Merger Procedure
I. Accounting
When
mergers and acquisitions take place, the combined entity's financial
statements have to reflect the effect of combination. According to the
Accounting Standard 14 (AS 14) issued by the Institute of Chartered
Accountants of India, an amalgamation can be in the nature of pooling of
interests, referred to as "amalgamation in the nature of merger', or
acquisition. The conditions to be fulfilled for an amalgamation to be
treated as an "amalgamation in the merger " are as follows:
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All
assetss and liabilities of the "Transferor Company" before
amalgamation should become assets and liabilities of the
"Transferee Company".
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Shareholders
holding not less than 90% of shares (in value terms) of the
"Transferor Company" should become the shareholders of the
"Transferee Company".
-
The
consideration payable to the shareholders of the "Transferor
Company" should be in the form of shares of the "Transferee
Company" only; cash can however, be paid in respect of fractional
shares.
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Business
of the "Transferor Company" is intended to be carried on by
the "Transferee Company."
-
The
"Transferee Company" incorporates, in its balance sheet, the
book values of assets and liabilities of the "Transferor
Company" without any adjustment except to the extent needed to
ensure uniformity of accounting policies. An amalgamation which does
not satisfy all the conditions stated above will be regarded as an
"Acquisition".
The accounting treatment of an amalgamation in the books of the
"Transferee Company" is dependent on the nature of
amalgamation. For a merger, the 'pooling of interest' method is to be
used and for an Acquisition the 'purchase' method is to be used. Under
'the pooling of interest' method, the balance sheet of the combined
entity is arrived at by a line by line addition of the corresponding
items in the balance sheets of the combining entities. Hence, there is
no asset write-up or write-down or even goodwill. Under the 'purchase'
method, however, the "acquiring company" treats the
"acquired company" as an acquisition investment and, hence,
reports its tangible assets at fair market value. So, there is often
an asset write-up. Further, if the consideration exceeds the fair
market value of tangible assets, the difference is reflected as
goodwill, which has to be amortized over a period of five years. Since
there is often an asset write-up as well as some goodwill, the
reported profit under the purchase method is lower because of higher
depreciation as well as amortization of goodwill.
II. Legal/ Statutary approvals
The
process of mergers or amalgamations is governed by sections 391 to 394
of the Companies Act, 1956 and requires the following approvals
Shareholder
approval
The shareholders of the amalgamating and the amalgamated companies are
directed to hold meetings by the respective High Courts to consider
the scheme of amalgamation. The scheme is required to be approved by
75% of the shareholders, present and voting, and in terms of the
voting power of the shares held (in value terms).
Further, Section 395 of the Companies act stipulates that the
shareholding of dissenting shareholders can be purchased, provided 90%
of the shareholders, in value terms, agree to the scheme of
amalgamation. In terms of section 81(IA) of the Companies Act, the
shareholders of the "amalgamated company" also are required
to pass a special resolution for issue of shares to the shareholders
of the "amalgamating company".
Creditors/Financial
Institutions/Banks approval
Approvals from these are required for the scheme of amalgamation in
terms of the agreement signed with them.
High
Court approvals
Approvals of the High courts of the States in which registered offices
of the amalgamating and the amalgamated companies are situated are
required.
Reserve
Bank of India approval
In terms of section 19 of FERA, 1973 Reserve Bank of India permission
is required when the amalgamated company issues shares to the
nonresident shareholders of the amalgamating company or any cash
option is exercised.
SEBI's
Takeover Code for substantial acquisitions of shares in Listed
companies
In
India take-overs are controlled. On 4th November 1994, SEBI announced
a take-over code for the regulation of substantial acquisition of
shares, aimed at ensuring better transparency and minimizing the
occurrence of clandestine deals. In accordance with the regulations
prescribed in the code, on any acquisition in a company which makes
acquirers's aggregate shareholding exceed 15%, the acquirer is
required to make a public offer. The take-over code covers three types
of takeovers-negotiated takeovers, open market takeovers and bail-out
takeovers.
III. Valuation
There
are several approaches to valuation. The important ones are the discounted
cash flow approach, the comparable company approach, and the adjusted book
value approach. Traditionally, the comparable company approach and the
adjusted book value approach were used more commonly. In the last few
years, however, the discounted cash flow approach has received greater
attention, emphasis, and acceptance. This is mainly because of its
conceptual superiority and its strong endorsement by leading consultancy
organizations.
The
discounted cash flow approach to corporate valuation involves four broad
steps:
-
Forecast
the free cash flow
-
Compute
the cost of the capital
-
Estimate
the continuing value
-
Calculate
and interpret results
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