Merger,Acquisition And Corporate Restructuring
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Transcript of Merger,Acquisition And Corporate Restructuring
Merger,acquisition And Corporate Restructuring
Structure• Conceptual framework
• Financial framework
• Corporate restructuring
• Accounting for amalgamation
• Tax benefits
• Exercise
CONCEPTIONAL FRAMEWORK
MEANING OF
• MERGERS
• ACQUSITIONS
• AMALAMATIONS
• TAKEOVERS
• ABSORPTIONS
TYPES OF MERGERS
• HORIZONTAL MERGER – SIMILAR LINES OF ACTIVITY
ADVANTAGES• REDUCTION OF COMPETITION• PUTTING AN END TO PRICE CUTTING• ECONOMIES OF SCALE IN PRODUCTION• RESEACH AND DEVELOPMENT• MARKETING AND MANAGEMENT
VERTICAL MERGER –
FIRMS SUPPLYING RAW MATERIALS MERGE WITH FIRM THAT SELLS
ADVANTAGE
• LOWER BUYING COST OF MATERIAL
• LOWER DISTRIBUITION COST
• ASSURED SUPPLIES AND MARKET
• COST ADVANTAGE
CONGLOMERATE MERGER
UNRELATED INDUSTRIES MERGE
PURPOSE
• DIVERSIFICATION OF RISK
• Egs Time warner-(they were into media & movie production) & AOL-(leading american website
FINANCIAL FRAMEWORK
IT COVERS THREE INTERRELATED
ASPECTS
1.DETERMINING THE FIRM’S VALUE
2.FINANCING TECHNIQUES IN MERGER
3.CAPITAL BUDGETING
DETERMINIG THE FIRMS VALUE
QUANTITATIVE FACTORS – BASED ON1. THE VALUE OF THE ASSETS• BOOK VALUE – OWNERS EQUITY• DEPENDS ON FIXED ASSETS AND WORKING CAPITAL2. APPRAISAL VALUE- INDEPENDENT APPRISAL AGENCIES3. MARKET VALUE – BASED ON STOCK MARKET
QUATATIONS ,BUT CHANCE FOR SPECULATION4. EARNING PER SHARE AND P/E RATIO – IMPACT OF EPS
AFTER MERGER
• THE EARNINGS OF THE FIRM
EXERCISE
COMPANY A• NO. OF SHARES 2
LACS• MARKET VALUE
PER SHARE RS.25• EPS RS.3.125
COMPANY B• NO. OF SHARES 1
LAC• MARKET VALUE
RS.18.75• EPS RS.2.5
CONCLUSIONS
• EXCHANGE AT EPS – NO EFFECT ON EPS AFTER MERGER
• EXCHANGE MORE THAN EPS RATIO – COMPANY WITH LOWER EPS GAINS
• IF LESS THAN EPS RATIO – COMPANY WITH HIGHER EPS BEFORE MERGER GAINS
PRICE EARNING RATIO APPROACH
• MEANING
• COMPUTATION :
P/E RATIO = MP/EPS
• EPS = EAT/NO. OF EQUITY SHARES
• MARKET PRICE = P/E (NO. OF TIMES) * EPS
EXAMPLEPRE MERGER SITUATION
FIRM A FIRM B
EAT 6,25,000 2,50,000
NO. OF SHARES 2,00,000 1,00,000
EPS 3.125 2.5
P/E RATIO(TIMES) 8 7.5
MARKET PRICE PER SHARE(MPS)
25 18.75
TOTAL MARKET VALUE (N*MPS) OR (EAT*P/E RATIO)
50,00,000 18,75,000
POST MERGER SITUATION 1
(BASED ON CURRENT MARKET PRICE
SITUATION 2
EXCHANE RATIO/ SWAP RATIO (ASSUMING)
2.5:3.125=.8 1 : 1
EAT(COMBINED FIRM) 6.25+2.5=8.75 8,75,000
NO. OF SHARES 2.8 lakhs 2,00,000+1,00,000=3,00,000
EPS 8.75/2.8=3.125 8,75,000/3,00,000=2.91/
P/E RATIO
(ASSUMED TO BE THE SAME)
8 7.5
MPS 3.125*8=25 21.825
TOTAL MARKET VALUE 70,00,000 65,47,500
CONCLUSION
• IF SHARES ARE EXCHANGED BASED ON CURRENT MARKET PRICE PER SHARE , POST MARKET PRICE SHARE INCREASED AT HIGHER RATE THAN EXCHANGED BELOW THIS RATIO
• MARKET VALUE AFTER MERGER = MARKET VALUE BEFORE MERGER = 68,75,000
• NET GAIN = 15,00,000? IF EXCHANGE RATIO IS 2.5:1 WHO GAINS
WHO LOSES? IF EXCHANGE RATIO IS 1:1 WHO GAINS
WHO LOSES? HOW TO CALCULATE TOLERABLE SHARE
EXCHANGE RATIO
DETERMINATION OF TOLERABLE SHARE EXCHANGE RATIO
TOTAL MV
LESS: MINIMUM TO BE GIVEN TO B
75,00,000
10,00,000
NET BENEFIT TO A 65,00,000
NO. OF SHARES OF A TO A CO. SHARE HOLDERS
1,00,000
DESIRED POST MERGER MPS 65 PER SHARE
NO. OF EQUTY SHARES TO BE ISSUED BASED ON DESIRED MARKET PRICE
10,00,000/65 = 15,385 SHARES
TOLERANCE SHARE EXCHANGE RATIO
50,000/15385 = 3.25 SHARES OF FIRM B, 1 SHARE IN FIRM A
1:3.25
CONCLUSION
• FIRM WITH HIGHER P/E RATIO CAN ACQUIRE FIRM WITH LOWER P/E RATIO WHICH WILL INVARIABLY INCREASES MARKET VALUE AFTER MERGER
CAPITAL BUDGETING
• THE TARGET FIRM SHOULD BE VALUED BASED ON PV OF INCREMENTAL CASH INFLOWS
CORPORATE RESTRUCTURING
• FINANCIAL RESTRUCTURING
• RESTRUCTURING SCHEMES : INTENAL AND EXTERNAL RESTRUCTURING
• DEMERGERS
• BUYOUTS
ACCOUNTING FOR AMALGAMATION
• POOLING INTEREST METHOD
CONDITIONS AS PER AS 14:
1. ALL ASSETS AND LIABILITIES OF TRANSFEROR CO. TO BE THE ASSETS OF THE TRANSFREE CO.
2. AT LEAST 90% OF F.V OF EQUITY SHARE HOLDERS SHOULD BE SHAREHOLDERS OF NEW CO.
3. PURCHACE CONSIDERATION TO BE SETTLED BY THE NEW CO.
4. THE BUSINESS OF NEW CO. SHOULD CONTINUE
5. NO ADJUSTMENT IS INTENDED TO BE MADE TO BOOK VALUE OF ASSETS AND LIABILITIES OF TRANSFEROR CO.
OTHER ACCOUNTING TREATMENTS
1. CROSS HOLDINGS OF SHARES TO BE CANCELLED SUBSIQUENT TO MERGER
2. INTER CO. TRANSACTIONS LIKE DEBTORS AND CREDITORS – SALE OF GOODS FROM ONE CO. TO ANOTHER
3. SALES TAX PAID ALREADY CAN NOT BE RECOVERED
INCOME TAX RELATED ISSUES FOR
AMALGAMATIONCONDITIONS OF AMALGAMATION UNDER INCOME TAX ACT SEC 2
(1B)1. ALL ASSETS AND LIABILITIES OF TRANSFEROR CO. TO BE THE
ASSETS OF THE TRANSFREE CO.2. SHARE HOLDERS HOLDING NOT LESS THAN 3/4TH IN VALUE OF
SHARES OTHER THAN SHARES ALREADY HELD SHOULD BECOME SHARE HOLDERS OF AMALGAMATED COMPANY
EX. NO. OF SHARES OF Altd CO. 1,00,000 NO. OF SHARES HELD BY Bltd IN Altd IS 20,000 NOMINAL VALUE OF SHARE IS RS.10 ASSUME Altd MERGE WITH Bltd THEN 75% OF 1,00,000- 20,000 =
60,000 TO BE THE SHARE HOLDES OF B CO.NOTE:SHARE HOLDERS MAY BE EQUITY OR PREFERNCE SHARE
HOLDERS
OTHER CONDITIONS
• THE AMALGAMATED CO. IS AN INDIAN CO.
EXCEPTION
1. IF SHARES OF INDIAN CO.HELD BY FOREIGN BEFORE MERGER AND SUCH FOREIGN CO. TAKEN OVER BY ANOTHER FOREIGN CO.
2. ATLEAST 25% OF THE FOREIGN CO. (BEFORE MERGER) TO BE SHARE HOLDERS OF THE NEW FOREIGN CO.
? WHAT IS THE BENEFIT TO THE AMALGAMATED CO. AMALGAMATING CO.(OLD CO.)
• NO CAPITAL GAIN ON TRANSFER ON CAPITAL ASSETS BY THE TRANSFEROR CO. UNDER SEC 47(VI) OF I.T ACT
? CAN NEW CO. CARRY FORWAD AND SET OF LOSS AND DEPRECIATION
SEC 72 A TO BE FULFILLED1. ACCUMULATED LOSSES REMAIN UNABSORBED FOR 3 OR MORE
YEARS2. 75% OF BOOK VALUE TO BE HELD ATLEAST FOR 2 YEARS
BEFORE AMALGAMATION3. THE AMALGAMATED CO. CONTINUES TO HOLD 3/4TH OF BOOK
VALUE ATLEAST FOR 5 YEARS4. NEW CO. SHOULD CONTINUE FOR ANOTHER 5 YEARS5. NEW CO. SHOULD ACHIEVE ATLEAST 50%OF INSTALLED
CAPACITY BEFORE END OF 5 YEARS AND SHOULD CONTINUE FOR 5 YEARS
6. THE NEW AMALGAMATED CO. SHOULD FURNISH TO ASSESSING OFFICER ABOUT PARTICULARS OF PRODUCTION
BENEFIT
• THIS SCHEME IS ALSO APPLICABLE TO BANKING INSTITUTIONS
?TATA VOLTAS & KELVINATOR HYDERABAD DIVISION vs. CBDT
EXAMPLE
A LTD AMALGAMATES WITH B LTD AS ON 2007
PARTICULARS DOES NOT SATISFY SEC 2(1B) & 72 A
SATISFIES 2(1B) BUT DOES NOT SATISFY 72 A
SATISFIES BOTH 2(1B) & 72 A
A MERGES WITH B (A GOES OUT)
NO BENEFIT TO A & B
DOES NOT ATTRACT CAPITAL GAIN FOR A BUT NO GAIN FOR B
NO CAPITAL GAIN TAX & ACCUMULATED LOSSES & UNABSORBED DEPERICIATION CAN BE CARRIED FORWARD
? If b merges with a & b goes out of market who gains under above 3 situations
? If a&b merge with c what are the tax implication under above situations
Assume b is a loss making co.& Have accumulated losses & unabsorbed depreciation
? If c is not an Indian co.
OTHER TAX BENEFITS
1. Expenditure on amalgamation or de-merger – allowed under sec 35DD both revenue and capital expenditure allowed
2. Expenditure on scientific research can be carried forward
3. Expenditure on acquisition of patent rights copyrights – depreciation can be provided
4. Expenditure for obtaining license for tele-communication service can be written off
5. Preliminary expenses
6. Capital expenditure on family planning
7. Bad debts are allowed
Tax Concession To Share Holders Of Amalgamating Co.
• No capital gain tax provided new co. Is a Indian co.& Shareholders are acquired everything in shares
EXERCISE
PARTICULARS CO. A CO. B
EAT 1,40,000 37,500
NO. OF SHARES 20,000 7,500
EPS 7 5
MARKET PRICE 70 40
P/E RATIO 10 8
• Co. A is acquiring co. B Exchanging one share for every 1.5 shares of B ltd & p/e ratio will continue even after merger
? Are they better or worse of than they were before in merger
? Determine the range of minimum & maximum ratio between the two firms
? A is an Indian co. ? A is a foreign co.? A merges with T & formed a new co. AT ltd? What are the tax planning required before & after
merger