Unit 4

Contents
 M&A – Exchange ratio Financial evaluation of mergers,
M&A as capital budgeting decision, Economic value added
& market value added Taxation aspects. Contemporary
issues in Financial Management – Public offerings -
IPO, FPO, ASBA, book building, Reverse book building,
private placement, Green shoe option, Red Herring
Prospectus. ESOP, ESPP, Refinancing, Securitization,
Carbon Credit,
 Balanced score card, P notes, GDR, ADR, ECB, Indian
Depository Receipts, Hundi, Parta system

Mergers & Acquisitions: An
Introduction
 A merger is when two or more companies combine
together to create a new larger company, usually with a
new name .
 This involves a transfer of ownership of all the assets
and liabilities
 The companies may get compensation in the form of
stock swap or a cash payment
 In practice, both companies surrender their stock and
issue new stock as a new company.
Acquisitions
 Acquisition takes place one company buys the other
company.
 That means, the buying company acquires the ownership
in the assets of the selling company.
 The selling company will no longer exist. Only the buying
company will exist. For example: Facebook acquired
WhatsApp. Now there is no separate company named
WhatsApp. But Facebook is in existence
 It also includes take overs. In case of take overs, the
company being taken over continues to exist but the
control of management will be in hands of the acquiring
company. For example
Reverse Merger
 It is a merger of a profit making company into a loss
making company. The company company so merged
gets the concessions and rebates under the Income Tax
Act 1961
Types of Mergers
 Horizontal Merger: Two or more companies in the same
industry merging together is horizontal merger. Example:
Recent Merger of Punjab National Bank, Oriental Bank of
Commerce and United Bank of India; Merger of Canara
Bank and Syndicate Bank and the merger of Union Bank
of India with Andhra Bank and Corporation Bank
announced recently by the Finance Minister
 Vertical Merger: A vertical merger is also two or more
companies in the same industry but in different stages of
the supply chain. (production and distribution stage). For
example, a tyre manufacturer acquires a rubber
manufacturer, or a textile company acquires a cotton yarn
manufacturer etc.
Conglomerate Merger
 If two firms operating in different or unrelated industries,
the merger is called a conglomerate merger.
 The total economic activities of the firm increases but their
existing business does not expand./
 Example : If Bharti Airtel decides to merge with Futures
group , it would be a conglomerate merger.
 Pure conglomerate merger is when the businesses are
totally unrelated.
 Congeneric Conglomerate merger is when both companies
which are in similar business but are not directly
competitive. For example, merger of a car maker with a
scooter maker.
Types of Mergers on the basis of
procedure adopted
 Negotiated Merger: Also called friendly merger.. Owners
of both companies negotiate about the terms and reach to
an agreement. Then the proposal for merger is placed in
the shareholders’ meeting. Example: Merger of ICIC Ltd.
With ICICI Bank.
 Tender Offer: It is a bid to acquire a controlling interest in
the target firm at a fixed price. The acquiring firm directly
approaches the shareholders of the target firm to sell their
shareholdings to the acquiring company at a fixed
price.The company may also indicate the number of shares
it is willing to buy. Example: Sterlite company’s tender offer
to Indian Aluminum Ltd.
Types of Mergers on the basis of
procedure adopted
 Hostile Takeover bid:When a company acquires a
controlling stake in another company without the
consent of the existing management.For example: L&
T acquired 60% stake in Mind Tree.
 Arranged Merger: In India, the Board of Financial
Reconstruction arranges for the take over of a
financially sick companies by other companies. For
example, The RBI had arranged for the take over of
United Western Bank Ltd by IDBI Bank in 2006
Motives behind Mergers:
 Operating Economies: The resources of the target
combined with those of the acquiring company offer some
synergies or special advantages. In case of horizontal
merger, the scale of operation of the merged entity
becomes larger and offer economies of scale
 Diversification: A firm which wants to enter into a new
area of business can acquire another company in the area.
This leads to diversification of the business of the acquiring
company. Diversification reduces the business risk of the
company.
 Earnings per share: Increasing the EPS may be a motive
for the merger. A company may buy another company
which has lower price/earnings ratio. This will lead to the
increase in EPS of the firm.
Motives behind Mergers:
 Financial Strategy: The merger is one of the financial
strategies adopted by a firm to increase its market
value. The firm may get tax benefits also which can be
shared by the two firms.
 Corporate control: Investors and companies are
ready to pay a huge premium to acquire a controlling
interest in another company.