MERGER AS AN INVESTMENT
By: -- Shrijan Shukla1
A merger is a tool used by companies for the purpose of expanding their operations often aiming at an increase of their long term profitability. There are 15 different types of actions that a company can take when deciding to move forward using M&A. Usually mergers occur in a consensual (occurring by mutual consent) setting where executives from the target company help those from the purchaser in a due diligence process to ensure that the deal is beneficial to both parties. Acquisitions can also happen through a hostile takeover by purchasing the majority of outstanding shares of a company in the open market against the wishes of the target's board. In the United States , business laws vary from state to state whereby some companies have limited protection against hostile takeovers. One form of protection against a hostile takeover is the shareholder rights plan, otherwise known as the " poison pill ”.
TYPES OF MERGER: the merger can be classified into four types: --
All this type of merger helps the companies to rebuild there profits in their specific sectors. This, mergers can also be termed as an investment, with an aim for earning the benefits, which has been attached with a merger. Therefore, the merger can be said as an investment done by the bigger Co. through acquiring the small or the sick Co. As, the main advantages of merger are the Tax benefits, increase in the assets of the Company etc. considering all this benefits only one Co. will place an offer of merger to the other. As, in the first chapter of my project I have tried to analyze the merger procedure given in the Companies Act, 1956. Thereafter, in the next portion of the project I have tried to put some of the basic necessities for which the amalgamation of the companies takes place.
As, the main endeavor of the investor is to make profit of the investment. Hence, the investment in the merger is also governed by the same principal. Here also the Big Co. which aims to merge the small or sick Co. , first investigate the pros & corns of the merger & then only proceed with the merger proceedings. As, for instance Ratan Tata taking Jaguar2 & Land Rover in to his group, to enlarge the assets & profits of the Tata group of industries. As, Jaguar & Land Rover are itself sick comanies & were not able to earn profit from last many years. This type of mergers, are basically the investments by the big players of the market to gain more profit & at the same time to also reduce the competition in the market.
Before analyzing more on the issue as a merger a tool for investment it is pertinent to discuss the process involved in the merger , to understand the topic in much more easier mode: --
DEFINATION OF MERGER : -- The specific definition of merger has not been discussed under Companies Act, 1956. But in general terms we can define merger as, i n business or economics a merger is a combination of two companies into one larger company. Such actions are commonly voluntary and involve stock swap or cash payment to the target. Stock swap is often used as it allows the shareholders of the two companies to share the risk involved in the deal. The basic procedure which must be followed by the merging companies. The procedure has been described under S. 391 – 394 of Companies Act. To summarize the procedure laid down in Companies Act, 1956, I have laid down the procedure of amalgamation in following points: --
STEPS TO BE FOLLOWED BY THE TRANSFEREE COMPANY : --
1. Memorandum of Association (M/A) : -- The Memorandum of Association must provide the power to amalgamate in its objects clause. It M/A is silent, amendment in M/A must take place.
2. Board Meeting : -- A Board Meeting3 shall be convened to consider and pass the following requisite resolutions:
• Approve the draft scheme of amalgamation;
• To authorize filing of application to the court for directions to convene a general meeting;
• To file a petition for confirmation of scheme by the High Court.
3. Application to the Court4 : -- An application shall be made to the court for directions to convene a general meeting by way of Judge's summons supported by an affidavit. The proposed scheme of amalgamation must be attached to such affidavit. Summons - Form No. 33, Affidavit - Form No. 34. The summons should be accompanied by:
• A certified copy of the M&A of both companies, &
• A certified true copy of the latest audited B/S and P&L A/c of transferee company
4. Copy to Regional Director : -- A copy of application made to concerned H.C. shall also be sent to the R.D. of the region. Although, such notice is supposed to be sent by the H.C., usually the company sends it without waiting for the H.C. to send it5 .
5. Order of High Court6 : -- On hearing of the summons, the H.C. shall pass the necessary orders which shall include:
• Time and place of the meeting
• Chairman of the meeting
• Fixing the quorum
• Procedure to be followed in the meeting for voting by the proxy
• Advertisement of notice of the meeting
• Time limit for the chairman to submit the report to the court regarding the result of the meeting. Orders in - Form No. 35
6. Notice of the Meeting : -- The notice of the meeting7 shall be sent to the creditors and/or the shareholders individually by the chairman so appointed by registered post enclosing: Notice in - Form No. 36 & Proxy in - Form No. 37
• A statement setting forth the following:
• Terms of amalgamation and its effects
• Any material interests of the director, MDs or Manager, in any capacity
• Effect of the arrangement on those interests.
• A copy of the proposed scheme of amalgamation
• A form of proxy
• Attendance slip
• Notice of the resolution for authorizing issue of shares to persons other than existing shareholders
7. Advertisement of Notice of Meeting : -- The notice of the meeting shall be advertised in English and Hindi N/P as the court may direct.
8. Notice to Stock Exchange : -- In case of the listed company, 3 copies of the notice of the general meeting along with enclosures shall be sent to the Stock Exchange where the company is listed.
9. Filing of Affidavit for the Compliance : -- An affidavit not les than 7 days before the meeting shall be filed by the Chairman of the meeting with the Court showing that the directions regarding the issue of notices and advertisement.
10. General Meeting : -- The General Meeting shall be held to pass the following resolutions:
• Approving the scheme of amalgamation by ¾th majority8
• Special Resolution authorizing allotment of shares to persons other than existing shareholders or an ordinary resolution be passed subject to getting Central Government's approval for the allotment as per the provisions of Section 81(1A) of the Companies Act, 1956.
• The resolution to empower directors to dispose of the shares not taken up by the dissenting shareholders at their discretion.
• An ordinary/special resolution shall be passed to increase the Authorized share capital, if the proposed issue of shares exceeds the present authorized capital. The decision of the meeting shall be ascertained only by taking a poll on resolutions.
11. Reporting, of Result of the Meeting : -- The Chairman of the meeting shall report the result of the meeting to the court within the time fixed by the judge or within 7 days, as the case may be. A copy of proceedings of the meeting shall also be sent to the concerned Stock Exchange. Report in - Form No. 39
12. Formalities with ROC : -- The following documents shall be filed with ROC along with the requisite filing fees:
• Form No. 23 of Companies General Rules & Forms + copy of Special Resolution
• Resolution approving the scheme of amalgamation
• Special resolution passed for the issue of shares to persons other than existing shareholders
13. Petition : -- For approval of the scheme of amalgamation, a petition shall be made to the H.C. within 7 days of the filing of report by the chairman. Petition in - Form No. 40
14. Sanction of the Scheme : -- The Court shall sanction the scheme on being satisfied that:
• The whole scheme is annexed to the notice for convening meeting. This provision is mandatory in nature
• The scheme should have been approved by the company by means of ¾th majority of the members present.
• The scheme should be genuine and bona fide and should not be against the interests of the creditors, the company and the public interest.
After satisfying itself, the court shall pass orders in the requisite Orders in - Form No. 41
15. Stamp Duty : -- A scheme sanctioned by the court is an instrument liable to stamp duty.
16. Filing with ROC9 : -- The following documents shall be filed with ROC within 3010 days of order:
• A certified true copy of Court's Order
• Form No. 21 of Companies General Rules & Forms
In default of the provision, the penalty of Rs. 500/- has been imposed.
17. Copy of Order to be annexed : -- A copy of court's order shall be annexed to every copy of the Memorandum of Association issued after the certified copy of the order has been filed with as aforesaid.
18. Allotment of Shares11 : -- A Board Resolution shall be passed for the allotment of shares to the shareholders in exchange of shares held in the transferor-company and to fix the record date for this purpose.
Hence, after discussing the brief procedure of merger, in conformity with the provisions of Companies Act, 1956. It can be said, that the main objective of merger is to form a synergy, to increases the revenue of the company. At the same time the co. also enjoys, the tax benefits. Cross selling, resource transfer, geographical or other benefit & for the specialization in a particular sector12 . Therefore, we can say that merger can be proved as a good tool for investment. Since, the benefits of the merging Co. as well as the acquiring Co. many extend. To guide the proper, investment in this sector, the investment banking has been established, which has been proved beneficial to the companies & also to the government. Investment banks help companies and governments raise money by issuing and selling securities in the capital markets (both equity and debt ), as well as providing advice on transactions such as mergers and acquisitions. The majority of investment banks also offer strategic advisory services for mergers , acquisitions , divestiture or other financial services for clients, such as the trading of derivatives , fixed income , foreign exchange , commodity , and equity securities . Hence, this Investment Banks can be proved as an important tool for the investment in merger13". The primary function of investment banking is buying & selling products both on behalf of the bank's clients and also for the bank itself. Banks undertake risk through proprietary trading14 , done by a special set of traders who do not interface with clients and through Principal Risk, risk undertaken by a trader after he buys or sells a product to a client and does not hedge his total exposure.
As, discussed earlier, the merger attracts, many benefits with the amalgamation of two companies. Few of the benefits which the merger attracts & at the same time also calls for investment in merger is, discussed below: --
SYNERGY: -- As, the most efficient benefit of merger is the formation of a synergy. The Corporate synergy occurs when corporations interact congruently. A corporate synergy refers to a financial benefit that a corporation expects to realize when it merges with or acquires another corporation. This type of synergy is a nearly ubiquitous feature of a corporate acquisition and is a negotiating point between the buyer and seller that impacts the final price both parties agree to. There are two distinct types of corporate synergies:
Hence, the amalgamation of the companies helps, to generate revenue & at the same time it also cut short the expenditure of the company. Therefore, we can say that, the formation of synergy, by amalgamation is a resourceful way of investment.
TAX BENEFIT : -- Secondly, merger of two or more companies helps a lot to get rebates in the taxes. A profitable company can buy a loss maker to use the target's loss as their advantage by reducing their tax liability. The Indian tax law offers several concessions for merger/de-merger. One of the key concessions is the transfer of unabsorbed losses and unabsorbed depreciation15 . Under Income-tax act there is a provision for set off and carry for-ward of losses. A sick company may not be in a position to earn sufficient profits in future to take advantage of the carry forward position. So a sick company with accumulated losses may like some profitable company to merger with it to take advantage of tax benefits. Even the sick company with accumulated losses may be merged with a profitable company and take advantage of income tax benefits with the approval of Government16 . Therefore the Indian market has witnessed huge number of mergers, which merges together to get the tax benefits, by various provisions under tax laws. Hence, this merger has been proved as an economical way of investment.
RESOURCE TRANSFER : -- When the merger takes place, the resources are transferred. Resources are unevenly distributed across firms and the interaction of target and acquiring firm resources can create value through either overcoming information asymmetry or by combining scarce resources. Hence, the transfer of resources has been proved to be a great advantage for the acquiring Co. As, the acquiring Co. gets the recourses of the merging Co. & this act, helps to increase the recourse content of the acquiring Co. Hence, one of the reasons of merger can be this resource transfer also, which can prove to be a crucial investment for the acquiring Co.
ECONOMIES OF SCALE : -- This generally refers to a method in which the average cost per unit is decreased through increased production, since fixed costs are shared over an increased number of goods. In a layman's language, more the products, more is the bargaining power. This is possible only when the companies merge/ combine/ acquired, as the same can often obliterate duplicate departments or operation, thereby lowering the cost of the company relative to theoretically the same revenue stream, thus increasing profit. It also provides varied pool of resources of both the combining companies along with a larger share in the market, wherein the resources can be exercised.
CROSS SELLING: -- For example, a bank buying a stock broker could then sell its banking products to the stock brokers customers, while the broker can sign up the bank' customers for brokerage account. Or, a manufacturer can acquire and sell complimentary products. Cross-selling comes with its advantages. It considerably reduces customer acquisition costs, servicing, and marketing and communication costs and thereby substantially increases spreads for banks, says a senior banker17 . Therefore, we can say that the cross selling is a new reason for the merger of the banks for getting a benefit in the advertisement expenditure.
GEOGRAPHICAL OR OTHER DIVERSIFICATION: -- Geographic diversification is another viable reason to merge. A merger with a credit union in geography can help reduce the exposure to any single area or region. This geographical merger is designed to smooth the earning results of a company, which over the long term smoothens the stock price of the company giving conservative investors more confidence in investing in the company. However, this does not always deliver value to shareholders. Hence, it can also be proved as a reason for investment in merger.
As, the investor always want to invest in that sector only, where it can get the maximum output. Hence, the investor will search for the benefit which he can take after investments. Hence considering the advantages, which the merger has, only can divert the mind of an investor to invest in this merger. The above mentioned are the circumstances which help the investor to invest for a merger. The investor can invest in merger by the way of cash payment. Such transactions are usually termed acquisitions rather than mergers because the shareholders of the target company are removed from the picture and the target comes under the (indirect) control of the bidder's shareholders alone. Secondly, the merger can be by finance. In this process, financing capital may be borrowed from a bank, or raised by an issue of bonds. Alternatively, the acquirer's stock may be offered as consideration. Acquisitions financed through debt are known as leveraged buyouts if they take the target private, and the debt will often be moved down onto the balance sheet of the acquired company. A to site the instance from the current happening, we can take the example of HDFC & Centurion Bank merger18 to form the third largest bank & the second largest in branches, after SBI Bank. Secondly, we can see the example of L&T cement sector merging with the Aditya Birla Group, to form a new entity, named as Ultratech Cement. This is also a big merger in the field of cement manufacturing industries. As, the L&T was facing some problems in running the factories which are established in different parts of the country. It, decided to merge itself in the Aditya Birla Group, & as one can witness the Co. is functioning smoothly over last years. The next target of ABG is the Grasim. This is again a big player, in the field of cement industry. If the ABG succeeds in amalgamating Grasim into the group. Then ABG will become a major player in the cement sector. All, this merger of ABG, is the one or other investment only. As, this merger has been proved as a major chunk of income for the group. Therefore, we can see that, the merger can be a tool for investment, which can be done to avail the profits which have been mentioned above.
CONCLUSION: -- This century is the era of globalization. The corporate of India has expanded there business in various directions of the world. The major expansion of the Indian corporate tycoons is made by merging the various foreign companies into its group. For example, Mr. Laxmi Mittal, who has made the world's biggest merger with Arcelor to form the world's biggest merger of the era. Hence, one can infer that the merger is a best form of investment in the world scenario. Since, merger attracts many befits, like that of the Tax redemption, increase in the assets of the Co. safe guards to the Co. etc. hence, the big companies always tries to acquire the small companies to expand there interest in many areas & can earn a huge amount of profit to he company. But, at the same time the Companies who are investing for the profit maximization, should also think of the social development also. Because at last, it is the society only in which the company is situated will be affected. To quote one example, for the establishment of the company, the land is acquired from the common public. Who are just compensated for one time, & after that the owner of the land has no right on the property. This person should also be made a shareholder, to the expanding company, so that they should also be benefited with the expansion of the company, by way of merger etc.
Secondly, the companies should take help of the investment banking, which has been established, for providing a proper guideline of the minutes of the merger proposed. This investment banking can be proved beneficial for the merger of two companies. At, last I just want to say that, merger can be a good way of investment as, this covers almost every aspect of the company & can be a good investment for future return, if the same has been done by a proper provision of law. Therefore at last I can say that merger is an tool of investment.
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1. IV Year, Hidayatullah National Law University , Raipur (C.G.)
2. A sick car manufacturing Co.
3. S. 391 (1) (b) of Companies Act, 1956.
4. S. 391 of Companies Act.
5. U/s. 393 (1) (a) of Companies Act, 1956.
6. S.394 (2) of Companies Act, 1956.
7. U/s. 393 (5) of Companies Act, 1956.
8. S. 391 (2) of Companies Act.
9. S. 394 (3) of Companies Act, 1956 .
10. Substituted by Act 31 of 1965, Section 62, for "fourteen" (w.e.f. 15-10-1965 ) .
11. S.394 (ii) of Companies Act, 1956.
12. All this benefits has been deled in brief in Chapter 2 .
13. Function of Investment Banks has been discussed later .
14. When the firm's traders actively trade stocks , bonds , options , commodities , or other items with its own money as opposed to its customers' money, so as to make a profit for itself.
15. http://www.thehindubusinessline.com/bline/2006/12/05/stories/2006120502410700.htm , visited on 14-3-08.
16. Example Ahmedabad Cotton Mills merge with Arvind Mills (Rs. 3.34 Crores as Tax Benefit).
17. For instance, HDFC Bank entered commercial vehicle financing in February with intent to tempt fleet operators to avail of cash management services and personal banking services along with vehicular finance.
18. This merger took place last month only. i.e. in the month of February 2008.