ipr

Course: BBA ISubject : Introduction to Business Organization

Unit: 5

Merger “It involves combination of all the assets, liabilities, loans, and

businesses (on a going concern basis) of two (or more) companies such that one of them survives.”

Merger is primarily a strategy of inorganic growth.

Example: India’s largest private sector corporate entity Reliance Industries

Limited (RIL) is indeed a result of many mega mergers of group companies into RIL.

Varieties of merger:1.Horizontal Merger:– Companies producing similar goods & services– Direct competition– Efficient economies of scale– Eg: Daimler-Benz and Chrysler– Effect can be extremely small or extremely huge

Merger

Varieties of merger:2. Vertical Merger:– Same business but on different levels– Different goods or services for same finished product– Forward integration: the business is combined with

the distributor (Customer & a company)– Backward integration: the business is combined with

the suppliers (producer & a company)– Reason:

• to ensure quality and availability• Reduce transaction cost

Merger

Varieties of merger:3. Conglomerate Merger:– Involved in totally unrelated business– Types: Pure & Mix• Pure: Companies that have nothing in common• Mix: Both look forward to product extension

– Not competitors– Each business in conglomerates run separately– Reasons:• Reduce cost by using fewer resources• Risk is mitigated (reduced)

– Too difficult to manage

Merger

AcquisitionAcquisition is an attempt or a process by which a company or an individual or a group of individuals acquires control over another company called ‘target company’.

Acquiring control over a company means acquiring the right to control its management and policy decisions.

It also means the right to appoint (and remove) majority of the directors of a company.

In acquisition, the target company’s identity remains intact.

Acquisition conti Ways to acquire a control over a company (a target company):

By acquiring ,i.e. purchasing a substantial percentage of the voting capital of the target company.

By acquiring voting rights of the target company through power of attorney or through a proxy voting arrangement.

By acquiring control over an investment or holding company, whether listed or unlisted, that in turn holds controlling interest in the target company.

By simply acquiring management control through a formal or informal understanding or agreement with the existing person (s) in control of the target company.

Ways to acquire a control over a company (a target company):

By acquiring ,i.e. purchasing a substantial percentage of the voting capital of the target company.

By acquiring voting rights of the target company through power of attorney or through a proxy voting arrangement.

By acquiring control over an investment or holding company, whether listed or unlisted, that in turn holds controlling interest in the target company.

By simply acquiring management control through a formal or informal understanding or agreement with the existing person (s) in control of the target company.

Acquisition conti

Acquisition of a target company through acquisition of its shares

The most common method is to acquire i.e. purchase substantial voting capital (i.e. equity capital) of the target company.

What percentage would be considered as adequate to qualify as controlling interest?

To understand that, one should understand various levels or degrees of control that are relevant.

Acquisition conti

Absolute control

This would mean an unfettered right to take any decision.

However, in such a case, the company cannot become a listed company or continue to be listed company if it was listed earlier.

The condition of minimum two members for a private company or seven members for a public company will have to be complied with.

Acquisition conti

Practically Absolute Control

• This can be defined as an ability to get any and all resolutions passed in the general body meeting of the shareholders

• Most of the important decisions, such as further issue of capital other than a rights issue, buy-back of shares, reduction of capital, delisting of the company, etc., can be taken, only by passing a special resolution.

• A special resolution can be passed if at least 75 per cent of the shareholders by value votes in favour of a special resolution.

Acquisition conti

General control over a company

Those decisions which do not require passing of a special resolution under the Companies Act, 1956, but which nevertheless require shareholder’s approval have to be taken by passing an ordinary resolution.

An ordinary resolution gets passed by a simple majority of the members present and voting, either in person or through proxies at the general meeting. The decisions which require passing of an ordinary resolution are approval of annual accounts, declaration of dividend, issue of bonus shares, appointment of directors, etc.

In this case, one does not need to acquire 51% of the voting capital to have a control over a company.

In India, in terms of the regulations promulgated by the Securities and Exchange Board of India (SEBI), no person can acquire 15 percent or more of share capital (having voting rights) of a company without making an open offer to public shareholders to acquire minimum 20 percent of the shares of the company from them.

Acquisition conti

Acquisition of a target company through power of attorney, etc.

This is not a commonly used way of effecting acquisition of a company.

It could be used only as a short-term tactic, probably as a precursor to the substantial acquisition of shares from existing promoters or a faction of the existing promoters, who, pending the conclusion of Memorandum of Understanding (MOU) to sell their shares to the acquirer, may allow him to vote on their behalf on certain key resolutions.

Acquisition conti

Acquisition of a target company through acquisition of an investment or holding company which is controlling the target company.

Acquisition of a target company through formal or informal agreement

Some of the significant acquisitions in Indian context in recent past :

Acquisition of Corus by Tata Steel Acquisition of Novelis by Hindalco Acquisition of Spice Communication by Idea Cellular Acquisition of Ranbaxy by Daiichi Sankyo Acquisition of Hutchison Essar by Vodafone Acquisition of Sahara Airlines by Jet Airways Acquisition of Deccan Airways by Kingfisher Airlines

Acquisition conti

References

1. Fundamentals of Business Organization and Management by Y.K.Bhushan- Sultan Chand

publications2. Principles & Practices Of Management by L M

Prasad – Himalaya Publishing House

Thank You!!