Concept Note on Mergers and Acquisitions

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By Kamal Agrawal A notes November 1, 2018

ACQUISITIONS:   An ‘acquisition’ or ‘takeover’ is the purchase by one person, of controlling interest in the share capital, or all or substantially all of the assets and/or liabilities, of the target. A takeover may be friendly or hostile, and may be effected through agreements between the offer or and the majority shareholders, purchase of shares from the open market, or by making an offer for acquisition of the target’s shares to the entire body of shareholders.

MERGER:  A ‘merger’ is a combination of two or more entities into one; the desired effect being not just the accumulation of assets and liabilities of the distinct entities, but organization of such entity into one business. The possible objectives of mergers are manifold – economies of scale, acquisition of technologies, access to sectors / markets etc. Generally, in a merger, the merging entities would cease to be in existence and would merge into a single surviving entity.

LAWS TO BE CONSIDERED IN CASE OF M&A

Company Law: Sec 230 – Sec 240 of Companies Act, 2013 governs the concept of Compromise, Arrangements and Amalgamations.

Securities Law:  SEBI (Substantial  Acquisitions of Shares & Takeovers) Regulations 2011. & SEBI  (Issue of Capital and Disclosure Requirements) Regulations, 2009.

Competition Law 2002: The Competition Commission of India (CCI) will regulate combinations which have caused or are likely to cause an appreciable adverse effect on competition (“AAEC”) in India.

  1. Sec 3: Deals with Anti-competitive Agreements
  2. Sec 4: Abuse of Dominant Position
  3. Sec 5 & 6: Regulation of Combinations

(Note: If Combination exceeds Threshold Limits then prior approval of CCI is required.)

Income Tax Act,1961 and other Taxation Laws: The ITA defines an ‘amalgamation’ as the merger of one or more companies with another company, or the merger of two or more companies to form one company. The ITA also requires that the following conditions must be met by virtue of the merger, for such merger to qualify as an ‘amalgamation’ under the ITA:

  1. all the property of the amalgamating company(ies) becomes the property of the amalgamated company
  2. all the liabilities of the amalgamating company(ies) become the liabilities of the amalgamated company; and
  3. Shareholders holding not less than 75% of the value of the shares of the amalgamating company become shareholders of the amalgamated company.

(Note: The Losses of amalgamating company is allowed to be carried forward by such amalgamated company on fulfillment of certain conditions.)

Accounting Standards (AS 21): In case of Acquisitions, the Holding companies are also required to prepare Consolidated Financial Statements in accordance with Accounting Standard 21.

ANALYZING MERGERS AND ACQUISITIONS

One of the biggest steps in the M&A process is analyzing and valuing acquisition targets. This usually involved two steps: valuing the target on a standalone basis, and valuing the synergies of the deal. When it comes to valuing synergies, there are two types: hard and soft.  Hard synergies are direct cost savings to be realized after completing the merger and acquisition process and soft synergies are revenue increases hoped to be realized after the deal closes.

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