M&A Unit 1 Part B PDF

Indian Scenario ✓ Economic liberalisation ✓ Corporate raids ✓ Rehabilitation takeovers ✓ MRTP mergers ✓ Cult of reverse mergers ✓ Split and division cult of reverse mergers Economic liberalisation and Mergers: Un...

Indian Scenario ✓ Economic liberalisation ✓ Corporate raids ✓ Rehabilitation takeovers ✓ MRTP mergers ✓ Cult of reverse mergers ✓ Split and division cult of reverse mergers Economic liberalisation and Mergers: Unfavourable economic environment before early 1990s. During 1988-92 about 121 takeovers and mergers and in addition 37 takeovers bids were unsuccessful. From 1991 there was speed of mergers. Mostly horizontal mergers took place. During 1988 such horizontal mergers occupied one-fourth place. Increased by one-half or 50% in 1991 and 65% in 1992 in total no of mergers. Mergers were in spirit of Companies Act 1956. Companies Act 1956 provides procedure for friendly amalgamations. Income-tax act 1962 carries incentive of carry forward losses under section 72a. What were the three peculiar circumstances in India which discouraged takeover? Stake of financial institutions in cos capital employed. Obtaining of industrial license was a problem. Sections 372 and 108 of Companies Act put limits to the extent of equity purchasable by other companies. And section 23 and 24 of MRTP1969 discouraged mergers, amalgamation and takeovers (this section was omitted vide MRTP Act, 1991) Corporate Raids: Despite the above circumstances, corporate sector has been witnessing exciting takeovers bids. Hostile takeovers through hectic buying equity shares of selected companies. Instances of corporate raids by NRIs 1. Swaraj Paul and Sethia groups attempted raids on Escorts Ltd and DCM and did not succeed. 2. NRIs Hindujas raided and took over Ashok Leyland and Ennore Foundaries and secured strategic interests in IDL chemicals and Astra IDL. 3. NRI Chhabria group acquired crucial stake in Shaw Wallace, Mather & Platt, Hindustan Dock Oliver, Dunlop India, Gordon Woodroffe and Falcon Tyres *Chhabria brothers had acquiring controlling interest in Genlec at Rs 65 a share and offered the same those who want to sell. Prominent Indian industrial groups 1 1. Goenkas of Calcutta successfully took over Ceat Tyres, Herdillia Chemicals, Polychem 2. Spartek took over control of Neiveli Ceramics 3.Oberoi Group took over Pleasant Hotels of Rane Group 4. Mahendra and Mahendra Ltd took over automotive pressing unit of Guest Keen Williams Ltd. 5. M&M had taken over Allwyn Nissan 6. Universal Luggage by Blow Plast 7. Crystal Investment & Finance by MRF 8. Shalimar Paints by Jindals 9. Furmarrite Nicco merged with Nicco Ltd. Both were closely held cos 10. Promoters increased their equity from 32% to 51% to lower stake of financial institutions 11. Tata Fertilizers, a loss making, merged with Tata Chemicals 12. Four cos, Hindustan Computers, Hindustan Reprographics, Hindustan Telecommunication and Indian Computers merged to form HCL Ltd. Rehabilitation Takeovers: Board for Industrial and Financial Reconstructing (BIFR) has been active for arranging takeovers of sick units and this type of takeovers are institutionally motivated mergers The terms and conditions in these cases are decided by creditor institutions and banks in consultation with BIFR 2 MRTP Mergers: ❖ During nine-year period Jan 1980 to 1989, 32 amalgamations and 52 takeovers of cos registered under section 26 of MRTP act were approved by the Govt. ❖ Some of the giant and mini –giant cos are: Brooke Bond India, Grasim Ind Hind Liver, Indian explosives Indian Steamship, Jayshree tea Larsen & Toubro, Mafatlal Ind. Modipon, polyolefins, Shree Digvijay cement Shriram Fibres, Southern petrochemicals, tata iron & steel. Texmaco. Cult of Reverse Mergers What are Reverse Mergers? Another aspect of mergers in India which has its roots ✓ Sick undertakings merging with healthy undertaking for tax advantage ✓ Sick unit survives and the healthy unit extinguishes ✓ As a result, profits of healthy unit are adjusted against the losses of the sick surviving unit. (This is known as reverse merger) In 1977 section 72a of I.T Act was added which permitted merger and amalgamation of sick units with healthy units 3  With the concession of fiscal incentives that the healthy units could absorb the carried forward losses (including depreciation and invest allowance) against its profit. Some of the undertakings which had benefitted of merger are ▪ Ahmedabad Laxmi Mills and Arvind mills ▪ Srigopal industries and Maharaja Umaid Singh mills ▪ Centro & Brooke bond ▪ Kelvinator with Aravali Swachalit Vahan ▪ Deccan wire and Panyam cements ▪ Reliance and Sidhpur mills ▪ Havco industries and Phaltan sugar What is the logic and outcome of healthy firm merging with sick unit? After the healthy unit mergers with sick unit ✓ After a year or so after filing one tax return sick unit will changes name to the healthy unit’s name. ✓ For example, Kirloskar Pneumatics Ltd (KPC) with Kirloskar Tractors Ltd (KTL) at Nasik KPC is the healthy firm with Rs 10 share quoting Rs 50 in stock market. KTL is the sick firm with Rs 10 share quoting Rs 2 in stock market KTL was restructured and KPC shareholders were given share of KTL in lieu of KPC Holding Merger was much in the benefit of KTL KPC share value fell around Rs 30 and quoted around Rs 15 After one year, KTL was changed to KPC Limited ✓ Gujarat Automatic Compound Ltd (sick) merged with Atul Products Ltd (healthy firm) ✓ GACL was compressed to one-tenth and exchange shares effected ✓ Wiltech limited (sick unit) merger with Asian cables (healthy firm) ✓ Merger of Reliance Petrochemicals Ltd (RPL) with Reliance Industries Ltd (RIL) (largest amalgamation in country’s corporate history ✓ Two Ambani group companies resulting into assets over Rs. 5000 crores. RPL has extinguished and RIL has survived. Prominent case is Reliance Industries which had merger effective from Jan 95 of two companies that is ☺ Reliance Polypropylene Ltd (RPPL) and Reliance Polyethlene Ltd (RPEL) on basis of exchange ratios (1:30 for RPPL and 1:25 for RPEL) with each merged cos rather than a uniform ratio. (This merger has been within the industry and same group units) 4