Mergers and Acquisitions PDF

Unit II: Mergers and Acquisitions 1  Motives behind M&A  Theories of M&A,  Process of M&A  Fast track merger.  Cross border M&A:  concept,  benefits &  difficulties.  Due diligence process.  Methods of payment and financing options in M&A  Takeover defense t...

Unit II: Mergers and Acquisitions 1  Motives behind M&A  Theories of M&A,  Process of M&A  Fast track merger.  Cross border M&A:  concept,  benefits &  difficulties.  Due diligence process.  Methods of payment and financing options in M&A  Takeover defense tactics  Reasons for failure of M&A 11-10-2024  Genesis of Merger and Acquisition 2 11-10-2024  Genesis of Merger and Acquisition Name: T.J.A. Nouwen – s685341 Supervisor: E. Pikulina Course: Bachelor Thesis Date: 27-05-2011 3 11-10-2024  Genesis of Merger and Acquisition 4  First wave, 1897–1904  Second wave, 1916–1929  Third wave, 1965–1969  Fourth wave, 1984–1989  Fifth wave, 1992–2001  Sixth wave, 2004–2007 Source: Mergers, Acquisitions, and Corporate Restructurings, Seventh Edition. Patrick A. Gaughan. © 2018 John Wiley & Sons, Inc. Published 2018 by John Wiley & Sons, Inc. doi:10.1002/9781119380771.ch2 11-10-2024  Theories of Mergers and Acquisitions 5 Merger by Rational Choice  Efficiency theory  Monopoly theory  Raider theory Beneficial to SH  Valuation theory  Empire building theory Beneficial to managers of Acquiring Company  Process theory  Disturbance theory Friedrich Trautwein “Merger Motives and Merger Prescription” 11-10-2024  Theories of Mergers and Acquisitions 6 Efficiency Theory M&A are planned and executed to achieve synergies thereby adding to enterprise valuation. 11-10-2024  Theories of Mergers and Acquisitions 7 Synergy Mergers are driven by synergy Synergy refers to the type of reactions that occur when two substances or factors combine to produce a greater effect together than that which the sum of the two operating independently could account for. The ability of a combination of two firms to be more profitable than the two firms individually. In this companies can create great shareholders value than if they are operated separately. There are two types of synergy:  Revenue generating synergies  Cost reduction synergies 11-10-2024  Theories of Mergers and Acquisitions 8 Synergy There are two types of synergies:  Revenue generating synergies: which generates much higher growth rate and turnover than the individual companies growth rates during independent operations. Tough to achieve  Cost reduction synergies: if combined operations result in cost savings in any of the areas viz., manufacturing, marketing, operations, manpower, corporate overheads, etc. ❑ Estimated synergies fail to materialize ❑ Knowingly overestimating synergies 11-10-2024  Theories of Mergers and acquisitions 9 Revenue generating Synergy example: ICICI merger with ICICI bank. 11-10-2024  Theories of Mergers and Acquisitions 10 Efficiency Theory There are five types of synergies: Operating synergy Financial synergy Manufacturing synergy Marketing synergy Tax synergy 11-10-2024  Theories of Mergers and acquisitions 11 Operating synergy Operating synergy is improved by Economies of scale and Economies of scope. Economies of scale: reduction of average cost with increase in volume or production. Horizontal Merger eliminates duplication of activity. Vertical mergers bring in economies of scale by acquiring control over the supplier and distribution. Warehouses, transportation facilities, software and common services, like accounts and finance, tax, HR, administration etc. Eg.: Jet Airways acquired Sahara Airlines 11-10-2024  Theories of Mergers and acquisitions 12 Economies of scope Average total cost of production decreases as a result of increasing the number of different goods produced. Currently employed set of skill or an asset can better be utilised to achieve economies of scope. Eg.: Kleenex has achieved economies of scope through the diversification of its simple tissue paper. The company expanded its product line to service numerous, unrelated end users, such as consumers and hospitals, all of which required a unique type of paper product. 11-10-2024  Theories of Mergers and acquisitions 13 Financial Synergy This means that debt capacity of two combined firm will be larger than summation of debt capacities of two individual firms. Financial synergy also arises from credit rating of both the firms, tax differential of both the firms, proportion of use of internal and external funds. Weighted average cost of capital can be reduced with financial synergy. Better gearing ratio or improved financial parameters. Eg.: Merger of Reliance Petrochemicals with Reliance Industries 11-10-2024  Theories of Mergers and acquisitions 14 Manufacturing Synergy It involves combining core competence of the acquirer company and target company in the different areas of manufacturing, technology, design and development, procurement, etc. It also mean rationalizing usage of the combined manufacturing capacities. Eg.: Tata steel taking over Corus (2007) – 76 million benefits. 11-10-2024  Theories of Mergers and acquisitions 15 Marketing Synergy Involves using either common sales force, or distribution channel or media to push the products and brands of both the acquirer and target companies at lower costs than the sum total of costs the two companies would incur in independent marketing operations. It can also involve leveraging on the brand equity of one of the two companies to push the sale of the other companies products. Eg.: HLL acquiring Lakme brand and its cosmetics business. 11-10-2024  Theories of Mergers and acquisitions 16 Tax synergy Involves merging a loss making company with a profitable one so that the profitable company against its profits of the profit making company. 11-10-2024  Theories of Mergers and Acquisitions 17 Merger by Rational Choice  Efficiency theory  Monopoly theory  Raider theory Beneficial to SH  Valuation theory  Empire building theory Beneficial to managers of Acquiring Company  Process theory  Disturbance theory Friedrich Trautwein “Merger Motives and Merger Prescription” 11-10-2024  Theories of Mergers and Acquisitions 18 Monopoly Theory M&A are planned and executed to achieve market share and market power, at times including pricing power. Monopoly theory works in three ways 1. Market leaders trying to consolidate their position further 2. Profitable and cash rich companies trying to gain market leadership 3. Market entry strategy Eg.: Mittal Steel acquiring Arcelor Tata Steel acquiring Corus – 56 - 5th place Vodafone acquisition of Hutchison 11-10-2024  Theories of Mergers and Acquisitions 19 Valuation Theory M&A are planned and executed by the acquirer who has better information about the valuation of the target than the stock market as a whole and who estimates the real intrinsic value to be much higher than the present market capitalisation of the company. 11-10-2024  Theories of Mergers and Acquisitions 20 Raider Theory M&A activity in the specific context of PE funds where the acquirer acquires controlling stake in cash needy companies at much lower valuation than potential valuation or even present valuation, just to transfer the wealth from existing shareholders to themselves without any strategic intent of running these companies themselves. 11-10-2024  Theories of Mergers and Acquisitions 21 Empire Building Theory M&A are planned and executed by the managers for expanding their own empire rather than creating shareholder wealth. 11-10-2024  Theories of Mergers and Acquisitions 22 Process Theory M&A are the outcome of a process. Theory views mergers as strategic decisions not as comprehensive rational choices but as outcomes of processes influenced by decision process, organisational routine and political power. 11-10-2024  Theories of Mergers and Acquisitions 23 Disturbance Theory M&A are macroeconomic phenomenon. Theory views merger waves are caused by economic disturbances. 11-10-2024  Theories of Mergers and Acquisitions 24 Differential Managerial Efficiency It is also called managerial synergy or managerial efficiency. If the management of one firm is better or efficient than the other and if better firm acquires the other firm the efficiency of the second firm is brought upto the level of efficiency of firm A. Efficiency is increased by merger.  Basis for horizontal merger 11-10-2024  Theories of Mergers and Acquisitions 25 Inefficient Management Theory This is similar to the concept of managerial efficiency but both are different in concept. The management of the company is not able to manage asset efficiently. Merger with another efficient firm provide the necessary managerial capabilities.  Basis for conglomerate merger. 11-10-2024  Theories of Mergers and Acquisitions 26 Target is not always inefficient. But only relatively inefficient. Hence, mergers is driven by differential efficiency between the target and bidder management. 11-10-2024  Theories of Mergers and acquisitions 27 Diversification Diversification may have risk reducing effect on overall business portfolio. It is undertaken to shift from the acquiring company core product line or market into those that have higher growth prospect. Demand for diversification may be by managers, employees, for preservation of organisation, reputation and capital. 11-10-2024  Theories of Mergers and acquisitions 28 Strategic Realignment to Changing Environment It suggests that the firms use the strategy of M&As as ways to rapidly adjust to changes in their external environments in regulatory framework and technological innovation. When a company has an opportunity of growth available only for a limited period of time slow internal growth may not be sufficient. Technical changes contributes to new products, industries, market. The use of IT is likely to encourage mergers which are less expensive and faster way to acquire new technology and owner knows that how to fill a gap in current offering or to entering new business. Due to dynamically changing environment, mergers provide perhaps fastest route to respond the changes in industry and market. 11-10-2024  Theories of Mergers and acquisitions 29 Hubris Hypothesis Hubris hypothesis implies that managers look for acquisition of firms for their own potential motives and that the economic gains are not the only motivation for the acquisitions. 11-10-2024  Theories of Mergers and acquisitions 30 Information and signaling The announcement of mergers negotiation or a tender offer may convey information or signals to market participants that future cash flows are likely to increase and that future will increase in future values. There are two versions of this theory: First, the tender offer by a bidder itself signifies undervaluation and lead to revaluation of shares by market. Second, the offer itself inspires the target to implement more powerful strategy. The tender offer on target firm signals that there is a untapped potential in the target. 11-10-2024  Theories of Mergers and acquisitions 31 Market Power / Share Mergers are initiated by dominating the market. Increased relative market share of the bidder provides it a potential to realize monopoly gains. Mainly mergers are undertaken to improve ability to set and maintain prices above competitive level. Increase in the size of the firm is expected to result in bigger market share. The decrease in the number of firm will increase recognized interdependence. 11-10-2024 32 11-10-2024  Theories of Mergers and acquisitions 33 Agency problem Takeover and mergers would be a threat because of inefficiency or agency problem. When it takes place where there is a divergence between the goals of management and owners. 11-10-2024  Theories of Mergers and acquisitions 34 Managerialism Managers may increase the size of the firm through mergers in the beliefs that their compensation is determined by size but in practice management compensation is determined by profitability. Managers initiate mergers to gain private benefits from the transaction irrespective of loss (or loss of profit) to the shareholders. Managers also tend to involve in mergers as they tend to be arrogant or overconfident about the success of the deal and land up entering into often inefficient transactions. 11-10-2024  Theories of Mergers and acquisitions 35 Tax credit and concessions Unused net operating loss of the target company and the revaluation or writing up of acquired asset and the tax free status of the deal influence M&A. Loss carry forward can be setoff against the combined firm taxable income. This means, firms with tax losses provide an opportunity to bidder with high taxable gains to reduce net tax liability through merger. Besides, merging of high growth firm with a mature firm may lead to conversion of dividend (ordinary income) into capital gain. This is helpful when there is substantial tax rate differential between dividend and capital gain. 11-10-2024  Theories of Mergers and acquisitions 36 Undervaluation This means the target is generally undervalued by the market. This may not be due to inefficiency of the target and that is what differentiate this theory from the inefficiency theory. The undervaluation may be only due to non-release of private information which only the bidder have at that point of time. 11-10-2024  Legal framework for Mergers and Acquisitions 37 Approvals in Scheme of Amalgamation  Approval of Board of Directors  Approval of Shareholders / Creditors  Approval of the Stock Exchanges  Approval of Financial Institutions  Approval from the Land Holders  Approval of the Tribunal  Approval of Reserve Bank of India  Approval from Competition Commission of India (CCI) 11-10-2024  Steps Involved in a Merger- A Flow Chart 38 11-10-2024 Steps Involved in a Merger- A Flow Chart Contd. 39 11-10-2024 Steps Involved in a Merger- A Flow Chart Contd. 40 11-10-2024 Steps Involved in a Merger- A Flow Chart Contd. 41 11-10-2024 42 Fast track Merger 11-10-2024  FTMs Historical Background 43  Companies Act, 1956 did not provide a simple procedure for M&As of certain type of companies.  It prescribed a cumbersome and time-consuming process for all companies irrespective of their size, net worth and turnover.  The legal provisions pertaining to merger process were stipulated in sections 391-394 of the Companies Act, 1956.  This procedure was perceived to be very confusing, complex and time-taking by all stakeholders involved in the process.  The process involved, inter alia, drafting a merger scheme, taking judicial approval for the scheme, getting Board and shareholders authorization etc. It defeated the very purpose for which mergers were entered into and proved to be a deterrent for companies looking for collaborations, rather than a facilitator. 11-10-2024  Legal Regime behind Fast Track Mergers 44 Section 233 of the Companies Act, 2013 has introduced the concept of fast track mergers. It carved out an exception from the regular merger procedure. It exempted small companies and holding and subsidiary companies entering into merger arrangements from the regular merger procedure as stipulated under sections 230-232 of the Companies Act, 2013. Section 233 of the Companies Act, 2013 along with Rule 25 of the Companies (Compromises, Arrangements and Amalgamations) Rules, 2016 lay down the entire legal framework of fast track mergers. 11-10-2024  Need 45 The following benefits were offered: Simplified procedure for merger No judicial approval required Separate procedures for certain type of companies would enable them to expand without any roadblocks Form filings required also significantly reduced 11-10-2024  Holding Company 46 Section 2(46) of the Companies Act, 2013 describes holding company as:  “holding company in relation to one or more other companies, means a company of which such companies are subsidiary companies.” Explanation: For the purpose of this clause, the expression ‘company’ includes any body corporate. Wholly owned subsidiaries (WOS): This is a company whose 100% shares are owned by its holding company. 11-10-2024  Subsidiary Company 47 “subsidiary company” or “subsidiary”, in relation to any other company means a company in which the holding company— i. controls the composition of the Board of Directors; or ii. exercises or controls more than one-half of the total share capital or total voting power either at its own or together with one or more of its subsidiary companies 11-10-2024  Small Companies 48 “Small Company” u/s 2(85) of the Companies Act, 2013 is defined as: “Small company’’ means a company, other than a public company, i. paid-up share capital of which does not exceed fifty lakh rupees or such higher amount as may be prescribed which shall not be more than ten crore rupees; and ii. turnover of which as per profit and loss account for the immediately preceding financial year does not exceed two crore rupees or such higher amount as may be prescribed which shall not be more than one hundred crore rupees: Provided that nothing in this clause shall apply to, A. a holding company or a subsidiary company; B. a company registered under section 8; or C. a company or body corporate governed by any special Act; 11-10-2024  Small Companies 49 The following are the features of a small company:  A small company is essentially a private limited company and not a public company.  Paid-up share capital does not exceed 50 lakh rupees  Turnover does not exceed 2 crore rupees  It is not a holding or subsidiary company  It is not a company or body governed under any special Act  It is not a company formed for charitable purposes (company within the meaning of section 8 of the Companies Act, 2013). 11-10-2024  Procedure of Fast Track Merger Flowchart 50 Meeting of Board Filing of Filing of Declaration members Approval of approval of scheme approved of solvency and scheme scheme with RD scheme creditors 11-10-2024  Steps involved in Fast Track Mergers 51 The following steps need to be followed in a fast track merger: 1. First of all, both the companies need to check their Articles of Association (AoA) and assess if they have the requisite authority under them to enter into a merger. If no, then the AoA need to be amended before such merger can take place. 2. Convene the Board Meeting and prepare a draft scheme of merger or amalgamation. 3. Prepare a financial statement of assets and liabilities and get an auditor’s report prepared. 4. Get the draft scheme approved in the Board Meeting. 5. Both the companies need to send a notice to the Registrar of Companies (RoC) and Official Liquidator (OL) of their respective regions inviting suggestions/objections to the scheme, if any within 30 days of issuing the notice. 11-10-2024  Steps involved in Fast Track Mergers 52 6. Such notice to the RoC should be in Form CAA 9 and have the following attachments: Copy of the scheme Shareholding pattern of the transferee pre and post- merger Last 3 years audited financial statements Memorandum and Articles of Association Board Resolution l Valuation Report 7. Both the companies are required to file a declaration of solvency with their respective ROCs. This declaration of solvency shall be accompanied by the following: Board Resolution Statement of Assets and Liabilities Auditors Report 11-10-2024  Steps involved in Fast Track Mergers 53 8. Sending notice of shareholders’ meeting and creditors’ meeting. 9. Conducting the shareholders’ meeting and getting the scheme approved. 10. Conducting creditors’ meeting and getting the scheme approved. 11. Filing of the results of each meeting with the Regional Director and the Official Liquidator by the transferee company. 12. Objections/Suggestions to be sent to the Regional Director by the RoC/Official Liquidator. 13. Regional director may file an application with the Tribunal if he is of the opinion that the scheme is against public interest. 14. The Tribunal can approve or disapprove the scheme. 15. If approved it shall be filed with the RoC of the transferee company and the transferor company respectively. 11-10-2024  Procedural Aspects of Fast Track Mergers 54 Forms Who shall be required Procedure Timeline required to comply Convene a Board Meeting: NA NA Both the transferor The board meeting shall approve the and the transferee scheme and pass resolutions for holding companies are and fixing date and time for a required to comply. shareholder and a creditors meeting. Notice of the Proposed Scheme: To be Form CAA Both the transferor The notice of the proposed scheme is to done 9 and the transferee be sent to the Registrar where after the companies are registered offices of both the companies Board required to comply. are situated. The notice shall invite meeting. objections/ suggestions, if any, from the respective registrars. 11-10-2024  Procedural Aspects of Fast Track Mergers 55 Forms Who shall be required Procedure Timeline required to comply Declaration of solvency: This is to be Form CAA Both the transferor Both the companies are required done before the 10 and the transferee to file a declaration of solvency meeting of companies are with the ROC of the place where shareholders or required to comply. their registered offices are the meeting of situated. creditors is convened. 11-10-2024  Procedural Aspects of Fast Track Mergers 56 Forms Who shall be required Procedure Timeline required to comply Convening a Meeting of Notice should NA Both the transferor Members: be sent 21 days and the transferee A notice convening a meeting of prior to the companies are the members or shareholders of meeting. required to comply. the company should be sent to all the members. This notice should contain, the details of the merger, copy of the scheme and a copy of the declaration of solvency. The objections/suggestions received by the company from the registrar would be discussed and voted upon in this meeting. 11-10-2024  Procedural Aspects of Fast Track Mergers 57 Forms Who shall be required Procedure Timeline required to comply Convening a Meeting of Creditors: Notice should NA Both the transferor A notice convening a meeting of be sent to the and the transferee the creditors of the company creditors 21 companies have to should be sent to all the creditors. days before comply. This notice should contain, the the meeting. details of the merger, copy of the scheme and a copy of the declaration of solvency. The scheme is to be approved by a majority that is nine-tenths in value of the creditors or class of creditors of the respective companies. 11-10-2024  Procedural Aspects of Fast Track Mergers 58 Forms Who shall be required Procedure Timeline required to comply Filing of the Scheme: Within 7 days Form CAA Only transferee A copy of the scheme along with of the meeting 11 company is required to the results of all the meetings shall of creditors. Form GNL comply. be filed with the regional director. 1 A copy of the scheme along with Form CAA 11 is also required to be formed with the ROC and the Official Liquidator. The former shall be filed in Form GNL1 and the latter shall be hand-delivered or sent through speed post or registered post. 11-10-2024  Procedural Aspects of Fast Track Mergers 59 Who shall Time Forms Procedure be required -line required to comply Approval of the Scheme by Regional Director: NA NA NA If the ROC or the Official Liquidator approves the scheme then the regional director shall register the same and issue a confirmation. If the ROC or Official Liquidator have objections then they may communicate the same to the Regional Director. The Regional Director, if is of the opinion that the scheme is not in public interest then it may file an application in Form CAA 12 before the Tribunal, to consider the scheme under section 232 (regular merger process). If the Tribunal is of the opinion that the scheme should be considered under section 232 it should direct accordingly otherwise the scheme shall be approved. 11-10-2024  Procedural Aspects of Fast Track Mergers 60 Forms Who shall be required Procedure Timeline required to comply Filing the confirmation order with Within 30 days Form INC- Both the transferor the ROC: of the receipt 28 and the transferee A copy of the confirmation of the of the companies are scheme approved by the ROC or the confirmation required to comply. Official Liquidator should be sent to of the scheme. the Registrar where the transferee’s registered office is situated. The registrar shall register the scheme and issue a confirmation which shall then be filed with ROC of the place where the transferor’s registered office is situated. 11-10-2024 61 11-10-2024  Cross-border Merger and Acquisitions 62 International mergers and acquisitions are also termed as global M&A or cross-border M&A. These M&A refer to those M&A that are taking place beyond the boundaries of a particular country. Home Country: State of origin of the company(s) that make an acquisition (the acquiring company) in other countries. Host Country: Country(s) where the target company is situated. 11-10-2024  Cross-border Merger and Acquisitions 63 Cross border Mergers and Acquisitions are deals between foreign companies and domestic firms in the target country. Or M&A of companies that have headquarters in two different countries. Or M&A of companies with headquarters in same country but branches across the world. 11-10-2024  Asia-Pacific Economic Cooperation (APEC) 64 Cross-border M&As are defined here as any transactions in assets of two firms belonging to two different economies. Therefore, cross-border M&As can take place between two firms located in different economies, or within one economy between two firms belonging to two different economies. 11-10-2024  Cross-border Merger and Acquisitions 65  A cross border merger refers to any merger, amalgamation or arrangement between an Indian company and foreign company in accordance with Companies (Compromises, Arrangements and Amalgamations) Rules, 2016 notified under the Companies Act, 2013.  Section 234 of the Companies Act, 2013 notified by the Ministry of Corporate Affairs provides the legal framework for cross border mergers in India. This has been brought into effect from 13th April, 2017, hence operationalising the concept of cross border merger. 11-10-2024  Cross-border Merger and Acquisitions 66 The following laws, govern cross border mergers in India:  Companies Act, 2013  SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011  Foreign Exchange Management (Cross Border Merger) Regulations, 2018  Competition Act, 2002  Insolvency and Bankruptcy Code, 2016  Income Tax Act, 1961  The Department of Industrial Policy and Promotion (DIPP)  Transfer of Property Act, 1882  Indian Stamp Act, 1899  Foreign Exchange Management Act, 1999 (FEMA)  IFRS 3 Business Combinations 11-10-2024  Types of Mergers 67 The concept of inbound and outbound mergers was introduced in the Companies Act, 2013 as part of Section 234 of the Act. Under the Companies Act, 1956, only inbound mergers were permitted. The Foreign Exchange Management (Cross Border Merger) Regulations, 2018 (Merger Regulations 2018) are effective from March 20, 2018. Mergers which follow the Merger Regulations are deemed to be automatically approved by the RBI and do not require a separate approval. 11-10-2024  Types of Mergers 68 The company which take over the assets and liabilities of the companies involved in the cross-border merger is called `Resultant Company’. A Resultant Company may be either Indian or foreign. 11-10-2024  Types of Mergers – Inbound Merger 69 An Inbound merger is one where a foreign company merges with an Indian company resulting in an Indian company being formed. 11-10-2024  Types of Mergers – Inbound Merger 70 Following are the key regulations which need to be followed during an inbound merger:  Transfer of Securities - The resultant company of the cross-border merger can transfer any security including a foreign security to a person resident outside India in accordance with the provisions of Foreign Exchange Management (Transfer or Issue of Security by a Person Resident Outside India) Regulations, 2017. However, where the foreign company is a joint venture/ wholly owned subsidiary of an Indian company, such foreign company is required to comply with the provisions of Foreign Exchange Management (Transfer or Issue of Any Foreign Security) Regulations, 2004) (Overseas Direct Investment ODI Regulations). 11-10-2024  Types of Mergers – Inbound Merger 71 Following are the key regulations which need to be followed during an inbound merger:  Branch/Office outside India - An office/branch outside India of the foreign company shall be deemed to be the resultant company’s office outside India for in accordance with the Foreign Exchange Management (Foreign Currency Accounts by a person resident in India) Regulations, 2015. 11-10-2024  Types of Mergers – Inbound Merger 72 Following are the key regulations which need to be followed during an inbound merger:  Borrowings - The borrowings of the transferor company would become the borrowings of the resulting company. The Merger Regulations has provided a period of 2 years to comply with the requirements under the External Commercial Borrowings (ECB) regime. The end use restrictions are not applicable here. Cross Border Mergers require hedging of External Commercial Borrowings (ECB) as well. An External Commercial Borrowings (ECB) is an arrangement between Indian Buyer and Foreign Bank whereby Foreign Bank is funding to Indian Corporate via Foreign Currency Loan having specific amount, tenor. FEMA does permit hedging of loan taken from outside Bank in Indian Books. 11-10-2024  Types of Mergers – Inbound Merger 73 Following are the key regulations which need to be followed during an inbound merger:  Transfer of Assets - Assets acquired by the resulting company can be transferred in accordance with the Companies Act, 2013 or any regulations framed thereunder for this purpose. If any asset is not permitted to be acquired, the same shall be sold within two years from the date when the National Company Law Tribunal (NCLT) had given sanction. The proceeds of such sale shall be repatriated to India. 11-10-2024  Types of Mergers – Inbound Merger 74 Following are the key regulations which need to be followed during an inbound merger:  Opening of overseas bank accounts for resultant company - The resultant company is allowed to open a bank account in foreign currency in the overseas jurisdiction for a maximum period of 2 years in order to carry out transactions pertinent to the cross-border merger. 11-10-2024  Types of Mergers – Outbound Merger 75 An outbound merger is one where an Indian company merges with a foreign company resulting in a foreign company being formed.  Outbound investment is permitted only with companies incorporated in the countries mentioned in the Annexure- B of the Companies Amalgamation Rules. 11-10-2024 Annexure-B of the Companies Amalgamation Rules 76 Jurisdictions specified in clause (a) of sub-rule (2) of rule 25A [Annexure-B] i. whose securities market regulator is a signatory to International Organization of Securities Commission’s Multilateral Memorandum of Understanding (Appendix A Signatories) or a signatory to bilateral Memorandum of Understanding with SEBI, or ii. whose central bank is a member of Bank for International Settlements (BIS), and iii. a jurisdiction, which is not identified in the public statement of Financial Action Task Force (FATF) as: a) a jurisdiction having a strategic Anti-Money Laundering or Combating the Financing of Terrorism deficiencies to which counter measures apply; or b) a jurisdiction that has not made sufficient progress in addressing the deficiencies or has not committed to an action plan developed with the Financial Action Task Force to address the deficiencies. 11-10-2024  Types of Mergers – Outbound Merger 77 The following are the major rules governing an outbound merger:  Issue of Securities - The securities issued by a foreign company to the Indian entity, may be issued to both, persons resident in and outside India. For the securities being issued to persons resident in India, the acquisition should be compliant with the ODI Regulations. Securities in the resultant company may be acquired provided that the fair market value of such securities is within the limits prescribed under the Liberalized Remittance Scheme.. 11-10-2024  Types of Mergers – Outbound Merger 78 The following are the major rules governing an outbound merger:  Branch Office - An office of the Indian company in India may be treated as the branch office of the resultant company in India in accordance with the Foreign Exchange Management (Establishment in India of a branch office or a liaison office or a project office or any other place of business) Regulations, 2016. 11-10-2024  Types of Mergers – Outbound Merger 79 The following are the major rules governing an outbound merger:  Other changes a) The borrowings of the resulting company shall be repaid in accordance with the sanctioned scheme. b) Assets which cannot be acquired or held by the resultant company should be sold within a period of two years from the date of the sanction of the scheme. c) The resulting foreign company can now open a Special Non-Resident Rupee Account in terms of the FEMA (Deposit) Regulations, 2016 for a period of two years to facilitate the outbound merger. 11-10-2024  Benefits of Cross Border Mergers 80  Diversification: A merger often leads to product diversification, whereas a cross border in addition to offering diversification of products also leads to geographical diversification. This is extremely important for companies which want to make their global presence felt.  Achieving cost effectiveness: When a company seeks to enter new markets, it takes some resources and money to build capacity. Having an existing infrastructure and resources in the new market helps in achieving cost effectiveness.  Technological advancement: Mergers enable both the parties to use each other’s intellectual properties hence enhancing technical know-how.  Distribution: Cross border mergers help in creating a large distribution network transcending boundary. 11-10-2024  Risks of Cross Border Mergers 81  Despite Double Tax Avoidance Agreements, the tax implications in the host countries may prove to be complex and tedious. This may increase costs as a local professional is required to be hired.  Regulatory landscape: The laws and regulations in the host country would be different and may be difficult to comply. An unusable regulatory landscape may pose risks to a cross border merger.  Political scenario: It is essential to assess the political situation of the country before one enters into a merger with an entity belonging to that country. Unstable politics may lead to difficulties in carrying out business. 11-10-2024  Worldwide M&A Announced — 1988 to 2006 82 Source: Grant Thornton (September 2006) 11-10-2024  India Cross Border M&A trend: 2012-2014 83 Source: Grant Thornton Annual Deal Tracker 2014, EY Confidence Spurs M&A: Transactions 2015 11-10-2024  Cross-border Merger and Acquisitions 84 Cross border deal accounted for almost 50% of M&A value in 2014. 11-10-2024  M&A Deal 85 Source: Grant Thornton 11-10-2024  Inbound M&A Deal Trend 86 Source: Grant Thornton 11-10-2024  Outbound M&A Deal Trend 87 Source: Grant Thornton 11-10-2024 Top 5 targeted nations by Indian companies: 2014 88 Source: Grant Thornton Annual Deal Tracker 2014, EY Confidence Spurs M&A: Transactions 2015 11-10-2024  Continent wise Inbound Merger 89 11-10-2024  Continent wise Outbound Merger 90 11-10-2024  Challenging zones for cross border M&A 91 Map indicates level of challenges perceived by respondents during their most recent cross-border acquisitions. Source: Mergermarket Report –Asia on the Buyside: The Key to Success, Aug 2010 11-10-2024 What constitutes a successful Cross Border deal 92 Source: Mergermarket Report –Asia on the Buyside: The Key to Success, Aug 2010 11-10-2024  Issues in Cross border M&A 93  Legal problems  Accounting issues  Weak understanding of fundamentals of acquired business  Technological differences  Strategic issues  Fundamental differences across countries  Tendency of overpay  Failure to integrate  HR issues 11-10-2024  Cross-border Merger and Acquisitions 94 Case Study: Tata - Corus Deal  Acquisition of Corus Group Plc by Tata Steel Limited (TSL), was the biggest overseas acquisition by an Indian company.  TSL emerged as the fifth largest steel producer in the world after the acquisition. The acquisition gave Tata Steel access to Corus’ strong distribution network in Europe. Resultant company was Tata Steel Europe Ltd.  Tata Steel had first offered to pay 455 pence per share of Corus, to close the deal at US$ 7.6 billion on October 17, 2006.  Counter offer: CSN (Companhia Siderúrgica Nacional is the second major steel-maker company in Brazil) then counter offered 475 pence per share of Corus on November 17, 2006. Within hours of Tata Steel increased its original bid for Corus to 500 pence per share, Brazil’s CSN made its formal counter bid for Corus at 515 pence per share in cash, 3% more than Tata Steel’s Offer. 11-10-2024  Cross-border Merger and Acquisitions 95 Case Study: Tata - Corus Deal Contd.  Finally, an auction was initiated on January 31, 2007, and after nine rounds of bidding, TSL could finally clinch the deal with its final bid 608 pence per share, almost 34% higher than the first bid of 455 pence per share of Corus. The deal (between Tata & Corus) was officially announced on April 2nd, 2007 at a price of 608 pence per ordinary share in cash.  Indian Steel Giant Tata Steel Limited (TSL) finally acquired the Corus Group Plc (Corus), European steel giant for US$ 13.70 billion. The merged entity, Tata- Corus, employed 84,000 people across 45 countries in the world. It had the capacity to produce 27 million tons of steel per annum, making it the fifth largest steel producer in the world as of early 2007. 11-10-2024  Cross-border Merger and Acquisitions 96 Case Study: Tata - Corus Deal Contd. Tata Corus Deal Synergy 1. Tata was one of the lowest cost steel producers in the world and had self sufficiency in raw material. Corus was fighting to keep its productions costs under control and was on the look out for sources of iron ore. 2. Tata had a strong retail and distribution network in India and South East Asia and was a major supplier to the Indian auto industry and hence there would be a powerful combination of high quality developed and low cost high growth markets. 3. Technology transfer and enhanced R&D capabilities between the two companies that specializes in different areas of the value chain. 4. There was a strong culture fit between the two organizations both of which highly emphasized on continuous improvement and ethics, i.e., ‘The Corus Way’ with the core values and code of ethics, integrity, creating value in steel, customer focus, selective growth and respect for people etc., were strong synergies. 11-10-2024  Cross-border Merger and Acquisitions 97 Case Study: Daiichi - Ranbaxy Ranbaxy Laboratories Limited, India’s largest pharmaceutical company, is an integrated, research based, international pharmaceutical company producing a wide range of quality, affordable generic medicines, trusted by healthcare professionals and patients across geographies. Ranbaxy’s continued focus on R&D has resulted in several approvals in developed markets and significant progress in New Drug Discovery Research. The Company’s foray into Novel Drug Delivery Systems has led to proprietary ‘Platform technologies’ resulting in a number of products under development. The Company is serving its customers in over 125 countries and has an expanding international portfolio of affiliates, joint ventures and alliances, ground operations in 49 countries and manufacturing operations in 11 countries. 11-10-2024  Cross-border Merger and Acquisitions 98 Case Study: Daiichi - Ranbaxy Contd.  Daiichi Sankyo Company was established in 2005 through the merger of two leading Japanese pharma companies. This integration created a more robust organization that allows for continuous development of novel drugs that enrich the quality of life for patients around the world. A central focus of Daiichi Sankyo’s research and development are thrombotic disorders, diabetes, hypertension etc.  Ranbaxy and the Singh family, the largest and controlling shareholders of Ranbaxy (the “Sellers”), entered into a binding Share Purchase and Share Subscription Agreement (the “SPSSA”) with Daiichi Sankyo, pursuant to which, Daiichi Sankyo to acquire the entire shareholding of the Sellers in Ranbaxy and further seek to acquire the majority of the voting capital of Ranbaxy at a price of Rs. 737 per share with the total transaction value expected to be between US$3.4 bn to US$4.6 bn. On the post closing basis, the transaction would value Ranbaxy at US$8.5 bn. 11-10-2024  Cross-border Merger and Acquisitions 99 Case Study: Daiichi - Ranbaxy Contd. Highlights of the Acquisition  To take the Company to a new orbit and a higher growth trajectory  To catapult the combined entity as the World’s 15th biggest drug maker  To become the largest generic Company in Japan, the world’s second largest pharma market  Complementary business model  Global reach covering mature and emerging markets  Strong growth potential  Cost competitiveness 11-10-2024  Cross-border Merger and Acquisitions 100 Case Study: Daiichi - Ranbaxy Contd. Acquisition stages Date Particulars June 11, Signing of Agreement by Daiichi with Ranbaxy and 2008 its Promoters June 14, Public announcement by Daiichi to the shareholders 2008 of Ranbaxy to acquire additional 20% equity shares at `737 per share under the Takeover Code. June 27, Submission of draft letter of offer by Daiichi to SEBI 2008 for its observations. July 15, Approval of preferential allotment of equity shares 2008 and warrants to Daiichi by the shareholders of Ranbaxy. 11-10-2024  Cross-border Merger and Acquisitions 101 Case Study: Daiichi - Ranbaxy Contd. Acquisition stages Contd. Date Particulars Aug16, 2008 Opening of open offer Sep 4, 2008 Closing of open offer Oct 15, 2008 Acquisition of 20% equity stake by Daiichi pursuant to open offer Oct 20, 2008 Ranbaxy becomes subsidiary of Daiichi upon increase in Daiichi’s stake to 52.5% (including preferential allotment and transfer of 1st tranche shares from Promoters) 11-10-2024  Cross-border Merger and Acquisitions 102 Case Study: Daiichi - Ranbaxy Contd. Acquisition stages Contd. Date Particulars Nov 7, 2008 Daiichi acquires balance 11.42% shares from the Promoters off the stock market and the deal is concluded. Daiichi’s equity stake in Ranbaxy reached up to 63.92% 11-10-2024  Cross-border Merger and Acquisitions 103 Case Study: Daiichi - Ranbaxy Contd. Approvals Obtained Ministry of Finance mandates prior approval of FIPB, if the foreign investor is already having an existing joint venture or technology transfer / trademark agreement in the ‘same’ field, as on January 12, 2005. Since Daiichi was already holding equity stake in Uni- Sankyo Limited, a company engaged in ‘same’ business as Ranbaxy, prior approval of FIPB was obtained. This foreign investment required prior approval of Cabinet Committee on Economic Affairs (CCEA), the clearance was received from CCEA by Daiichi in the month of October, 2008. 11-10-2024  Cross-border Merger and Acquisitions 104 Case Study: Daiichi - Ranbaxy Contd. Synergies The Synergies are 1. Their respective presence in the developed and emerging markets. Ranbaxy’s strengths in the 21 emerging generic drug markets can allow Daiichi Sankyo to tap the potential of the generics business, 2. Both Daiichi Sankyo and Ranbaxy possess significant competitive advantages, and have profound strength in striking lucrative alliances with other pharmaceutical companies. 3. R&D perhaps playing the most important role in the success of these two players. 4. The patent perspective of the merger clearly indicates the intentions of both companies in filling the respective void spaces of the other and emerge as a global leader in the pharmaceutical industry. 11-10-2024  Cross-border Merger and Acquisitions 105 Case Study: Daiichi - Ranbaxy Contd. According to Ranbaxy newsletter it will provide a new and stronger platform to harness Ranbaxy’s capabilities in drug discovery/development, manufacturing and global reach, helping it establish a significant milestone in the Company’s mission of becoming a ‘Research based International Pharmaceutical Company’. 11-10-2024  Cross-border Merger and Acquisitions 106 Case Study: Daiichi - Ranbaxy Contd. This transaction will create significant long-term value for all stakeholders through:  A complementary business combination that provides sustainable growth by diversification, that spans the full spectrum of the pharmaceutical business;  An expanded global reach that enables leading market positions in both mature and emerging markets with proprietary and nonproprietary products;  Strong growth potential by effectively managing opportunities across the full pharmaceutical life cycle, cost competitiveness by optimizing usage of R&D and manufacturing facilities of both companies, especially in India.  Ranbaxy will be able to leverage its extensive front-end presence through a larger product flow and ascend the pharma value chain by enhancing drug discovery capabilities. It will also widen the scale and scope of the biosimilars opportunity. 11-10-2024  Cross-border Merger and Acquisitions 107 Case Study: Daiichi - Ranbaxy Contd.  Ranbaxy has also established the ‘Synergy Office’ in July 2009 which has the task of promoting synergies and thereby helping maximize the opportunities for Ranbaxy and Daiichi Sankyo to expand their global operations.  Pharmaceutical companies are working together on a number of areas including drug discovery and development, marketing and manufacturing. Surely a healthy trend, it will go a long way in addressing the growing imperative of the global pharmaceutical industry to lower the cost of medicines while addressing availability challenges around the world. 11-10-2024  Practical Aspects 108 Some practicalities which need to be kept in mind while entering cross border mergers are:  Conduct due diligence on the other firm.  Conduct a risk-benefit analysis before entering into the merger.  Valuation of both the firms is essential so as to predict the competition law treatment of the merger.  Make sure that when you enter into an outbound merger it is with a company from one of the prescribed jurisdictions.  Have an in-depth analysis of the host country’s regulatory and political landscape ready before you take the decision of the merger. 11-10-2024