DPS was published.

An acquisition that triggers an open offer obligation must be completed within 26 weeks after the conclusion of offer period. If the acquisition could not be completed within the specified period, SEBI may grant an extension if it deems fit in the interest of the investors.

Implications

Merger

Acquisition

The assets and liabilities of the Transferor company become the assets and liabilities of the Transferee company.

The assets and liabilities of the acquiror and target company continue to remain in the balance sheet of respective entities.

The shareholders of the Transferor company are issued all the shares, as per the share exchange swap ratio, of the Transferee company to become the shareholders of the latter.

The acquiror purchases a majority of the shares, as per the share exchange ratio, of the target company to acquire control over the latter.

The entities involved in the transaction either merge into an existing entity (DIL-Fermenta merger to form Fermenta Biotech Ltd.) or form a new entity (Citicorp-Travelers Group merger to form Citigroup - USA).

The acquiror and the target company continue to have legal existence post acquisition.

One or more entities participating in the transaction are dissolved.

None of the participating entities are dissolved.

Two or more entities merge into a single entity with new ownership and management structure.

The acquiror and the target company have distinct management, but the former has the control over the management of the latter.

Conclusion

While the terms ‘merger’ and ‘acquisition’ may be used synonymously, the procedure and legal implications of the two forms of corporate restructuringis very distinct. The corporate entities must weigh their objectives of executing the transaction and the desired output before proceeding with either. Such transactions demand heavy investment, not only in monetary terms, but also in terms of time, effort and human resources, and they tend to have a long term impact over the sustenance and growth of the company.

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