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MERGER,ACQUISITION AND CORPORATE RESTRUCTURING

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Information about MERGER,ACQUISITION AND CORPORATE RESTRUCTURING

Published on August 9, 2008

Author: divinvarghese

Source: slideshare.net

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MERGER,ACQUISITION AND CORPORATE RESTRUCTURING
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Merger,acquisition And Corporate Restructuring

Structure Conceptual framework History of M&A Financial framework Corporate restructuring Accounting for amalgamation Tax benefits Exercise

Conceptual framework

History of M&A

Financial framework

Corporate restructuring

Accounting for amalgamation

Tax benefits

Exercise

CONCEPTIONAL FRAMEWORK MEANING OF MERGERS ACQUSITIONS AMALAMATIONS TAKEOVERS ABSORPTIONS

MEANING OF

MERGERS

ACQUSITIONS

AMALAMATIONS

TAKEOVERS

ABSORPTIONS

TYPES OF MERGERS HORIZONTAL MERGER – SIMILAR LINES OF ACTIVITY as Ford announced the sale of the two British iconic cars to Tata Motors Ltd. 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.

HORIZONTAL MERGER – SIMILAR LINES OF ACTIVITY

as Ford announced the sale of the two British iconic cars to Tata Motors Ltd.

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.

HDFC Bank's merger with Centurion Bank of Punjab and Walt Disney Company's acquisition of 17.2per cent stake in UTV Software Communication to increase its stake to 32.10 per cent in the company. 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.

HDFC Bank's merger with Centurion Bank of Punjab and Walt Disney Company's acquisition of 17.2per cent stake in UTV Software Communication to increase its stake to 32.10 per cent in the company. 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.

Diologic Report 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.

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.

ADVANTAGES REDUCTION OF COMPETITION PUTTING AN END TO PRICE CUTTING ECONOMIES OF SCALE IN PRODUCTION RESEACH AND DEVELOPMENT MARKETING AND MANAGEMENT

REDUCTION OF COMPETITION

PUTTING AN END TO PRICE CUTTING

ECONOMIES OF SCALE IN PRODUCTION

RESEACH AND DEVELOPMENT

MARKETING AND MANAGEMENT

VERTICAL MERGER – FIRMS SUPPLYING RAW MATERIALS MERGE WITH FIRM THAT SELLS ADVANTAGE LOWER BUYING COST OF MATERIAL LOWER DISTRIBUITION COST ASSURED SUPPLIES AND MARKET COST ADVANTAGE

FIRMS SUPPLYING RAW MATERIALS MERGE WITH FIRM THAT SELLS

ADVANTAGE

LOWER BUYING COST OF MATERIAL

LOWER DISTRIBUITION COST

ASSURED SUPPLIES AND MARKET

COST ADVANTAGE

CONGLOMERATE MERGER UNRELATED INDUSTRIES MERGE PURPOSE DIVERSIFICATION OF RISK Ex:Time warner-(they were into media & movie production) & AOL-(leading American website)

UNRELATED INDUSTRIES MERGE

PURPOSE

DIVERSIFICATION OF RISK

Ex:Time warner-(they were into media & movie production) & AOL-(leading American website)

Expansion Merger and Acquisition Asset acquisition Joint ventures Tender offer

Merger and Acquisition

Asset acquisition

Joint ventures

Tender offer

Contraction 1.Spin off-shares in subsidiary distributed to its own shareholders Kotak Mahendra Capital finance Ltd formed a subsidiary called Kotak Mahendra Capital Corporation by spinning off its investment division. 2.Split off- A new company is created to takeover an existing division or unit. It does not result in any cash inflow to the parent company

1.Spin off-shares in subsidiary distributed to its own shareholders

Kotak Mahendra Capital finance Ltd formed a subsidiary called Kotak Mahendra Capital Corporation by spinning off its investment division.

2.Split off- A new company is created to takeover an existing division or unit.

It does not result in any cash inflow to the parent company

HISTORY

The First wave 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. More than 3000 companies disappeared. General Electric,Navistar, Standard Oil, Du-Point, American Tobacco-90% of market share Transformation of regional firms into national firms. Exploited the economies of scale.

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.

More than 3000 companies disappeared.

General Electric,Navistar, Standard Oil, Du-Point, American Tobacco-90% of market share

Transformation of regional firms into national firms.

Exploited the economies of scale.

Table-1 Year Number of mergers 1897 69 1898 303 1899 1208 1900 340 1904 79

Year Number of mergers

1897 69

1898 303

1899 1208

1900 340

1904 79

Problems of the first Wave Financial factors Fraudulent financing Stock Market crash in 1904 and Banking panic of 1907 Closure of many banks and formation of Federal Reserve System. Easy finance ends here. The US President Teodore Roosevelt and President William Taft made a crack down on Large Monopolies. As a result: ???? What happened to Standard Oil?

Financial factors

Fraudulent financing

Stock Market crash in 1904 and Banking panic of 1907

Closure of many banks and formation of Federal Reserve System.

Easy finance ends here.

The US President Teodore Roosevelt and President William Taft made a crack down on Large Monopolies.

As a result: ???? What happened to Standard Oil?

Standard Oil(SO) Broken in to 30 Companies. SO of New Jersey named EXXON SO of New York named MOBIL SO of California renamed CHEVRON SO of Indiana renamed AMOCO

Broken in to 30 Companies.

SO of New Jersey named EXXON

SO of New York named MOBIL

SO of California renamed CHEVRON

SO of Indiana renamed AMOCO

The Second Wave 1916-1929 Oligopolies industry structure Industries like primary metals, petrolium products, food products, chemicals Outside the previously consolidated heavy manufacturing industries. Product extension merger like IBM and General Foods Vertical mergers In the mining and metal industries(1920)

1916-1929

Oligopolies industry structure

Industries like primary metals, petrolium products, food products, chemicals

Outside the previously consolidated heavy manufacturing industries.

Product extension merger like IBM and General Foods

Vertical mergers In the mining and metal industries(1920)

Prominent Corporations General Motors, IBM, Union Carbide, John DEERE Between 1926 and 1930- there were 4600 mergers took place Result of which between 1919 and 1930 12,000 manufacturing , mining,public utility and banking firms disappeared. This period rail transportation, motor vehicle transportation became national market. Radios in homes, entertainment enhanced the competition. Mass merchandising, national brand advertising

General Motors, IBM, Union Carbide, John DEERE

Between 1926 and 1930- there were 4600 mergers took place

Result of which between 1919 and 1930 12,000 manufacturing , mining,public utility and banking firms disappeared.

This period rail transportation, motor vehicle transportation became national market.

Radios in homes, entertainment enhanced the competition.

Mass merchandising, national brand advertising

Enhance productivity as a part of war effect. The firms were urged to work together rather than compete 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.

Enhance productivity as a part of war effect.

The firms were urged to work together rather than compete

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.

The 1940s The second world war with merger of small firms with larger firms Motive of tax relief High estate taxes There were no increased concentration of wealth Mergers were small.

The second world war with merger of small firms with larger firms

Motive of tax relief

High estate taxes

There were no increased concentration of wealth

Mergers were small.

The third Wave-1965-1969 Merger activity reached its highest level during this period Booming of economy Conglomerate merger period-80% Diversification strategy It is because of ANTI TRUST enforcement Federal government adopted a stronger antitrust enforcement both with horizontal and verticle merger. 1963-1361 mergers; 1970-5152 mergers

Merger activity reached its highest level during this period

Booming of economy

Conglomerate merger period-80%

Diversification strategy

It is because of ANTI TRUST enforcement

Federal government adopted a stronger antitrust enforcement both with horizontal and verticle merger.

1963-1361 mergers; 1970-5152 mergers

Management sciences 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:-????

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:-????

Finance for mergers Equity financing Boom in stock market prices Many conglomerate merger failed The Revlon –cosmetic entered into health care and failed and suffered in cosmetic industry.

Equity financing

Boom in stock market prices

Many conglomerate merger failed

The Revlon –cosmetic entered into health care and failed and suffered in cosmetic industry.

The Fourth Wave-1981-1989 Recession in 1974-75 Hostile merger Take over or targeting on target company’s board of directors. If the board accepts, it is considered friendly, and if it opposes it, it is deemed to be hostile. The great mergers such as Oil companies-21.6% Of dollar values of merger and acquisitions Drugs and medical equipment industries due to deregulation in some industries Deregulation of airline industries

Recession in 1974-75

Hostile merger

Take over or targeting on target company’s board of directors.

If the board accepts, it is considered friendly, and if it opposes it, it is deemed to be hostile.

The great mergers such as Oil companies-21.6%

Of dollar values of merger and acquisitions

Drugs and medical equipment industries due to deregulation in some industries

Deregulation of airline industries

Investment bankers played an aggressive role. M&A advisory services became a lucrative source of income for Goldman Sachs Innovation in acquisition techniques

Investment bankers played an aggressive role.

M&A advisory services became a lucrative source of income for Goldman Sachs

Innovation in acquisition techniques

The Fifth Wave-1992-till date Once again increased activity in merger in 1992 Mega mergers Strategic mergers Equity based Deregulations and technological changes Banking , telecommunications entertainment and media industries High growth in banking sectors in 1990 as banks grew greater than central banks. Banks fund M&A rather than new ventures.

Once again increased activity in merger in 1992

Mega mergers

Strategic mergers

Equity based

Deregulations and technological changes

Banking , telecommunications entertainment and media industries

High growth in banking sectors in 1990 as banks grew greater than central banks.

Banks fund M&A rather than new ventures.

Oligopoly market structure Competition declined Very few competitors Example: Coco-Cola-44.5%,Pepsi-31.4%,Cadbury Schweppes-14.4% Globalisation Not confined to US companies 1995-US companies were acquired

Competition declined

Very few competitors

Example: Coco-Cola-44.5%,Pepsi-31.4%,Cadbury Schweppes-14.4%

Globalisation

Not confined to US companies

1995-US companies were acquired

1981-2395 1989-2366 1990-2074 companies 2001-7528 companies merged

1981-2395

1989-2366

1990-2074 companies

2001-7528 companies merged

Major Mergers in the telecom Acquirer Target Vodafone Mannes man MCL worldcom Spirit Bell atlantic GTE AT&T MeCaw Celluar SBC Pacific Telesis

Acquirer Target

Vodafone Mannes man

MCL worldcom Spirit

Bell atlantic GTE

AT&T MeCaw Celluar

SBC Pacific Telesis

Major Mergers in Media and Entertainment sector AOL Time Warner VIOCOM CBS WALT DISNEY CAPITAL ITIES/ABC AT&T MEDIA ONE TIME WARNER TURNER BRODCAST

AOL Time Warner

VIOCOM CBS

WALT DISNEY CAPITAL ITIES/ABC

AT&T MEDIA ONE

TIME WARNER TURNER BRODCAST

M&A IN INDIA License era-Unrelated diversification Conglomerate merger Friendly take over and hostile bids by buying equity shares Example: Swaraj paul attempted to raid on Escorts Ltd.and DCM Ltd but could not succeed. The Hindujas raided and took over Ashok leyland and Ennore Foundaries. Chhabria Group acquired stake in Shaw Wallace, Dunlop india and Falcon Tyres.

License era-Unrelated diversification

Conglomerate merger

Friendly take over and hostile bids by buying equity shares

Example: Swaraj paul attempted to raid on Escorts Ltd.and DCM Ltd but could not succeed.

The Hindujas raided and took over Ashok leyland and Ennore Foundaries.

Chhabria Group acquired stake in Shaw Wallace, Dunlop india and Falcon Tyres.

Goenka group from culcutta took over Ceat tyres. The Obroi-Pleasant hotels of Rane group. 1989- Tata Tea acquired 50% of the equity shares of Consolidated Coffee Ltd from resident shareholders. merged to form HCL Ltd??.

Goenka group from culcutta took over Ceat tyres.

The Obroi-Pleasant hotels of Rane group.

1989- Tata Tea acquired 50% of the equity shares of Consolidated Coffee Ltd from resident shareholders.

merged to form HCL Ltd??.

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

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

Comparative study US India Strategic By default(ANZ& Standard chartered Gains by invest Not benefited by banks ment bankers Capital goods consumer goods Borrowed Earlier debt later by equity cash/FDI Anti trust MRTP later The competition bill 2001

US India

Strategic By default(ANZ& Standard chartered

Gains by invest Not benefited by banks

ment bankers

Capital goods consumer goods

Borrowed

Earlier debt later by equity cash/FDI

Anti trust MRTP later The competition bill 2001

FINANCIAL FRAMEWORK IT COVERS THREE INTERRELATED ASPECTS DETERMINING THE FIRM’S VALUE FINANCING TECHNIQUES IN MERGER CAPITAL BUDGETING

IT COVERS THREE INTERRELATED

ASPECTS

DETERMINING THE FIRM’S VALUE

FINANCING TECHNIQUES IN MERGER

CAPITAL BUDGETING

DETERMINIG THE FIRMS VALUE QUANTITATIVE FACTORS – BASED ON THE VALUE OF THE ASSETS BOOK VALUE – OWNERS EQUITY DEPENDS ON FIXED ASSETS AND WORKING CAPITAL APPRAISAL VALUE- INDEPENDENT APPRISAL AGENCIES MARKET VALUE – BASED ON STOCK MARKET QUATATIONS ,BUT CHANCE FOR SPECULATION EARNING PER SHARE AND P/E RATIO – IMPACT OF EPS AFTER MERGER THE EARNINGS OF THE FIRM

QUANTITATIVE FACTORS – BASED ON

THE VALUE OF THE ASSETS

BOOK VALUE – OWNERS EQUITY

DEPENDS ON FIXED ASSETS AND WORKING CAPITAL

APPRAISAL VALUE- INDEPENDENT APPRISAL AGENCIES

MARKET VALUE – BASED ON STOCK MARKET QUATATIONS ,BUT CHANCE FOR SPECULATION

EARNING PER SHARE AND P/E RATIO – IMPACT OF EPS AFTER MERGER

THE EARNINGS OF THE FIRM

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

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

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

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

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

MEANING

COMPUTATION :

P/E RATIO = MP/EPS

EPS = EAT/NO. OF EQUITY SHARES

MARKET PRICE = P/E (NO. OF TIMES) * EPS

EXAMPLE 7.5 8 P/E RATIO(TIMES) 18,75,000 50,00,000 TOTAL MARKET VALUE (N*MPS) OR (EAT*P/E RATIO) 18.75 25 MARKET PRICE PER SHARE(MPS) 2.5 3.125 EPS 1,00,000 2,00,000 NO. OF SHARES 2,50,000 6,25,000 EAT FIRM B FIRM A PRE MERGER SITUATION

7.5 8 P/E RATIO (ASSUMED TO BE THE SAME) 21.825 3.125*8=25 MPS 65,47,500 70,00,000 TOTAL MARKET VALUE 8,75,000/3,00,000=2.91/ 8.75/2.8=3.125 EPS 2,00,000+1,00,000=3,00,000 2.8 lakhs NO. OF SHARES 8,75,000 6.25+2.5=8.75 EAT(COMBINED FIRM) 1 : 1 2.5:3.125=.8 EXCHANE RATIO/ SWAP RATIO (ASSUMING) SITUATION 2 SITUATION 1 (BASED ON CURRENT MARKET PRICE POST MERGER

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

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

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 75,00,000 10,00,000 TOTAL MV LESS: MINIMUM TO BE GIVEN TO B 1,00,000 NO. OF SHARES OF A TO A CO. SHARE HOLDERS 65,00,000 NET BENEFIT TO A 10,00,000/65 = 15,385 SHARES NO. OF EQUTY SHARES TO BE ISSUED BASED ON DESIRED MARKET PRICE 50,000/15385 = 3.25 SHARES OF FIRM B, 1 SHARE IN FIRM A 1:3.25 TOLERANCE SHARE EXCHANGE RATIO 65 PER SHARE DESIRED POST MERGER MPS

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

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

CAPITAL BUDGETING THE TARGET FIRM SHOULD BE VALUED BASED ON PV OF INCREMENTAL CASH INFLOWS

THE TARGET FIRM SHOULD BE VALUED BASED ON PV OF INCREMENTAL CASH INFLOWS

CORPORATE RESTRUCTURING FINANCIAL RESTRUCTURING RESTRUCTURING SCHEMES : INTENAL AND EXTERNAL RESTRUCTURING DEMERGERS BUYOUTS

FINANCIAL RESTRUCTURING

RESTRUCTURING SCHEMES : INTENAL AND EXTERNAL RESTRUCTURING

DEMERGERS

BUYOUTS

ACCOUNTING FOR AMALGAMATION POOLING INTEREST METHOD CONDITIONS AS PER AS 14: ALL ASSETS AND LIABILITIES OF TRANSFEROR CO. TO BE THE ASSETS OF THE TRANSFREE CO. AT LEAST 90% OF F.V OF EQUITY SHARE HOLDERS SHOULD BE SHAREHOLDERS OF NEW CO. PURCHACE CONSIDERATION TO BE SETTLED BY THE NEW CO. THE BUSINESS OF NEW CO. SHOULD CONTINUE NO ADJUSTMENT IS INTENDED TO BE MADE TO BOOK VALUE OF ASSETS AND LIABILITIES OF TRANSFEROR CO.

POOLING INTEREST METHOD

CONDITIONS AS PER AS 14:

ALL ASSETS AND LIABILITIES OF TRANSFEROR CO. TO BE THE ASSETS OF THE TRANSFREE CO.

AT LEAST 90% OF F.V OF EQUITY SHARE HOLDERS SHOULD BE SHAREHOLDERS OF NEW CO.

PURCHACE CONSIDERATION TO BE SETTLED BY THE NEW CO.

THE BUSINESS OF NEW CO. SHOULD CONTINUE

NO ADJUSTMENT IS INTENDED TO BE MADE TO BOOK VALUE OF ASSETS AND LIABILITIES OF TRANSFEROR CO.

OTHER ACCOUNTING TREATMENTS CROSS HOLDINGS OF SHARES TO BE CANCELLED SUBSIQUENT TO MERGER INTER CO. TRANSACTIONS LIKE DEBTORS AND CREDITORS – SALE OF GOODS FROM ONE CO. TO ANOTHER SALES TAX PAID ALREADY CAN NOT BE RECOVERED

CROSS HOLDINGS OF SHARES TO BE CANCELLED SUBSIQUENT TO MERGER

INTER CO. TRANSACTIONS LIKE DEBTORS AND CREDITORS – SALE OF GOODS FROM ONE CO. TO ANOTHER

SALES TAX PAID ALREADY CAN NOT BE RECOVERED

INCOME TAX RELATED ISSUES FOR AMALGAMATION CONDITIONS OF AMALGAMATION UNDER INCOME TAX ACT SEC 2 (1B) ALL ASSETS AND LIABILITIES OF TRANSFEROR CO. TO BE THE ASSETS OF THE TRANSFREE CO. SHARE HOLDERS HOLDING NOT LESS THAN 3/4 TH 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

CONDITIONS OF AMALGAMATION UNDER INCOME TAX ACT SEC 2 (1B)

ALL ASSETS AND LIABILITIES OF TRANSFEROR CO. TO BE THE ASSETS OF THE TRANSFREE CO.

SHARE HOLDERS HOLDING NOT LESS THAN 3/4 TH 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 IF SHARES OF INDIAN CO.HELD BY FOREIGN BEFORE MERGER AND SUCH FOREIGN CO. TAKEN OVER BY ANOTHER FOREIGN CO. 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.)

THE AMALGAMATED CO. IS AN INDIAN CO.

EXCEPTION

IF SHARES OF INDIAN CO.HELD BY FOREIGN BEFORE MERGER AND SUCH FOREIGN CO. TAKEN OVER BY ANOTHER FOREIGN CO.

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

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

ACCUMULATED LOSSES REMAIN UNABSORBED FOR 3 OR MORE YEARS

75% OF BOOK VALUE TO BE HELD ATLEAST FOR 2 YEARS BEFORE AMALGAMATION

THE AMALGAMATED CO. CONTINUES TO HOLD 3/4 TH OF BOOK VALUE ATLEAST FOR 5 YEARS

NEW CO. SHOULD CONTINUE FOR ANOTHER 5 YEARS

NEW CO. SHOULD ACHIEVE ATLEAST 50%OF INSTALLED CAPACITY BEFORE END OF 5 YEARS AND SHOULD CONTINUE FOR 5 YEARS

6. THE NEW AMALGAMATED CO. SHOULD FURNISH TO ASSESSING OFFICER ABOUT PARTICULARS OF PRODUCTION BENEFIT THIS SCHEME IS ALSO APPLICABLE TO BANKING INSTITUTIONS ?TATA VOLTAS & KELVINATOR HYDERABAD DIVISION vs. CBDT

6. THE NEW AMALGAMATED CO. SHOULD FURNISH TO ASSESSING OFFICER ABOUT PARTICULARS OF PRODUCTION

BENEFIT

THIS SCHEME IS ALSO APPLICABLE TO BANKING INSTITUTIONS

?TATA VOLTAS & KELVINATOR HYDERABAD DIVISION vs. CBDT

EXAMPLE A LTD AMALGAMATES WITH B LTD AS ON 2007 NO CAPITAL GAIN TAX & ACCUMULATED LOSSES & UNABSORBED DEPERICIATION CAN BE CARRIED FORWARD DOES NOT ATTRACT CAPITAL GAIN FOR A BUT NO GAIN FOR B NO BENEFIT TO A & B A MERGES WITH B (A GOES OUT) SATISFIES BOTH 2(1B) & 72 A SATISFIES 2(1B) BUT DOES NOT SATISFY 72 A DOES NOT SATISFY SEC 2(1B) & 72 A PARTICULARS

A LTD AMALGAMATES WITH B LTD AS ON 2007

? If b merges with a & 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.& Have accumulated losses & unabsorbed depreciation ? If c is not an Indian co.

? If b merges with a & 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.& Have accumulated losses & unabsorbed depreciation

? If c is not an Indian co.

OTHER TAX BENEFITS Expenditure on amalgamation or de-merger – allowed under sec 35DD both revenue and capital expenditure allowed Expenditure on scientific research can be carried forward Expenditure on acquisition of patent rights copyrights – depreciation can be provided Expenditure for obtaining license for tele-communication service can be written off Preliminary expenses Capital expenditure on family planning Bad debts are allowed

Expenditure on amalgamation or de-merger – allowed under sec 35DD both revenue and capital expenditure allowed

Expenditure on scientific research can be carried forward

Expenditure on acquisition of patent rights copyrights – depreciation can be provided

Expenditure for obtaining license for tele-communication service can be written off

Preliminary expenses

Capital expenditure on family planning

Bad debts are allowed

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

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

EXERCISE 40 70 MARKET PRICE 8 10 P/E RATIO 5 7 EPS 7,500 20,000 NO. OF SHARES 37,500 1,40,000 EAT CO. B CO. A PARTICULARS

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 ? Determine the range of minimum & maximum ratio between the two firms ? 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

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

? Determine the range of minimum & maximum ratio between the two firms

? 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

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