Download Strategic Financial Management - Evaluation Of Merger Proposal - Notes - Finance and more Study notes Financial Management in PDF only on Docsity!
3.2.12 EVALUATION OF MERGER PROPOSAL
Top management defines the organisation‘s goals and outlines the policy framework to achieve these objectives. The organisation‘s goal for business expansion could be accomplished, inter alia through business combinations assimilating a target corporate which can remove the present deficiencies in the organisation and can contribute in the required direction to accomplish the goal of business expansion through enhanced commercial activity i.e., supply of inputs and market for output product diversification, adding up new products and improved technological process, providing new distribution new channels and market segments, making available technical personnel and experienced skilled manpower, research and development establishments, etc. Depending upon the specific need and cost advantage with reference to creating a new set up and/or acquiring a well established setup firm.
Search for a Merger Partner
The top management may use their own contacts with competitors in the same line of economic activity or in other diversified field which could be identified as better merger partners or may use the contacts of merchant bankers, financial consultants and other agencies in locating suitable merger partners. A number of corporate candidates identified and evaluated based on the organisational h istory of business and promoters and capital structure; organisational goals; product, market and competitors; organisational setup and management pattern; assets profile movable and immovable assets, land and building; manpower skilled, unskilled, technical personnel and detailed particulars of management employees; accounting policies, financial management and control; operational data; profitability projections; creditors profile and company‘s credit performance and
record with its bankers in particular. They may be short listed when they passed on the above detailed aspects of information.
Negotiating with Merger Partner
Top management can negotiate at a time with several identified short listed companies suited to be merger partner for settling terms of merger and pickup one of them which offers favorable terms.
Negotiations can be had with target companies before making any acquisitional attempt. Same drill of negotiations could be followed in the cases of merger and amalgamation. Activity schedule for planning merger covering different aspects like preliminary consultations with the perspective merger partner and seeking its willingness to cooperate in investigations should be prepared. There are other aspects, too, in the activity of schedule covering, quantification action plan, purpose, shape and date of merger, profitability and valuation, taxation aspects, legal aspects and developmental plan of the company after merger.
3.13 STEPS FOR MERGER AND AMALGAMATION
Once the merger partner has been identified and terms of merger are settled the following procedure can be followed.
1. Scheme of Merger / Amalgamation
Once two/more firms agree to merge with each other, and then they have to prepare a scheme of amalgamation. Generally the acquiring company prepares scheme of amalgamation after consulting its merchant banker or financial consultants. There is no specific form prescribed for scheme of amalgamation but scheme should generally contain the following information:
- Particulars about transferee (amalgamated) and transferor (amalgamating)
firms and the business of transferor.
- Miscellaneous provisions covering income tax dues, contingencies and other accounting entries deserving attention or treatment.
- Commitment of transferor and transferee companies towards making applications/ petitions under sections 391 and 394 and other applicable provisions of the Companies Act, 1956 to their respective High Courts.
- Enhancement of borrowing limits of the transferee company upon the scheme coming into effect.
- Transferor and transferee companies give assent to change in the scheme by the court or other authorities under law and exercising the powers on behalf of the companies by their respective Boards.
- Description of powers of delegates of transferee to give effect to the scheme.
- Qualification attached to the scheme, which require approval of different agencies, etc.
- Description of revocation/cancellation of the scheme in the absence of approvals qualified in clause 20 above not granted by concerned authorities.
- The transferor company will be dissolved without winding up after amalgamation is affected.
- Statement to bear costs, etc. in connection with the scheme by the transferee company.
The acquiring company should be ensured that the scheme of amalgamation is just and equitable to the shareholders and employees of each of the amalgamating company and to the public.
2. Approval of Board of Directors for the scheme
In India the scheme of amalgamation / merger is governed by the provisions of Companies Act, 1956, under sections 391-394. Therefore, the scheme of amalgamation requires approval from respective bodies. Respective Board of
Directors for transferor and transferee companies is required to approve the scheme of amalgamation.
3. Approval from other Boards
According sec.391, of the Company‘s Act, 1956, the scheme of amalgamation should get it approved by shareholders of the acquiring firm and target firm. Generally shareholders of amalgamating companies should hold their respective meetings under the directions of respective High Courts, and consider the scheme of amalgamation.
Approval of the scheme by specialized financial institutions / banks / trustees for debenture holders
The Board of Directors should in fact approve the scheme only after it has been cleared by the financial institutions / banks, which have granted loans to these companies or the debentures trustees to avoid any major change in the meeting of the creditors to be convened at the instance of the Company Court‘s under section 391 of the Companies Act, 1956.
Approval of Reserve Bank of India is also needed where the scheme of amalgamation contemplates issue of share / payment of cash to Non-Resident Indians/ Foreign nationals under the provisions of Foreign Exchange Management (Transfer or Issue of Security by a Person Resident Outside India) Regulation,
Approval from respective high courts, confirming the amalgamation. The court(s) issues orders for dissolving the amalgamating company, without winding up, on receipt of reports from the official liquidator and the regional director.
4. Examination of Object Clause
Examination of object clauses of memorandum of association (MoA) of the transferor and transferee companies to ascertain whether the power of amalgamation / merger exists or not. Further, the object clause of MoA of
Advocate Chairman to preside over the meeting and submit a report to the Court. The court for calling the meeting of creditors in case such request has been made in the application issues similar directions.
- Approval of Registrar of High Court to notice for calling the meeting of
Members / Creditors
Pursuant to the directions of the Court, the transferor as well as the transferee companies shall submit for the approval to the Registrar of the respective High Courts the drafts notice/ s calling the meetings of the members in Form No.36 together with a scheme of arrangements and explanations, statement under section 393 of the Companies Act and form of proxy in Form No. 37 of the Companies (Court) Rules to be sent to the members along with the said notice. Once Registrar has accorded approval to the notice, then the Chairman appointed for the meeting by the High Court who shall preside over the proposed meeting of members should be signed it.
9. Dispatch of Notices to Members / Shareholders
Once the notice has been signed by the chairman of the forthcoming meeting as aforesaid it could be dispatched to the members under certificate of posting at least 21 days before the date of meeting.
10. Advertisement of the Notice of Members’ Meetings
The Court may direct the issuance of notice of the meeting of these shareholders by advertisement. In such case rule 74 of the Companies (Court) Rules provides that the notice of the meeting should be advertised in such newspaper and in such a manner as the Court may direct not less than 21 clear days before the date fixed for the meeting. The advertisement shall be in Form No. 38 appended to the Companies (Court) Rules. The companies should submit the draft for the notice to be published in Form No. 38 in an English Daily together with a translation thereof in the regional language to the National Company Law Tribunal (NCLT).
The advertisement shall be released in the newspapers after the Registrar approves the draft.
11. Confirmation about the Service of the Notice Ensure that at least one week before the date of the meeting, the Chairman appointed for the meeting files an Affidavit to the Court about the service of the notices to the shareholders that the directions regarding the issue of notices and advertisement have been duly complied with. 12. Holding the Shareholders’ General meeting and passing the resolutions The general meeting should be held on the appointed by each company for passing the scheme of amalgamation. The amalgamation scheme should be approved by the shareholders, by a majority in number of shareholders present in person or on proxy and voting on the resolution and this majority must represent at least 3/4 th in value of the shares held by the members who vote in the poll.
Getting approval of scheme amalgamation from shareholders in just enough it should also get approval (at least 3/4th in value of creditors, in each class, who have vote in either person or by proxy) from creditors of the company, for which company need hold separate meeting for creditors.
13. Filing of Resolutions of General Meeting with NCLT for Confirmation Once the shareholders‘ and creditors general meeting approves the amalgamation scheme by a majority in number of members holding not less than 3/4ths in valu e of the equity shares, the scheme is binding on all the members of the company. The companies involved in the amalgamation / merger should present a copy of the resolution passed by the shareholders approving the scheme of amalgamation should be filed with the NCLT. Then the NCLT will fix a date of hearing. A notice about the hearing and the date of hearing has to be published in two newspapers. At the date of hearing NCLT here the parties concerned and ascertaining that the amalgamation / merger scheme is fair and reasonable, and then the NCLT will pass an order sanctioning the same.
iii. The third situation is where allotment to Non-Resident Indians is involved and permission of Reserve Bank of India is necessary. The allotment will take place only on receipt of RBI permission. In this connection refer to regulations 7, 9 and 10B of Foreign Exchange Management (Transfer or Issue of Security by a Person Resident Outside India) Regulations, 2000 as and where applicable.
Having made the allotment, the transferee company is required to file with ROC the return of allotment in Form No. 2 appended to the Companies (Central Government‘s) General Rules and Forms within 30 days from the date of allotment in terms of section 75 of the Act.
Transferee company shall having issued the new share certificates in lieu of and in exchange of old ones, surrendered by transferor‘s shareholders should make necessary entries in the register of members and index of members for the shares so allotted in terms of sections 150 and 151 respectively of the Companies Act,
17. Listing of Shares at Stock Exchange
After the amalgamation is effected, the company, which takes over the assets and liabilities of the transferor company, should apply to the Stock Exchanges where its securities are listed, for listing the new shares allotted to the shareholders of the transferor company.
18. Court order to be Annexed to Memorandum of Transferee Company
It is the mandatory requirement vide section 391(4) of the Companies Act, 1956 that after the certified company of the Court‘s order sanctioning scheme of amalgamation is filed with the Registrar, it should be annexed to every copy of the Memorandum issued by the transferee company. Failure to comply with requirement renders the company and its officers liable to punishment.
19. Preservation of Books and Papers of Amalgamated Company
Section 396A of the Act requires that the books and papers of the amalgamated company should be preserved and not be disposed of without prior permission of the Central Government.
20. Post Merger Secretarial Obligations
There are various formalities to be compiled with after amalgamation of the companies is given effect to and allotment of shares to the shareholders of the transferor company is over. These formalities include filing of returns with Registrar of Companies, transfer of investments of Transferor Company in the name of the transferee, intimating banks and financial institutions, creditors and debtors about the transfer of the transferor company‘s assets and liabilities in the name of the transferee company etc. All these aspects along with restructuring of organisation and management and capital are discussed in chapter relating to post- merger reorganization of Transferee Company.
21. Withdrawal of the scheme not permissible
Once the requisite majority of Shareholders and creditors has approved the Scheme for merger, the Scheme cannot be withdrawn by subsequent meeting of shareholders by passing Resolution for withdrawal of the Petition submitted to the Court under section 391 for sanctioning the scheme.
22. Cancellation of Scheme and order of Winding-up
It was held by the Supreme Court in J.K (Bombay) (P) Ltd. v New Kaiser-i-Hind that the effect of winding-up order is that except for certain preferential payments provided in the Act, the property of the company is applied in satisfaction of its liabilities, as they exist at the commencement of the winding-up.
So long as the scheme is in operation and is binding on the company and its creditors, its provisions undoubtedly govern the rights and obligations of those on whom it is binding. But once the scheme is cancelled under section 392(2) on the
1. Carry forward and Set off of Business Losses and Unabsorbed Depreciation Section 72 A, of the Income Tax Act, 1961, allows the amalgamated company to carry forward accumulated business losses as well as unabsorbed depreciation of the amalgamating company, provided the following conditions are fulfilled: a. Amalgamated company continues the business of amalgamating company for the minimum period of 5 years from the date of amalgamation order, b. Amalgamated company should hold at least 3/4 th of the value of the assets of the amalgamating company (ies), acquired in the scheme of amalgamation, for a minimum period of 5 years.
c. The amalgamated company ensure that the amalgamation is for genuine business purpose, by fulfilling the conditions that are prescribed for revival of amalgamating company (ies),
d. Amalgamation should be of a company owning an industrial undertaking (the manufacturer or processing of goods, or manufacture of computer software, or generation and distribution of electricity, or business of providing telecommunication services like – cellular, domestic satellite, broad brand network, etc., or mining, or construction of ships, aircrafts or rail systems)
2. Expenditure on Acquisition of Patent Right or Copy Rights
Generally acquisition of patents rights or copyrights involves expenditure that may be recovered over a period of time. If there were any un-recovered amount in the books of amalgamating company the same would be allowed to be written off by the amalgamated company in the same number of balance installments. After payment of the last installment the rights may be sold by the amalgamated company for a profit or loss if they are no more required, and the profit or loss on sale of the rights is the profit or loss of the amalgamated company. The
expenditure on acquisition of rights is eligible for depreciation if it is spent after
31st March, 1998.
3. Capital Expenditure on Scientific Research
Capital expenditure of research is must for any company that wants to stay back in the industry. The amount spent on scientific research is generally a huge amount, which is supposed to be recovered over the future period. If amalgamated company accepts an assets represented by capital expenditure on scientific research, on such asset any unabsorbed capital expenditure in the books of amalgamating company would be eligible to be carried forward and set off in the hands on amalgamated company.
4. Amortization of Preliminary Expenses
Preliminary expense is the amount spent in the beginning of the firm. If there is any not written off amount in the books of amalgamating company the same would be allowed to deduct in the same manner as would have been allowed to the amalgamating company(ies).
5. Expenditure for Obtaining License to Operate Telecommunication
Services
When the amalgamating company transfers license to the amalgamated company and the expenditure spent on obtaining the license are yet to be recovered, the same is allowed to the amalgamated company in the same number of balance instalments. After payment of the last installment the license may be sold by the amalgamated company for a profit or loss if they are no more required, and the profit or loss on sale of the rights is the profit or loss of the amalgamated company.
Accounting Treatment of Reserves in Amalgamations issued by the Institute in
1983 will stand withdrawn from the aforesaid date.
In India merger, defined as amalgamation, which involves the absorption of the target company by the acquiring company that results in the uniting of the interests of the two companies. The accounting treatment in the books of the transferee company is dependent on the nature of amalgamation. If the amalgamation is in the nature of merger then the merger should be structured as pooling of interest. On the other hand acquiring purchases the shares of the target company, then it should be structured as purchase. Therefore there are two main methods of accounting for amalgamations:
(1) The pooling of interests method; and (2) The purchase
method.
1. Pooling of Interest Method
Use of this method is confined to circumstances which meet the criteria referred to in paragraph 3(e) of Accounting Standard (AS) 14 (issued 1994) Accounting for Amalgamations for an amalgamation in the nature of merger. Under this method the assets and liabilities of the acquiring and the acquired companies are aggregated based on book values without making any adjustments. There is no goodwill, because there is no revaluation of assets and liabilities. Rreserves is preserved and they appear in the financial statements of the transferee company in the same form in which they appeared in the financial statements of the transferor company. The difference in capital on account of the exchange ratio (swap ratio) is adjusted in the reserves.
Illustration: Company H acquires company B, and issues share worth Rs.20 crore to company B‘s shareholders. The balance sheets of the both the companies at the time of merger are as follows:
(Rs. In Crore) Particulars Company H Company B Combined Co. Assets: Net fixed assets Current assets Total
Liabilities: Shareholders funds Borrowings Current liabilities Total
From the above table in can be understood that the shareholders funds are recorded at the book values. Even shareholders‘ of Company B received shares worth Rs.20 crore.
2. Purchase Method Under this method the assets and liabilities of the acquiring company after the acquisition are stated into the books of the acquired company at their market values. The difference between the purchase consideration and the net books value of assets over liabilities is shown as ‗goodwill, in the acquiring company books. The same has to be amortised over a period not exceeding five years. If the purchase consideration less than the net book value of assets over liabilities, the difference is shown as ‗capital reserve‘. Illustration: Company H acquires company B, assuming to take all its assets and liabilities. The fair market value of company B‘s fixed assets and current assets is Rs. 27 crore, and Rs.9 respectively. Current liabilities are valued at book value while the fair value of debt is estimated to be Rs. 16 crore. Company H raises cash of Rs. 20 crore to pay to B‘s shareholders by issuing worth Rs. 20 crore to its
own shareholders. The balance sheets of the both the companies before acquisition and after acquisition are shown below:
expenses (depreciation and amortisation) less additional investments expected to be made in the long-term assets and working capital of the acquired company. Steps Involved in Evaluating Merger as Capital Budgeting Decision It consists of the following steps – Step 1: Determination of Cost of Acquisition or Amalgamation (CoA)
Particulars Amount (Rs) Payment to equity shareholders (No. of Equity shares issued in amalgamated company X Market Price of share) Add: Payment to Preference shareholders XXX Debenture holders XXX External Creditors XXX Preference shareholders XX Accepted obligations XXX Add: Dissolution expense XXX Unrecorded liability XXX
Less: Cash proceeds from sale of assets of target company
XXXX
XXXX
XXXX
XXXX
XXX
Cost of Amalgamation / Merger XXXXX Step 2: Determination of Incremental Expected Free Cash Flows to the Company (FCF)
Particulars Amount (Rs) Operating Earnings after tax Add: Non cash expenses (Deprecation and amortisation) Less: Investment in long-term assets Investment in working capital
XXXX
XXX
XX
XX
Free Cash Flows XXXX
