Discuss the similarities and differences between the uk and us pattern of merger waves?

Ans 1- There have been five large merger waves in the UK and USA. The first wave-, IN UK, it was characterized by multiform horizontal amalgamations. Some industry concentration took place ( eg. Imperial tobacco, Lever Brothers etc), although most companies remained fairly small. In US the merger wave was similar to the case in UK in that it was dominated by horizontal mergers. The first major wave however took place slightly later in the US, than in the UK, and the US merger wave tended to involve larger transactions than in the UK. The first merger wave thus had more of an impact on market share and industrial concentration in the US than in UK. Large companies such as Du Pont, Eastman Kodak, and General Electric with near monopolistic market shares were created through mergers during this wave. The second merger- it was dominated by horizontal mergers in UK. Some of the transactions were large, creating major companies with high market share (eg. ICI, Unilever, Cadbury, Nobel etc.). There were few restrictions on takeovers. Whereas second merger wave took place slightly earlier in the US than in the UK, and this pattern of the US merger waves leading those of UK has held since. Horizontal mergers dominated both in US and in UK with US companies merging to increase market share. The second US merger wave ended with the stock market crash in October 1929. The third wave In UK, it was characterized by large horizontal mergers (eg. British Steel, British Leyland, NatWest bank etc.). Industry concentration occurred but regulation was still relatively lax. Some of the mergers were initiated by the government, in attempt to create national champions. Whereas in in USA, it showed different characteristics than in the UK. While the UK continued to see mainly horizontal mergers, regulatory movements were strengthened in the US with more stringent anti-monopoly rules. Horizontal transactions were less in the US and now conglomerate mergers were the norm, which do not affect the industrial concentration. Hostile takeovers were rare amongst large companies in this time period and reverse takeovers emerged. The fourth merger wave - in UK , Key characteristics of this wave were very large transactions, increased used of debt (LBO), hostile bids being much more common, increased importance of cross- border acquisitions, and several acquisitions by takeover specialists (eg. Hanson and BTR ) aimed at asset stripping ( selling off the various parts of the company). Fourth merger wave had relatively low number of transactions with high value. The merger wave in the UK and US were similar, with increased number of hostile takeovers accounting to almost 25% of all transactions and cross border acquisitions, increased use of innovative financing schemes (such as junk bonds and LBOs), and asset-stripping acquisitions.

The fifth UK merger wave - This wave is characterized by some very large deals, and cross border acquisitions are increasingly dominating the takeover markets. During the early years of merger wave hostile acquisitions were less common than during the fourth wave, although there is some evidence to suggest that the level of hostile acquisitions is once again on the increase. There is also some indication of the mergers being more focused on strategy rather than financial asset stripping than during the fourth merger wave. The merger wave started earlier in the US than in the UK, and once again the pattern of the merger activity has been similar In the two markets, and several large acquisitions, less use of hostile acquisitions, and acquisitions mainly being horizontal. Cross border acquisitions are still important in both markets.

2 ) Explain what is meant by the term synergy and discuss how synergies may arise from merger activity? Synergy refers to a situation where the value (or the output) of the combined entity is greater than the sum of its individual parts. It is on the occasions referred to as the 2 +2 = 5 effect. A merger will create value to shareholders overall if the value of new merged company exceeds the combined value of the target and biding companies as separate entities ( although the split of this gain between bidding and target company shareholders depend on the price paid for the target). This would be the case if the capitalized value of synergies exceeds the transactions costs of the merger. Synergies which can arise from merging include: operating economies ( such as economies of scale, where the unit cost of production falls with increased production volume) and economies of scope ( such as the benefit of combining complementary resources), market power economies ( such as the ability to increase profit margin if the level of competition falls), financial economies ( such as tax savings from sharing tax shields, tax loss carry forwards, or economies of scale in the issuing of securities); and economies from eliminating inefficiencies, such as incompetent target company management.

Revenue enhancement which explains marketing gains it is frequently claimed that, due to improved marketing, mergers and acquisitions can increase the operating revenues. Improvements can be made in the following areas 1) Previously ineffective media programming and advertising efforts 2) A weak existing distribution network 3) An unbalanced product mix Strategic benefits some acquisitions promise a strategic benefit, which is more like an option than a standard investment opportunity. For example, imagine that a sewing machine company

acquires a computer company. The firm will be well positioned if technological advances allow computer driven sewing machines in the future. Market or monopoly power- one firm may acquire another to reduce competition. If so, prices can be increased, generating monopoly profits. However, mergers that reduce competition do not benefit society, and the US Department of justice or the federal trade commission may challenge them.

1) Economies Of scale- By operating on a larger scale, companies may be able to achieve economies of scale. This refers to where the marginal cost of production falls with increased volume of output. Savings can arise in any area of the operation, from scale of economies in eg production or operations. An example of a company successfully achieving operating economies is the German car manufacturer Volkswagen. Developing and producing different chassis (framework) is hugely expensive, and most car manufacturers are trying to reduce the number of different chassis used. Volkswagen has successfully managed this rationalization, with different companies in the group (following the acquisition of Seat and more recently Skoda) using the same chassis. Such production economies of scale are most commonly associated with horizontal mergers (where 2 emerging companies operate in the same line of business, and were competitors prior to the merger). 2) Economies of Scope- Another closely related form of cost savings is found in economies of scope. This refers to savings or benefits arising from combining complementary resources. Companies may choose to acquire a company with specialized skills or other resources which may be necessary for the success of the acquiring company. By combining complimentary resources, the 2 companies may be worth more together than apart. One way to achieve economies of scope is through vertical integration. However, economies of vertical integration may prove hard to achieve, and although some industries tend to maintain high levels of vertical integration (e.g., the major oil companies which often control all stages from oil exploration to drilling, production, refining and distribution), other industries have seen a general reduction in the level of vertical integration( e.g, car manufacturers, where the production of components is increasingly being done by sub-contractors rather than by the car manufacturers themselves). 3) Market power economies- by merging with a former competitor, the acquiring company may be able to increase its market share and with its market power. This is

also known as the economies of horizontal integration. With increased market power, the company may be able to exercise some control over pricing. In most developed economies, abuse of market power is illegal and regulators will tend to ban mergers which are likely to reduce the level of competition significantly. In the UK, mergers which cause concerns regarding their possible impact on competition will be referred by the Office of Fair Trading( OFT) to the Monopolies and Mergers Commission (MMC) for review. For eg, the aggressive acquisition of market share by Scottish bus operator Stagecoach has caused considerable concern with the British competition authorities. During the decade from mid 1980s, stagecoach undertook over 50 acquisitions, of which 30 were referred to OFT and 8 resulted in MMC inquiries. MMC has the power to ban proposed mergers if the transaction will result in the merged company dominating the industry. 4) Financial Economies- Tax savings may form a major motive for mergers and acquisitions. A company will receive tax credits on their investment in plant and machinery; these tax credits can be used to reduce the companys corporation tax. However, if the company is not making profits, it will not be able to take the full benefit of these tax credits. While companies may be able to carry tax losses forward and in this way reduce their tax liabilities in future yrs. One way to take advtg of tax loss carry- forwards is for the company with the unused tax credits to merge with a profitable firm. In this way it may be possible for the profitable firm to reduce its tax liabilities by taking advtg of the other companys tax loss carry-forwards. However, tax authorities in both UK and US have made it very difficult to take advtg of such tax savings from mergers in the recent yrs. 5) Eliminating Economies- one of the key motives of many mergers and acquisitions is to eliminate inefficiencies. If a company is running inefficiently, one would expect the performance of the company to be sub-optimal, and the share price to be comparatively low. Due to the separation of ownership and control, there may be scope for conflict of interest between the owners and the managers acting as their agents. However, while mergers and acquisitions form an important part of the corporate governance system in economies such as the UK or the US and are seen as an important means for removing inefficient management. Mergers and acquisitions are more likely to be carried out in order to maximize the wealth of managers than the wealth of shareholders. Discuss Mergers and acquisitions are prime examples of instances where agency conflict may occur. The motives of managers and shareholders for undertaking mergers may diverge significantly. It is generally assumed that the managers work towards the corporate goal of maximizing shareholder wealth. Due to the separation of ownership and control , it is possible that managers will undertake mergers and acquisitions in order to maximize their own personal

utility rather than with the best interests of shareholders in mind.,. Assuming the objective of the firm is to maximize shareholders wealth, managers should only undertake acquisitions if the transaction is expected to be a positive NPV investment. Given that the target company shareholders will usually demand to be paid a significant premium, Positive NPV would at a minimum require the two companies to be worth more together than apart. This would be the case if synergies, such as operating economies (economies of scale or economies of scope), market power economies, or financial economies are present, or where the merger allows for the removal of inefficiencies. However, managers may have reasons to undertake mergers even when such transactions are not expected to benefit the companys shareholders. Mergers may result in increased level of EPS. If managerial bonuses are linked to EPS; the merger may result in increased manager remuneration even where no shareholder wealth has been created. Salaries may also rise substantially after the merger. Being in charge of a large company is also likely to give manager increased power and prestige ( particularly if the company is the part of main stock market index, such as FTSE100 IN UK , as well as more perks such as, the use executive jet. However, it is difficult to determine whether the acquisition was motivated by managerial self interest or was aimed at increasing shareholders wealth. The evidence is consistent with takeovers being motivated by managers wanting to maximize their own welfare. Shareholder wealth maximization appears to be a weaker motivation in many acquisitions.

Discuss why the level of merger and acquisition activity may be related to the level of stock market index. ? Empirical evidence suggest that the level of merger and acquisition activity ( or at least the level of domestic transactions ) is positively correlated with the level of the stock market index. The cause of the positive correlation between domestic acquisitions and level of the stock is not clear. High share prices may make it easier for the acquiring company to raise the funds required for the acquisition. However, if the price of the target company rises as well, additional funds may be required, thus leaving no net benefit. If the price of the target company does not rise with the generally rising stock market, this may indicate that the target company is undervalued ( again, inconsistent with the market efficiency hypothesis), although alternatively it may indicate that the target company is underperforming . If the acquiring company can operate the target company better than the existing management, or achieve other operating or financial benefits, value may be extracted. A possible reason why the level of merger and acquisition rises with a rising stock market may be managerial psychology. When the shares of a company are doing well, management may believe they have superior managerial skills, which can be used to run an underperforming

(target) company better than the existing management. Such confidence may not be warranted, resulting in over confidence of hubris In conclusion, while empirical evidence in both the UK and US has found merger and acquisition activity to be positively related to the level of the stock market index, the cause of this relationship is a subject of controversy Discuss how the stock market size may act as a merger motive? The stock market size affect, whereby shares in small companies on average tend to earn higher rates of return than shares in companies with high market capitalizations may influence the level of takeover activity in two main ways. First, if small companies are capitalized at a higher required rate of shareholder return, their values will be relatively low. Companies with high market values may benefit from acquiring small companies if, after the acquisition , the target company will be capitalized by the market at the higher capitalization rate ( i.e, lower cost of capital ) appropriate for large companies. For example, Banz(1981) found shares in small US companies tending, on average, to earn higher rates of return than shares in larger companies. Second, it has been suggested that bull markets (periods with high or rising share prices) tend to start with large companies, and that it take longer for shares in small companies to rise. If this were to be the case, large companies may take advantage of the temporary overvaluation of large companies and undervaluation of small companies by acquiring small firms. Such over or under valuation would, however, imply some form of stock market inefficiency, and while there is ample evidence to support the notion of a size change, the opportunity for such bargainbuying opportunities may be limited Would you expect target and bidding company shareholders to gain or lose from mergers and acquisitions? explain clearly your reasoning ? in order to obtain majority of the issued shares, the acquiring company will need to persuade a large number of shareholders in the target company to part with their shares. Some of these investors will believe the pre-bid share price was low (which was presumably why they owned the shares at the time of the bid). Some of the target company shareholders are unlikely to part with their shares unless a considerable premium is being offered, and in order to obtain majority, acquiring companies usually offer target shareholders a price significantly higher than the pre-bid value of the target firm. We can therefore expect target company shareholders, on average, to gain significantly from mergers and acquisitions. Conflicting theories exist as to whether the acquiring company shareholders will gain, come out even, or lose. If managers act with the shareholders best interest at heart, we would expect acquisitions only to take place if acquiring company shareholders are expected to benefit. However, in competitive acquisitions market, the premium offered for the target company

shares is likely to capture most of any synergies, resulting in small, if any, gains to the acquiring company shareholders. Finally, if acquisitions are driven by managers pursing the maximization of their personal wealth and utility rather than the maximization of shareholder wealth, acquisitions may take place even when they are negative NPV investments, with too high a price being offered for the target company. A similar outcome may result if managers suffer from over confidence or hubris. In such circumstances, acquiring company shareholders can be expected to lose

Are mergers and acquisitions positive net present value ( NPV) investments for the acquiring firms ? discuss the empirical evidence In order to assess whether mergers and acquisitions are positive NPV investments, we can adopt 2 approaches. First, it may be possible to analyze the impact of the acquisition on the cash flow (or the accounting performance) of the acquiring firm. The majority of the accounting studies (eg, Singh 1975 for the UK, or Ravenscraft and Scherer 1987 for the US) find no improvement in the accounting performance after the merger, although Healey et al, 1992 find some evidence of improved corporate performance after large US mergers. However, such accounting studies tend not to separate out the impact of the transaction on the bidder but rather analyze whether the merged entity is performing better than the bidder and target combined pre-merger. An alternative is to analyze the abnormal returns to the bidding companies at the time of bid announcements. This measures the markets expectations regarding the NPV of the acquisitions, as in efficient markets, the NPV of investments should immediately be incorporated in the market capitalization of the firm. The evidence on the bidding company abnormal returns is mixed and inconclusive. For example, for the UK, Firth 1980 and Gregory 1997 find bidders make large losses; Limmack 1991 uncovers small losses, while Franks and Harris 1989 find UK bidders gain at the time of the bid. For the US, some of the evidence is slightly more positive than for the UK, with eg., Jensen and Ruback 1983, concluding from their view of prior US evidence that US bidders gain or do at least not lose from mergers and acquisitions. The evidence is thus overall rather mixed. While some UK studies find small gains to bidders at the time of the bid, most uncover negative bidding company abnormal returns, which become increasingly negative post-bid. The US evidence is also mixed, although there is at least some evidence to suggest US acquirers gain from certain types of transactions. Identify the different stages of the bid process and describe how a bidder prepares for each stage.

The pre-bid stages would be where the bidder made sure it was in good shape to enter the bid process. The next stage would be to search for suitable candidates, either doing the search on their own or with the help of an investment bank. This will vary from bidder to bidder on a case by case basis. Some companies will go through extensive research and spend much time analyzing targets, others, once they have broad criteria on board, know what they are looking for and can move quickly to seal a deal if something comes up. To choose a target, an acquisition company should draw broad acquisition criteria, along the line of: country, sector, size, national coverage or local operator, profitable or loss making, stock market listed or private company. For example, the target must be in the same line of business and have operations that overlap geographically, so as to share distribution costs. The targets would be evaluated and any candidates that did not fit the bidders acquisition criteria would be screened out. The remaining potential targets would be valued, identifying any unique synergies that would help the bidder. A key element of the takeover process is valuing the target company. The bidder will not have all the information necessary to make a completely accurate valuation. There are many ways to value a company such as relative valuation, earning valuation, stock market value and other valuation mergers. Now the selective target would be approached and negotiation would start. If the two companies are on agreement, a price would be set subject to the target passing a due diligence investigation. This is done to ensure the target is worth the bidder is paying. A thorough due diligence is vital to the deal being successful in the longer term. The two companies would merge and the integration stage would then start. Communication and leadership are essential in the early stages of integration. The bidder should have an integration team which will ensure the smooth transfer of ownership. If the target refuses to be taken over, a hostile bid would follow. The bidder and advisors have to work out the range of prices that they would be willing to pay for the target, above which they would not bid. The investment bank and public relations advisors will work together presenting the best argument for the takeover. The investment banker and bidder executives will make presentation to the key target shareholder. If the bidder gains 50.1% it wins and moves onto the key implementation and integration stage. The bid timetable starts once the offer document is posted to the target shareholders. There are strict guidelines as to what is contained with the offer document. Why do companies sometimes launch hostile takeovers? The hostile takeover is an unwelcome bid that is made for the equity of a target company. It does not have the recommendation of the target board. Companies are reluctant to enter into hostile takeover. In seeking agreement, the bidder will enter into negotiations with the target board. Each side will have a clear idea of the value it feels the target company should command. The aim of the bidder is not to pay too high a price to gain control, and of the target board to get the best price for their shareholders if they agree to sell the company. It is much easier in a hostile takeover to achieve cost cutting. The bid will usually have been conducted in an atmosphere of hostility. Once the deal has been won, the bidder will not feel

uneasy about cutting costs in the same way the bidder in a friendly deal would. The hostile bidder does not need to worry as much over target sensitivities. Advantages of hostile takeover1) Speed and surprise- the target can be taken unawares and the bidder may be able to gain a decisive advantage. 2) May be able to take advantage of short-term misfortune (eg, profits warning) at the target company. 3) May give Target Company less chance to put defences in place. For example, Yahoo owns 30% of their stock with the other 70% being owned by individuals or companies, where each entity only owns 1% or less. Microsoft can attempt a hostile takeover by buying stock from all the individuals until they own more than the 30% of Yahoo stock.

What are the disadvantages of friendly mergers? Friendly mergers may struggle to achieve the benefits that a similar but hostile deal would achieve. Friendly deals have a few disadvantages1) May have to pay high premium to gain the recommendation of the target board. 2) To gain agreement may have to offer some key jobs to target executives. 3) Probably cannot cut costs as quickly compared to hostile bid, because of the need to maintain friendly takeover atmosphere. A good example is to compare the outcomes of Royal Bank of Scotland (RBS) hostile takeover of NatWest (2000) and the Bank of Scotland (BoS) merger with Halifax(2001). In the year following RBS deal the share price more than doubled. In the yr following BoS deal the share price remained exactly the same. RBS was able to cut 18,000 jobs as a result of the takeover; huge financial cost savings flowed as a result. The BoS deal resulted in 2000 job cuts; the synergies were much smaller. What are the considerations in deciding whether to use cash or shares to pay for a target company? This is a problem of asymmetric information. If the bidder feels its shares are undervalued it will prefer to use cash. If it feels its shares are overvalued it will use the shares.

For the target company shareholders, if they feel the bidders shares are overvalued, they will prefer cash. If cash is not being offered, they will demand an extra premium for accepting the targets (overvalued ) shares. What are the advantages of payment in equity for a target shareholder ? the advantage for the target shareholder in receiving the bidders equity is that they maintain an interest in the ongoing performance of their company. If the bidder pays in shares it means that they will take the target shareholders with them. This means any further gains from the merger will be shared with the target shareholders. So the target shareholders could end up up with the a takeover premium plus a share in the ongoing merger synergy benefits. ( they could also share in the misery if it all goes wrong. Evaluate the alternatives to growth by acquisition

How should a company start preparing a defence against a possible future takeover? When analyzing the defence of an existing strategy it is worth splitting the defending companies into 2, those who have a successful strategy and those who do not. A successful strategy would be one that has delivered consistently growing shareholders wealth over a number of yrs. The other category would be where this no longer holds. It may be that the company has been successful but has to run out of steam and needs a change at the top. In many cases this can be done by replacement of the Chief Executive. For example, the removal of Eckhard Pfieffer as CEO from Compaq by the life president in 1999. It was felt that Pfieffer had done a very good job of driving Compaq as far as it could go in computer hardware, but he had been unable to make a move into the internet market. It was felt that he had become too risk averse and that shareholders needed someone at the top willing to take risks for them again. A company defending a takeover is in a much strong position if it is defending a successful strategy. Shareholders will be happy with the performance of the company and the returns that have been generated. In this situation shareholders are more likely to be unwilling to side with the bidder. Where a company is trying to defend a strategy that is no longer delivering the growth in shareholder value that it used to, the company has a harder task to justify its independence. When a strategy is failing to deliver, the company is in the weakest position. Whether they survive largely depends on whether the bidder has the credibility and track record to improve performance.

Do you think US companies have too much or too little protection from takeovers? Compared to the defences available to UK companies, US companies seem to have greater protection against takeovers. In any country defence tactics can be broken down into 2 types, proactive and reactive. Proactive tactics would be defences put in place to strengthen a companys defences ahead of a possible bid. Reactive tactics are measures taken once the bid has been announced.

PROACTIVE- Companies should be aware of their weaknesses, whether it is a temporary downturn in their fortunes or no succession plan for replacing a long time chief executive. If the company is aware of the weaknesses, it can plan a defence to counter the attacks made on it. (i) Corporate Strategy- one of the most effective defences for the company to be highly valued by the stock market, leaving very little on the table for a bidder to extract in the form of efficiencies and cost savings. If the company itself is in control of costs and has a record that is as good as any in the industry that is a strong foundation to building an effective defence. (ii) Poison Pills- are designed to make hostile bids prohibitively costly. The poison pill works by granting right to the shareholders, enabling them to buy shares in the target company at a substantial discount. These rights are usually triggered when a certain threshold is passed. For eg, a potential bidder buying 15% of the shares in the target company. All target shareholders except the bidder have the right to buy new shares in the target company at a large discount to the existing price. The directors can withdraw poison pill if they agree to takeover. The rights are issued to the shareholder on the triggering event as a dividend of one right per share held.

(iii) Anti-greenmail Provisions- greenmail payments are payments for shares made to a bidder at a premium to the underlying share price. What companies did was to remove the ability of companies to make the greenmail payment. Other shareholders in the company could not benefit from the greenmail payment price for the shares, so there was not equality of treatment. The passing of these anti-greenmail clauses has drastically reduced the incidence of these attacks. REACTIVE(i) White Knight- the company accepts that it is going to be taken over but it would prefer taken over by a company of its own choosing. It may be that the only effect of the pursuit of a white knight is the receipt of a higher bid from the original bidder. A white knight (friendly rival bidder) may end up paying high price for saving the company. The white knight may not be able to force through the cuts predicted by the hostile bidder. Shareholder returns to white

knight bidders have been negative, so it is not really in shareholders interests for a company to act out the role of white knight defender. For eg, in Europe in 1999, Telecom Italia (TI) was subject to an unwelcome bid from Olivetti. Ti sought a friendly bidder, Deutsche Telekom came in as a white knight and was ultimately unsuccessful (Olivetti took control of TI). (ii) Pacman- a Pacman defence is a fairly desperate attempt to fend off being taken over. The target company looks to turn the tables and bid for the bidder. For eg, in 1999, the pacman defence came in France with TotalFina-Elf bid battle. TotalFina-Elf launched a $43 billion bid for Elf, another French oil company. Elf was bitterly opposed to the takeover and as a defence, launched a $53 billion bid for TotalFina. The problem with the pacman defence is that, once it is used, it is difficult to argue against the logic of the bid if the target is making a bid. (iii) Break fees-a risk companies faced when putting a merger together was that someone else might come along and spoil the party. A new feature was the insertion of break fees into the merger agreements. If two companies agreed a merger, they would usually include a fee that would be payable if one of the parties broke off the merger agreement for any reason. For eg, $1.8 billion break fee paid by Warner Lambert (WL) to American Home Products(AHP) in late 1999 as a result of their merger agreement being terminated. The cause of the termination is usually the approach of another bidder which puts a higher bid on the table.

Difference between equity carve out and demerger

Equity Carve out (partial floatation)-When a parent company sells a portion or all of its interest in a subsidiary to the public in an initial public offer (IPO) it is called equity carve out. Thereby this creates a new legal entity with its own management team and provides the company with cash infusion. The proceeds(cash) are distributed to parent and subsidiary. parents company needs to raise cash efficiently. The cash is used to finance the projects of the parent company. The parent retains a controlling interest in the subsidiary.

 Managers prefer carve out.

Examples - On October 22, at the height of the IPO drought, $45 billion, Wilmington, Delaware-based DuPont raised $4.4 billion in a public offering carving out roughly 30 percent of its oil subsidiary, Conoco Inc. of Houston. It was the biggest U.S. IPO and the biggest U.S. carve-out of all time, topping AT&T's $2.3 billion carve-out of Lucent Technologies in 1996. On November 11, Rupert Murdoch's News Corp. went public with 18.6 percent of Fox Entertainment, and raised $2.8 billion, the thirdlargest U.S. IPO. On December 10, CBS Inc. went public with 16 percent of Infinity Broadcasting and raised $2.97 billion, replacing Fox as the third largest U.S. IPO. On February 5, General Motors Corp. went public with 18 percent of its Delphi Automotive business, and raised $1.7 billion.

DEMERGER the act of splitting off part of an existing company to become a new company. The new company operates completely separate from the original company. Shareholders of the original company are usually given equal stake in the ownership of the company on pro rata basis. Thereby helping each of the segment operate smoothly as they can now focus on more specific tasks. no cash is raised however this aims to create shareholders value. The parent company distributes shares in the subsidiary to its own shareholder. The parent company loses control of the subsidiary. Stock market prefers demerger. for example, in 2001 British Telecom carried out a de-merger of its mobile phone arm, BT Wireless, in an attempt to boost the performance of its stock. British Telecom took this action because it was struggling under high debt levels from the wireless venture.

Bajaj Auto Ltd (BAL) has been demerged. Consequently, shareholders of the erstwhile BAL will receive shares of the demerged new companies as per the provisions of the demerger.

The historical demerger of DCM group where it split into four companies (DCM Ltd., DCM shriram industries Ltd., Shriram Industrial Enterprise Ltd. and DCM shriram consolidated Ltd.) is one example of family units splitting through demergers

Hanson trust example in text book pg 135 3rd para

Difference between spin off and tracking stock

Spin off is the creation of an independent company through the sale or distribution of new shares of an existing business/division of a parent company. spin off can take 2 other forms 1. Split up parent company separates into different units and distributes shares in pro rata basis. The parent company would cease to exist. Example hanson trust . In text book page 135 2. Split off shareholders in parent company can exchange the shares in parent to obtain shares of the subsidiary. The parent company loses control of the subsidiary. Shareholders of the original company are usually given equal stake in the ownership of the company on pro rata basis. Stock market prefer spin offs Independent Tracking stock is a form of equity that is issued by the company to reflect the performance of a subsidiary. The tracking stock is like a separate class of equity in the parent company. The parent company will have equity that reflects all its business except the division that has the tracking stock and it will also have the tracking record.

 The parent company retains full control of the division. Shareholders of the tracking stock do not have direct claim on the assets of the division. Stock market reaction to tracking stock issue has been negative. Division is not independent, as parent retains full control. Example general motors issued the 1st tracking stock in 1985 based on the performance of the EDS(electronic data systems) division.
Why do we have anti-trust take over regulation

From the mid 1800s onwards, the industry in the US faced cut-throat competition when companies wages damaging price wars against each other. Result of it being that the companies did not make much of the return on their capital invested. Particularly in the railroad sector, the companies began to suffer to the extend that they could not even pay their bond holders. A solution to this was consolidation which was accomplished by the efforts of JP morgan an investment banker. Through series of mergers the industry became concentrated, prices were raised, profitability returned and boldholders were repaid. Page 141, 2nd last para. Copy the example However the main industries had taken on monopoly type structures. Companies dominated the markets and competed to maintain their dominance. This had further effected the other companies in the industry as competition started to lessen and trade was restrained. Hence the Anti trust law was regulated to protect the welfare of the weaker companies and consumers. Anti trust is the legislation enacted by the federal and Govt to regulate trade and commerce by preventing unlawful restraints, price fixing, monopolies and mainly promoting competition. Primary goal of Anti trust is to safeguard the companys welfare and seek to make all businesses compete fairly. There was a need to scrutinize the companies under the Anti Trust Regulations.

What are the Benefits of regulation

What are the benefits of regulation? Anti trust regulations are legal regulations in order to practice and address Globalisation, Deregulation and changing technologies, thereby increasing economic efficiency. Anti trust enforcement helps the economy grow and has a goal to make the markets operate more competitively by eliminating monopolies. The regulations included various acts. 1. Sherman Act 1890- the original anti trust act still forms the basis of US anti trust law which aims to prohibit all those contracts, combinations and conspiracies that would restraint trade. and also prohibits attempts or conspiracies made to monopolize a particular industry. All contracts that restraint trade were illegal according to shermans act. The act effected merger regulations worldwide. The act aimed to prohibit mergers which would create monopoly type companies and to stop companies that were already exhibiting dominant behavior in their industries. Example page 142 , under shermans act .. d last para. 2. Clayton Act 1914 - the act was passed to strengthen the provisions of the Sherman act. The extra provisions stated that price discrimination was banned, tied contracts were banned and buying shares in other companies was banned if this led to reduction in competition. Also the act forbids companies to buy shares in other companies if the result is lessening of competition. (Choose any 1 example and write lol)

Example - In 1948, the Supreme Court upheld the Federal Trade Commission's enforcement of the Act in the landmark case FTC v. Morton Salt.[3] The Commission found that Morton Salt violated the act when it sold its finest "Blue Label" salt, on a purportedly standard quantity discount available to all customers, but was really available only to five national chain stores who bought sufficient quantities of respondent's salt to obtain the discount price. According to the Court, "The legislative history of the Robinson-Patman Act makes it abundantly clear that Congress considered it to be an evil that a large buyer could secure a competitive advantage over a small buyer solely because of the large buyer's quantity purchasing ability."[3]

In 1976, a dozen Texaco retailers in Spokane, Washington who sued Texaco and won damages of $449,000, which were trebled under antitrust law. Texaco and other oil companies had made a practice of selling gasoline at one price to retailers, and a

lower price to wholesalers. When some wholesalers went into the retail business, they obtained gasoline for their retail stations at the wholesaler discount: resulting in unlawful price discrimination.[4] The Supreme Court unanimously affirmed this decision in 1990.

In 1994, the American Booksellers Association and independent bookstores filed a federal complaint in New York against Houghton Mifflin Company, Penguin USA, St. Martin's Press and others, alleging that defendants had violated the RobinsonPatman Act by offering "more advantageous promotional allowances and price discounts" to "certain large national chains and buying clubs."[5]Later, complaints were filed against Random House and Putnam Berkley Group, and these cases also were later settled with the entry of similar consent decrees. Eventually, seven publishers entered consent decrees to stop predatory pricing, and Penguin paid $25 million to independent bookstores when it continued the illegal practices.[6] In 1998, the ABA (which represented 3500 bookstores) and 26 individual stores filed suit in Northern California against chain stores Barnes & Noble and Borders Group, who had reportedly pressured publishers into offering these price advantages.[7] 3. Federal trade commission act- prohibited acquisition of stocks that result in lessening of competition. Example- Standard Oil .. the Court treated Standard oils 90 percent share of renery output as proof of monopoly. 4. Celler Kefauver act 1950 - the act acted to close the loopholes of the clayton act. It forbade the acquisition of assets and shares if the result was lessening of competition. The act aimed at merger control by banning asset or stock consolidations which fell short of creating dominance. Example - In Brown Shoe Co. v. United States (370 U.S. 294 [1962]), perhaps the most famous case under the 1950 Act, the Supreme Court invalidated a merger that would have yielded a horizontal market share of 5 percent and generated a vertical foreclosure of under 2 percent. Brown Shoe ruled that the parties market share, though low overall, could be deemed excessive in certain submarkets. The Court also held that non-efciency goals, such as preserving small rms, were relevant to applying the statute. 5. Hart scott rodino antitrust improvements act 1976 (HSR act) intended to improve the powers of the justice dept and the federal trade commission by giving them time to examine merger proposals. The justice dept and the federal trade commission enforce the anti trust laws in the US. Merger proposals have to be submitted to these bodies. the authorities will do an initial review which would last 30 days. And they can request further info from the companies thereby giving the authorities time to identify the cases.

The bidder must file documents when they announce their offer of the target company. The target company also has to file with the authorities. Effect of the HSR act is to delay the implementation of takeovers, it gives the authorities and shareholders a waiting time so they can evaluate the cases of the bidders and target.