Subject: FINANCIAL MANAGEMENT

1 Subject: FINANCIAL MANAGEMENT Course Code: M. Com Author: Dr. Suresh Mittal Lesson: 1 Vetter: Dr. Sanjay Tiwari FINANCIAL MANAGEMENT OF BUSINESS EXPANSION, COMBINATION AND ACQUISITION STRUCTURE Objectives Introduction Mergers and acquisitions Types of Mergers Advantages of merger and acquisition Legal procedure of merger and acquisition FINANCIAL evaluation of a merger/acquisition Financing techniques in merger/Acquisition FINANCIAL problems after merger and acquisition Capital structure after merger and consolidation Regulations of mergers and takeovers in India SEBI Guidelines for Takeovers Summary Keywords

2 Self assessment questions Suggested readings OBJECTIVES After going through this lesson, the learners will be able to Know the meaning and advantages of merger and acquisition. 1 Understand the FINANCIAL evaluation of a merger and acquisition. Elaborate the financing techniques of merger and acquisition. Understand regulations and SEBI guidelines regarding merger and acquisition. INTRODUCTION Wealth maximisation is the main objective of FINANCIAL MANAGEMENT and growth is essential for increasing the wealth of equity shareholders.

3 The growth can be achieved through expanding its existing markets or entering in new markets. A company can expand/diversify its business internally or externally which can also be known as internal growth and external growth. Internal growth requires that the company increase its operating facilities marketing, human resources, manufacturing, research, IT etc. which requires huge amount of funds. Besides a huge amount of funds, internal growth also require time. Thus, lack of FINANCIAL resources or time needed constrains a company s space of growth.

4 The company can avoid these two problems by acquiring production facilities as well as other resources from outside through mergers and acquisitions. MERGERS AND ACQUISITIONS Mergers and acquisitions are the most popular means of corporate restructuring or business combinations in comparison to amalgamation, takeovers, spin-offs, leverage buy-outs, buy-back of shares, capital re-organisation, sale of business units and assets etc. Corporate restructuring refers to the changes in ownership, business mix, assets mix and alliances with a motive to increase the value of shareholders.

5 To achieve the objective of wealth maximisation, a company should 2 continuously evaluate its portfolio of business, capital mix, ownership and assets arrangements to find out opportunities for increasing the wealth of shareholders. There is a great deal of confusion and disagreement regarding the precise meaning of terms relating to the business combinations, mergers, acquisition, take-over, amalgamation and consolidation. Although the economic considerations in terms of motives and effect of business combinations are similar but the legal procedures involved are different.

6 The mergers/amalgamations of corporates constitute a subject-matter of the Companies Act and the acquisition/takeover fall under the purview of the Security and Exchange Board of India (SEBI) and the stock exchange listing agreements. A merger/amalgamation refers to a combination of two or more companies into one company. One or more companies may merge with an existing company or they may merge to form a new company. Laws in India use the term amalgamation for merger for example, Section 2 (IA) of the Income Tax Act, 1961 defines amalgamation as the merger of one or more companies (called amalgamating company or companies) with another company (called amalgamated company)

7 Or the merger of two or more companies to form a new company in such a way that all assets and liabilities of the amalgamating company or companies become assets and liabilities of the amalgamated company and shareholders holding not less than nine-tenths in value of the shares in the amalgamating company or companies become shareholders of the amalgamated company. After this, the term merger and acquisition will be used interchangeably. Merger or amalgamation may take two forms: merger through absorption, merger through consolidation.

8 Absorption is a combination of two or more companies into an existing company. All companies except one lose their identity in a merger through absorption. For example, absorption of Tata Fertilisers Ltd. (TFL) by Tata Chemical Limited (TCL). Consolidation is a combination of two or more companies into a new company. In this form of merger, all companies are legally 3 dissolved and new company is created for example Hindustan Computers Ltd., Hindustan Instruments Limited, Indian Software Company Limited and Indian Reprographics Ltd.

9 Lost their existence and create a new entity HCL Limited. Types of Mergers Mergers may be classified into the following three types- (i) horizontal, (ii) vertical and (iii) conglomerate. Horizontal Merger Horizontal merger takes place when two or more corporate firms dealing in similar lines of activities combine together. For example, merger of two publishers or two luggage manufacturing companies. Elimination or reduction in competition, putting an end to price cutting, economies of scale in production, research and development, marketing and MANAGEMENT are the often cited motives underlying such mergers.

10 Vertical Merger Vertical merger is a combination of two or more firms involved in different stages of production or distribution. For example, joining of a spinning company and weaving company. Vertical merger may be forward or backward merger. When a company combines with the supplier of material, it is called backward merger and when it combines with the customer, it is known as forward merger. The main advantages of such mergers are lower buying cost of materials, lower distribution costs, assured supplies and market, increasing or creating barriers to entry for competitors etc.