Monday, April 1, 2019
Mergers And Acquisitions In Restructuring Business Organizations Finance Essay
Mergers And learnednesss In Restructuring Business Organizations Finance experimentMergers and Acquisitions deport gained literal importance in todays corporal world. This process is extensively used for restructuring the business organizations. Some wholesome known financial organizations withal took the necessary initiatives to restructure the corporate sector of India by adopting the jointures and accomplishments policies. TheIndian sparing reform since 1991 has opened up a whole lot of ch altoge on that pointnges some(prenominal)(prenominal) in the domestic and international spheres. The increased competition in the b entirely-shaped merchandise has prompted the Indian companies to go for jointures and achievements as an important strategic choice. The lines of fusions and acquisitions in India have transmitd over the years. The immediate installs of the mergers and acquisitions have similarly been divers(a) across the various sectors of the Indian scrim ping.The Indian Economy has been growing at the fast rate and emerging as the closely promising economy in the world. Be it in IT, RD, pharmaceutical, infrastructure, energy, consumer retail, telecom, financial services, media, and hospitality etc, there has been a sign of promising boom in the Indian economy. It is the second scurrying growing economy in the world with GDP touching 8.9 % in 2010. Investors, big companies, industrial houses view Indian market in a growing and proliferating phase, whereby returns on jacket and the sh argonholder returns be high. Both the inward and outbound mergers and acquisitions have increased dramatically. harmonise to Investment bankers, Merger Acquisition (MA) deals in India will cross $100 billion this year, which is double closing years level and quadruple of 2005.Indias merger and acquisitions deal apprise in year 2010 reached almost US $50 billion which is deuce-ace measure of the deal time value last year 2009. There were MA de als deserving about $16 billion in 2009, down from close to US $40 billion in 2008.DefinitionsMergersMergers or merger is combination of ii or more than companies to form as a single invigorated order. In this process no fresh investment is made, however an flip of contends takes place between the entities. In simple names, a merger involves the unwashed decision of cardinal companies to combine and become unmatchable entity. Generally, merger is through with(p) between the two entities having similar size.Varieties of MergersMergers kitty be of various types. scarcely if there be 5 chief(prenominal) mergers varieties which are valued most in the corporate world.Horizontal merger both companies that are in direct competition and sharethe equal product lines and markets.Vertical merger Two companies which are in the Value Chain.Market-extension mergerTwo companies having same product but varied target market.Product-extension mergerTwo companies selling differ ent but related products in the same market.Conglomeration Two companies with unrelated business/ industry.AcquisitionsAcquisition sum buying the ownership of hotshot go with by a nonher bon ton, often as the part of the ontogeny strategy. Unlike in merger, acquisition is generally through with(p) by a large company to a small one. Acquisitions can be either friendly or hostile. Like mergers, acquisitions are actions through which companies seek economies of home plate, efficiencies and intensify market visibility. Acquisition is done either in bills or getting the song of the target company or both.Distinction between Mergers and AcquisitionsMergers and Acquisitions are often uttered as one and the same and considered to have the same meaning. But the terms merger and acquisition are two different term meaning.When one company takes over another self-sufficing company and clearly established itself asthe stark naked owner, the purchase is called an acquisition. From a legal point of view, thetarget companyceases to exist and the buyer or the merchant bank possesses the full realize of the business and the buyers communication channel leads to be traded, wherefore it is acquisition.Regard little of the type of the strategic alliance they all have one purpose in common. They are all meant to pee synergy that makes the value of the combined companies greater than the sum of the two parts.SynergySynergyis the tear that is obtained when two or more components meet together to produces an invite outional consequent which when done solely cannot be attaind. In a business synergy takes the form of enhanced capital punishment, increased lucrativeness and exceptional cost reduction. By merging, the companies hope to benefit from the followingStaff reductionsEconomies of scaleAcquiring impudently technologyImproved market reach and industry visibility richness of the studyWhen a company wants to expand, there are various slipway its can do. Th ey can achieve the growth either by capturing the market share or by growing through strategic alliances. The main objective of the merger or acquisition is to achieve growth and synergy, economies of scale and capture or expand the market share.Buzz of merger and acquisition often creates hype in the financial market about the acquirers stock price. While most empirical enquiry on merger center on on daily stock return surrounding announcement date, a few studies also look at long term coifance of term process of getting regular after merger.1Not only that, the performance of the company as a whole is also a matter of question mark. Will the company be able to perform better than it is doing or not?Problem Statement galore(postnominal) libertine prior to merger and acquisition have an expectation to create a synergy from merger and acquisition. The main motive behind MA is to create efficiencies in the business and expansion of the business. But they most of the time cut do wn the fact that the effect of merger and acquisition has direct cor singing with the value of the acquirers company and the stock price. The other problem that is to be considered is the financial endangerment associated with the MA. investigate ObjectiveThe objective of this study is to gain the deeper and clear companionship of the merger and acquisition on the acquiring staunch. It also aims at the financial risk that a company may face post merger/ acquisition asa well as the long term performance of the acquirer. The objectives are as followsTo examine the effect of EPS myopia on the return of acquiring firms in mergers.Evaluate the effect on the stock price of the acquiring company post merger and acquisition.Critically evaluating if the shareowners of the acquiring companies experience wealth effect as a result of MA.The expected long term performance of the acquiring firm.Study of the financial risk pertaining to the merger and acquisition.enquiry QuestionWhat is the motive behind Merger and Acquisition?What is the effect on the stock price of the acquirer pre and post MA?Does the buzz create the bubble effect on the market or is it long lasting?What is the wealth effect of the acquirer firm post and pre MA?What is the trend of MA in Indian market?Drivers of MA in IndiaWhat are the effects of MA to the competitors?Effect of the tax to the politics post merger and acquisition.Limitations of the StudyNo proper information on the companies is found except for their Balance Sheet and Income Statement.This study is based on secondary database, so errors in the data could affect the results of the study.External factors such as scotch conditions, regulatory changes etc are not taken into consideration.An overview of the StudyThis dissertation is split up into five chapters. The beginning(a) chapter deals with the background information, problem statement, objective of the study, importance of study, research question limitation of the study.Th e second chapter deals with literature review. This chapter indicates the theoretical modeling of the military rating method of Merger and Acquisition. It shows the detail description of the past research that has been done on the topic and discusses the outcome of the study.The third chapter deals with the research methodology of the dissertation. It deals with the Research method used for the data and information collection. It includes sample selection/ approach pattern procedure, data collection and data analysis tools used in the dissertation. In this part assumptions had been made where there is lack of appropriate data and information.The quaternary chapter deals with analysis and interpretation of the financial data that are used to achieve the objectives of the dissertation. This section mainly deals with the findings from the study and also focuses on the analysis and its results.The fifth part and the last chapter of this dissertation present the findings of the study, recommendation of the study to the investors, financial managers regulators. It also concludes the suggestions for future research.Chapter IIReview of the Literature2. Literature ReviewMany authors and writers have written lot about merger and acquisition and its impingement on the performance of the company as well as on the economy. A great deal of research has been carried out on the performance of the corporations involved in the merger and acquisition. When a company wants to jump set about a long term growth or boost up the corporate performance, MA may seem to be the best option. further study after study puts the success rate of MA lies in effect(p) between 20% and 30%. A lot of researcher had seek to explain the abysmal statistics, usually by analyzing the attributes of the deals that worked and those that didnt. What is lacking is the robust speculation that identifies the causes of those success and failures.22.1 Merger and Acquisition Conceptual ReviewFarlex Finan cial lexicon3has depositd A decision by two companies to combine all operations, officers, structure, and other functions of business. Mergers are meant to be mutually beneficial for the parties involved. In the miscue of two publicly-traded companies, a merger usually involves one company bountiful shareholders in the other its stock in exchange for surrendering the stock of the first companyPratap G. Subramanyam (2005) has stated merger as in the term associated with the desegregation of one company into another. The merging company should exist thereafter and all its assets and liabilities get legally vested in the merged company. This content that the merger means jointure of the assets of the two or more companies to form a tonic company serving the similar or different purpose.2.1.1 Recognition of conjugation (merger) by Indian Statutory BodiesThe Company Act of India does not define an amalgamation or a merger. Therefore, the term are being see as being included in the term arrangement as defined in part 390(b). This is vindicated by the fact that piece 394 talks about arrangement that are in nature of amalgamation of two or more companies. It is possible under Companies Act for two or more companies to amalgamate using the shareholder approval travel plan under Section 293(1)(a) though such route is never adopted. The more appropriate route is to get court order under Section 394 of the Act, which has been specifically enacted to enable amalgamations.Section 390 This section provides that The expression arrangement includes a reorganization of the share capital of the company by the consolidation of shares of different classes, or by the division of shares into shares of different classes, or by both these methodsSection 394 This section contains the powers while sanctioning scheme of reconstruction or amalgamation.Under the Income Tax(IT) Act, 1961 Section 2(1B) the word amalgamation in relation to companies means the merger of one or mor e companies to another company or the merger of two or more companies to form one company so thatAll the property of the amalgamating company or companies beforehand the amalgamation becomes the property of amalgamating company by lawfulness of the amalgamation.All liabilities of the amalgamating company or companies immediately before the amalgamation become the liabilities of amalgamating company by the virtue of amalgamation.Accounting Standard AS-14 defines amalgamations as those pursuant to the readinesss of the companies Act or any other statute, which may be applicable to the companies. Therefore, it applies to all proceeding that come under the purview of Section 391-394 of the Companies Act that relate to integration of two or more companies. AS-14 categorizes amalgamation into two categories (a) amalgamation in nature of merger (b) amalgamation in nature of purchase.An amalgamation assume into former category ifAll assets and liabilities of agitateor company become af ter amalgamation, the assets and liabilities of the transfer company.Shareholders holding not less than 90% of the face value of the faithfulness share of transferor company (excluding the shares held by the transferee company), become the equity shareholder of the transferee company by virtue of the amalgamation.The consideration for the amalgamation, receivable by those equity shareholders of the transferor company who agree to become the equity shareholder in the transferee company, is discharged wholly by issue of shares (except for fractional shares that may be settled in cash).The business of the transferor company is intended to be carried on by the transferee company.Acquisition is the mechanism by which companies change hands and through transfer of ownership of share or transfer of control. Acquisition means the purchase of or getting access to real stakes in a company, often making such acquirer a major shareholder or force in the company.According to Dictionary of Fina ncial Term4If a company buys another company outright, or accumulates enough shares to take a controlling interest, the deal is draw as an acquisition. For example, if club A buys 51% or more of Corporation B, then Corporation B becomes a subsidiary of Corporation A, and the military action is called an acquisition. A single investor may buy out a publicly-traded company one calls this going private. Acquisitions turn over in exchange for cash, stock, or both.Acquisitions may be friendly or hostile a friendly acquisition occurs when the board of directors supports the acquisition and a hostile acquisition occurs when it does not.2.1.2 The Acquisition and coup Code in IndiaAfter the advent of the SEBI, introduced in 1994, there was a concerted attempt at formulation of a comprehensive framework under which acquisition and takeover could be made in alert listed companies. However the takeover code does not apply to unlisted companies and continue to be regulated by the prepared ness of the Company Act. Listed companies are soon governed by the provision of Takeover Code, clause 40A and 40B of the Listing Agreement of the stock exchange and Section 108B and 108D of the Companies Act as regards acquisition and takeovers.Under the provision of Section 108B, corporate under the same management holding whether respectively or in aggrete.10% or more of the nominal value of the bid equity share capital of the any other company shall, before transferring one or more such shares, give to the central government an intimation of its proposal to do with the prescribed details. Section 108D provides the similar provision wherein the Central Government can act suo moto of any transfer of a block share in a company. All the Sections under 108 are backed by Section 108G.Section 108G Applicability of the render of sections 108A to 108F.-The provisions of sections 108A to 108F (both inclusive) shall apply to the acquisition or transfer of shares or share capital by or t o, an individual firm, group, constituent of a group, body corporate or bodies corporate under the same management, who or which-(a) is, in end of acquisition of shares or share capital, the owner in relation to a dominant undertaking and there would be, as a result of such acquisition, any increase-(i) in the production, supply, distribution or control of any goods that are produced, supplied, distributed or controlled in India or any substantial part so by that dominant undertaking, or(ii) in the provision or control of any services that are rendered in India or any substantial part thereof by that dominant undertaking or(b) would be, as a result of such acquisition or transfer of shares or share capital, the owner of a dominant undertaking or(c) is, in case of transfer of shares or share capital, the owner in relation to a dominant undertaking.The SEBI Takeover Code brought in several naked as a jaybird features into acquisition law which were not present in Clause 40A and 40B . The primary theme of the code is to provide for fair play and transparency in acquisition and takeover but at the same time to get word that they are not stifled into extinction.2.2 Differentiation of Merger and AcquisitionIn general Mergers and Acquisitions are used interchangeably, but they have a acute differentiation in there meaning. Weston and Copeland (1992) distinguished merger and acquisition merger as a transaction between more or less equal partners, while acquisitions are used to denote a transaction where a substantially bigger firm takes over a little firm. Their basis of distinguish was the size. But there are other factors away from size that denotes the differences between merger and acquisition.Asquith Mullins (1986) define mergers and acquisitions on basis of share distribution. When two firms merge, shares of both are surrendered and new shares in name of the new firm will be issued. Unlike in merger, shares of the acquiring firm are not surrendered but traded in the market prior to the acquisition and continue to be traded by the public after the acquisition. The shares of the target firm cease to exist publicly.Motives behind Merger and AcquisitionThere are three major motives for the mergers and takeovers Synergy, Agency, HubrisSynergy motive means that the sum intact return/value from the integration of two or more companies should be greater than that from the individual company. Elazar Berkovitch (1993) suggests that the takeovers occur because of economic gains that results by merging the resources of the two firms. They even concluded that total gains from MA are forever plus and thus can say that synergy appears.The agency motive suggests that takeovers occur because they enhance the acquirer managements welfare at the expense of acquirer shareholders.Elazar Berkovitch and M. P. Narayanan (1993) suggested three major motives for mergers and acquisitions synergy, agency and hubris. The synergy motive suggests that the ta keovers occur because of economic gains that results by merging the resources of the two firms. The agency motive suggests that takeovers occur because they enhance the acquirer managements welfare at the expense of acquirer shareholders. The hubris hypothesis suggests that managers make mistakes in evaluating target firms, and engaged in acquisitions even when there is no synergy.Khemani (1991) states that there are multiple reasons, motives, economic forces and institutional factors that can be taken together or in isolation, which influence corporate decisions to engage in MAs. It can be assumed that these reasons and motivations have enhanced corporate profitability as the ultimate, long-term objective. It seems reasonable to assume that, even if this is not always the case, the ultimate concern of corporate managers who make acquisitions, regardless of their motives at the outset, is increase long-term profit. However, this is affected by so many other factors that it can beco me very difficult to make isolated statistical measurements of the effect of MAs on profit.The free cash flow theory developed by Jensen (1988) provides a good example of intermediate objectives that can lead to greater profitability in the long run. This theory assumes that corporate shareholders do not necessarily share the same objectives as the managers. The conflicts between these differing objectives may well intensify when corporations are profitable enough to generate free cash flow, i.e., profit that cannot be profitably re-invested in the corporations. Under these circumstances, the corporations may check to make acquisitions in order to use these liquidities. It is therefore higher debt levels that cause managers to take new measures to increase the efficiency of corporate operations. According to Jensen, long-term profit comes from the re-organization and restructuring made necessary by takeovers.