Roles of Management Graduates in Mergers and Acquisitions

By Prof. Augustin Amaladas M.Com.,AICWA.,PGDFM.,B.Ed. For IMIS Bhubaneshwar 28/04/08 at 9.20 AM

Issues related to Mergers and Acquisitions.

       

Direct Tax implications Sales tax implications Foreign Direct investments Method of valuation Anti Trust Act Financing of Mergers and Aquisitions Role of Investment Bankers Accounting of Mergers.

Recent Mergers and Acquisitions

 

HORIZONTAL MERGER As Ford announced the sale of the two British iconic cars to Tata Motors Ltd.for 2.3 billion. Ford acquired Jaguar for $2.5 bn in 1989 and Land Rover for $2.75 bn in 2000 but put them on the market last year after posting losses of $12.6 bn in 2006 - the heaviest in its 103-year history.

The Hutch and Vodafone merger

Takes over Vodafone(Briton) A Foreign company HTIL(Whampoa group of Li-Ka Shing. Hong Kong A foreign company

67% Essor group Hutchison Essor Indian Company

Asim Ghosh-12% A.Singh and other companies (Minority)

INCOME TAX RELATED ISSUES FOR AMALGAMATION

CONDITIONS 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 FULFILLED 1. ACCUMULATED LOSSES REMAIN UNABSORBED FOR 3 OR MORE YEARS 2. 75% OF BOOK VALUE TO BE HELD ATLEAST FOR 2 YEARS BEFORE AMALGAMATION 3. THE AMALGAMATED CO. CONTINUES TO HOLD 3/4TH OF BOOK VALUE ATLEAST FOR 5 YEARS 4. NEW CO. SHOULD CONTINUE FOR ANOTHER 5 YEARS 5. NEW CO. SHOULD ACHIEVE ATLEAST 50%OF INSTALLED CAPACITY BEFORE END OF 5 YEARS AND SHOULD CONTINUE FOR 5 YEARS


A LTD AMALGAMATES WITH B LTD AS ON 1st April 2008

PARTICULARS DOES NOT SATISFY SEC 2(1B) & 72 A SATISFIES 2(1B) SATISFIES BUT DOES NOT BOTH 2(1B) & SATISFY 72 A 72 A DOES NOT ATTRACT CAPITAL GAIN FOR A BUT NO GAIN FOR B NO CAPITAL GAIN TAX & ACCUMULATE D LOSSES & UNABSORBED DEPERICIATIO N CAN BE CARRIED FORWARD

A MERGES NO BENEFIT WITH B (A GOES TO A & B OUT)

? If B merges with A . If 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. Can accumulated losses & unabsorbed depreciations be carried forward and set off by the new company? ? If C is not an Indian co?

Tax Concession To Share Holders Of Amalgamating Co.

No capital gain tax provided, new co. is an Indian co.& Shareholders are acquired everything in shares

EXERCISE
PARTICULARS EAT CO. A 1,40,000 CO. B 37,500 7,500 5 40 8

NO. OF SHARES 20,000 EPS 7

MARKET PRICE 70 P/E RATIO 10

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 ?? 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

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

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 Boot strap effect

CONCLUSION


FIRM WITH HIGHER P/E RATIO CAN ACQUIRE FIRM WITH LOWER P/E RATIO WHICH WILL INVARIABLY INCREASES MARKET VALUE AFTER MERGER

Conclusion
        

Fulfill section 2(1B) of Income tax act by transferor company Amount to be in the form of shares No cash to be received Foreign Direct investments in selected sector can not exceed 74% by foreign company Fulfill section 72A of the IT act so as to reap the benefit by transferee company Shareholders can not transfer their holdings with in 5 years. Sales tax at the rate of 8% can not be avoided. Set off and carry forward of losses is possible. What are the losses can be carried forward and set off? How many years?

Some Facts-USA Companies

1897-1904-horizontal Mergers  Monopolistic Market structure  Mega merger between US Steel and Carnegie Steel.It also merged with 785 separate firms-75% of Steel production of US. As a result: ???? What happened to Standard Oil?


Standard Oil(SO)
     

Broken in to 30 Companies. Some of them are SO of New Jersey named EXXON SO of New York named MOBIL SO of California renamed CHEVRON SO of Indiana renamed AMOCO What is ANTI TRUST Act? What is known in India? HCL was formed?

HCL


Hindustan Computers, Hindustan Reprographic, Hindustan Telecommunications and Indian Software Ltd.

In February 2008, as many as 38 cross-border deals were announced with total value of $2.80 billion, of which 27 were outbound deals with a value of $2.57 billion .In March 2008 it has crossed $10 billion in investment by Indian Companies outside India.

Diologic


Meanwhile, global financial information provider Diologic in its latest report said that India-targeted M&A volumes reached $11.9 billion through 345 deals so far this year. US was the leading acquiring country with deals worth 1.6 billion dollars, followed by the UK with $904 million and Germany with USD 584 million.

Some Facts
 

Between 1926 and 1930- there were 4600 mergers took place Result of which between 1919 and 1930 12,000 companies went out of market.

The second wave came to an end when stock market crashed on October 29,1929. Investment Bankers played in the first two phases of mergers.

1965-69 in USA
    

Management principles were applied in industries. Management graduates were employed to manage conglomerate mergers. There were 6000 mergers which leads to 25000 firms disappeared. Investment Bankers do not finance most of these mergers Finance:-????

Equity financing

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

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


EXAMPLE
PRE MERGER SITUATION EAT NO. OF SHARES EPS FIRM A FIRM B 6,25,000 2,00,000 3.125 2,50,000 1,00,000 2.5

P/E RATIO(TIMES) MARKET PRICE PER SHARE(MPS) TOTAL MARKET VALUE (N*MPS) OR (EAT*P/E RATIO)

8 25 50,00,000

7.5 18.75 18,75,000

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 Boot strap effect

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 NET BENEFIT TO A NO. OF SHARES OF A TO A CO. SHARE HOLDERS DESIRED POST MERGER MPS NO. OF EQUTY SHARES TO BE ISSUED BASED ON DESIRED MARKET PRICE TOLERANCE SHARE EXCHANGE RATIO 75,00,000 10,00,000 65,00,000 1,00,000 65 PER SHARE 10,00,000/65 = 15,385 SHARES

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

POST MERGER

SITUATION 1 (BASED ON CURRENT MARKET PRICE 2.5:3.125=.8 6.25+2.5=8.75 2.8 lakhs

SITUATION 2

EXCHANE RATIO/ SWAP RATIO (ASSUMING) EAT(COMBINED FIRM) NO. OF SHARES

1:1 8,75,000 2,00,000+1,00,000=3,00,0 00 8,75,000/3,00,000=2.91/ 7.5

EPS P/E RATIO (ASSUMED TO BE THE SAME) MPS

8.75/2.8=3.125 8

3.125*8=25

21.825

TOTAL MARKET VALUE

70,00,000

65,47,500

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.


Life Education


Abraham Lincolin

Thank You All.

Pricing of Capital issues

   

Step-I Total assets Less: Preference Capital Secured and unsecured borrowings
Current liabilities  Contingent liabilities --------------------------------------------------A.Net Worth --------------------------------------------------

Method II(Liability Approach)

Equity Share capital  Add: Free reserves  ------------------------------ Less:Contingent Liabilities --------------------------------------------Net worth -------------------------------------------

2.Profit Earning Capacity ValuePECV



Weighted Adjusted Average Profit before Tax Less: Provision for Tax at % -----------------------------------------------Weighted average profit after Tax Less : Preference dividend ---------------------------------------------Net profit after Tax and dividend Number of Equity shares including Fresh and bonus shares ------------------------------------------------------------------------EPS PECV= Capitalisation of Profit at 15%/12%/10%/8% respectively = Net Profit After tax and dividend*100/15

3.Fair value


(Net Asset value +Profit Earning Capacity Value)/2

4.Average Market Price

   

Year I High Year II Year (Current Year) 4. Monthwise: 1

   

Low Average

2 3 4 etc for 12 months (Average market price for the three years)

5. Capitalisation rate
   

If MV not more than 20% of FV-15% If MV more than 20%-50% -12% Between 51-75 - 10% Above 75% - 8%

PE- Multiple


Average P/E ratio of related companies are Considered to discount