Effects of

Mergers & acquisition

On
Performance of company

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 Table of contents

Sr.
title Page no.
No.
1 Introduction 2
Mergers: meaning, definition and what mergers
2 4
actually mean
3 Mergers vs. acquisitions 6
4 Purpose of mergers 7
5 Reasons why companies merge 9
6 Motivation for mergers 13
7 Types of mergers 16
8 Concerns for mergers 18
9 Steps in bringing about mergers of companies 20
10 Legal procedure for mergers 22
11 Corporate merger procedure 24
12 Why mergers fail? 24
Cases of mergers 25

13 Case 1: Arcelor-Mittal merger 25

Case 2: deutsche-Dresdner bank merger 27

14 references 29

Introduction
We have been learning about the companies coming together to from
another company and companies taking over the existing companies to
expand their business.

With recession taking toll of many Indian businesses and the feeling of
insecurity surging over our businessmen, it is not surprising when we
hear about the immense numbers of corporate restructurings taking
place, especially in the last couple of years. Several companies have

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been taken over and several have undergone internal restructuring,
whereas certain companies in the same field of business have found it
beneficial to merge together into one company.

In this context, it would be essential for us to understand what corporate

restructuring and mergers are all about.

All our daily newspapers are filled with cases of mergers, acquisitions,
spin-offs, tender offers, & other forms of corporate restructuring. Thus
important issues both for business decision and public policy formulation
have been raised. No firm is regarded safe from a takeover possibility.
On the more positive side Mergers may be critical for the healthy
expansion and growth of the firm. Successful entry into new product and
geographical markets may require Mergers at some stage in the firm's
development. Successful competition in international markets may
depend on capabilities obtained in a timely and efficient fashion through
Mergers. Many have argued that mergers increase value and efficiency
and move resources to their highest and best uses, thereby increasing
shareholder value.

To opt for a merger or not is a complex affair, especially in terms of the

technicalities involved. We have discussed almost all factors that the
management may have to look into before going for merger.
Considerable amount of brainstorming would be required by the
managements to reach a conclusion. e.g. a due diligence report would
clearly identify the status of the company in respect of the financial
position along with the net worth and pending legal matters and details
about various contingent liabilities. Decision has to be taken after having
discussed the pros & cons of the proposed merger & the impact of the
same on the business, administrative costs benefits, addition to
shareholders' value, tax implications including stamp duty and last but
not the least also on the employees of the Transferor or Transferee
Company.

Corporate restructuring refers to a broad array of activities that

expands or contracts a firms operation or substantially modify its
financial structure or bring about a significant change in its
organizational structure and internal functioning. It includes mergers,
takeovers, acquisitions, slump sales, demergers etc.

Mergers, acquisitions and restructuring have become a major force in

the financial and economic environment all over the world. Essentially
an American phenomenon till mid-1970s, they have become a dominant
global business theme since then.

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On the Indian scene, too, corporates are seriously looking at mergers,
acquisitions and restructuring which has indeed become the order of the
day. The pace of corporate restructuring has increased since the
beginning of the liberalization era, thanks to greater competitive
pressures and a more permissive environment.

Mergers, acquisitions and restructuring evoke a great deal of public

interest and perhaps represent the most dramatic facet of corporate
finance. This report discusses various facets of mergers.

Mergers

Meaning

A merger is a combination of two companies where one corporation is

completely absorbed by another corporation. The less important

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company loses its identity and becomes part of the more important
corporation, which retains its identity.

Merger Law Definition

1. In contract law, the action of superceding all prior written or oral

agreements on the same subject matter.
2. In criminal law, the inclusion of a lesser offense within a more
serious one, rather than charging it separately, this might cause
double jeopardy.
3. In litigation, the doctrine that all of the plaintiff’s prior claims are
superceded by the judgment in the case, which becomes the
plaintiff’s sole means of recovering from the defendant.
4. The combination under modern codes of civil procedure of law and
equity into a single court.
5. In corporate law, the acquisition of one company by another, and
their combination into a single legal entity.

What Mergers actually mean:

A merger is a combination of two companies where one corporation is

completely absorbed by another corporation. It may involve absorption
or consolidation.

In absorption one company acquires another company. For example,

Hindustan Lever Limited acquired Tata Oil Mills Company.

In consolidation, two or more companies combine to form a new

company. For example, Hindustan Computers Limited, Hindustan
Instruments Limited, Indian Software Company Limited, and Indian
Reprographics Limited combined to form HCL Limited.

The less important company loses its identity and becomes part of the
more important corporation, which retains its identity. A merger
extinguishes the merged corporation, and the surviving corporation
assumes all the rights, privileges, and liabilities of the merged
corporation. A merger is not the same as a consolidation, in which two
corporations lose their separate identities and unite to form a
completely new corporation. In India mergers are called amalgamations
in legal parlance.

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Federal laws regulate mergers. Regulation is based on the concern that
mergers inevitably eliminate competition between the merging firms.
This concern is most acute where the participants are direct rivals,
because courts often presume that such arrangements are more prone
to restrict output and to increase prices. The fear that mergers and
acquisitions reduce competition has meant that the government
carefully scrutinizes proposed mergers. On the other hand, since the
1980s, the federal government has become less aggressive in seeking
the prevention of mergers.

Despite concerns about a lessening of competition, firms are relatively

free to buy or sell entire companies or specific parts of a company.
Mergers and acquisitions often result in a number of social benefits.
Mergers can bring better management or technical skill to bear on
underused assets. They also can produce economies of scale and scope
that reduce costs, improve quality, and increase output. The possibility
of a takeover can discourage company managers from behaving in ways
that fail to maximize profits. A merger can enable a business owner to
sell the firm to someone who is already familiar with the industry and
who would be in a better position to pay the highest price. The prospect
of a lucrative sale induces entrepreneurs to form new firms.

Antitrust merger law seeks to prohibit transactions whose probable

anticompetitive consequences outweigh their likely benefits. The critical
time for review usually is when the merger is first proposed. This
requires enforcement agencies and courts to forecast market trends and
future effects. Merger cases examine past events or periods to
understand each merging party's position in its market and to predict
the merger's competitive impact.

Merger is also defined as amalgamation. Merger is the fusion of two or

more existing companies. All assets, liabilities and the stock of one
company stand transferred to Transferee Company in consideration of
payment in the form of:

 Equity shares in the transferee company,

 Debentures in the transferee company,
 Cash, or
 A mix of the above mode

Mergers vs. Acquisitions

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These terms are commonly used interchangeably but in reality, they
have slightly different meanings. An acquisition refers to the act of one
company taking over another company and clearly becoming the new
owner. From a legal point of view, the target company, the company
that is bought, no longer exists. Acquisition in general sense is acquiring
the ownership in the property. In the context of business combinations,
an acquisition is the purchase by one company of a controlling interest
in the share capital of another existing company.

A merger is a joining of two companies that are usually of about the

same size and agree to meld into one large company. In the case of a
merger, both company’s stocks cease to be traded as the new company
chooses a new name and a new stock is issued in place of the two
separate company’s stock. This view of a merger is unrealistic by real
world standards as it is often the case that one company is actually
bought by another while the terms of the deal that is struck between the
two allows for the company that is bought to publicize that a merger has
occurred while the company that is doing the buying backs up this
claim. This is done in order to allow the company that is bought to save
face and avoid the negative connotations that go along with selling out

Purpose of Mergers:

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Purposes for mergers are short listed below: -

(1)Procurement of supplies:

To safeguard the source of supplies of raw materials or intermediary

product; to obtain economies of purchase in the form of discount,
savings in transportation costs, overhead costs in buying department,
etc.
To share the benefits of suppliers economies by standardizing the
materials

(2)Revamping production facilities:

To achieve economies of scale by amalgamating production facilities

through more intensive utilization of plant and resources;
To standardize product specifications, improvement of quality of
product, expanding market and aiming at consumers’ satisfaction
through strengthening after sale services;
To obtain improved production technology and know-how from the
offeree company
To reduce cost, improve quality and produce competitive products to
retain and improve market share.

(3) Market expansion and strategy:

To eliminate competition and protect existing market;

To obtain a new market outlets in possession of the offeree;
To obtain new product for diversification or substitution of existing
products and to enhance the product range;
Strengthening retain outlets and sale the goods to rationalize
distribution;
To reduce advertising cost and improve public image of the offeree
company;
Strategic control of patents and copyrights

(4) Financial strength:

To improve liquidity and have direct access to cash resource;

To dispose of surplus and outdated assets for cash out of combined
enterprise;
To enhance gearing capacity, borrow on better strength and the greater
assets backing;
To avail tax benefits;
To improve EPS (Earning Per Share)

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(5) General gains:

To improve its own image and attract superior managerial talents to

manage its affairs;
To offer better satisfaction to consumers or users of the product

(6) Own developmental plans:

The purpose of acquisition is backed by the offeror company’s own

developmental plans.
A company thinks in terms of acquiring the other company only when it
has arrived at its own development plan to expand its operation having
examined its own internal strength where it might not have any problem
of taxation, accounting, valuation, etc. but might feel resource
constraints with limitations of funds and lack of skill managerial
personnel’s. It has to aim at suitable combination where it could have
opportunities to supplement its funds by issuance of securities; secure
additional financial facilities, eliminate competition and strengthen its
market position.

(7) Strategic purpose:

The Acquirer Company view the merger to achieve strategic objectives

through alternative type of combinations which may be horizontal,
vertical, product expansion, market extensional or other specified
unrelated objectives depending upon the corporate strategies. Thus,
various types of combinations distinct with each other in nature are
adopted to pursue this objective like vertical or horizontal combination.

(8) Corporate friendliness:

Although it is rare but it is true that business houses exhibit degrees of

cooperative spirit despite competitiveness in providing rescues to each
other from hostile takeovers and cultivate situations of collaborations
sharing goodwill of each other to achieve performance heights through
business combinations. The combining corporates aim at circular
combinations by pursuing this objective.

(9) Desired level of integration:

Mergers and acquisition are pursued to obtain the desired level of

integration between the two combining business houses. Such
integration could be operational or financial. This gives birth to
conglomerate combinations. The purpose and the requirements of the
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offeror company go a long way in selecting a suitable partner for merger
or acquisition in business combinations.

Reasons why companies merge:

The principal economic rationale of a merger id that the value of the
combined entity is expected to be greater than the sum of the
independent values of the merging entities. For example, if firms A and
B merge, the value of the combined entity, V (AB), is expected to be
greater than (VA+VB), the sum of the independent values of A and B.

A variety of reasons like growth, diversification, economies of scale,

managerial effectiveness and so on are cited in support of merger
proposals. Some of them appear to be plausible in the sense that they
create value; others seem to be dubious as they don’t create value.

Plausible reasons:

The most plausible reasons in favor of mergers are strategic benefits,

economies of scale, economies of scope, economies of vertical
integration, complementary resources, tax shields, utilization of surplus
funds, and managerial effectiveness.

» Strategic benefit:

♦ As a pre-emptive move it can prevents competitor from

establishing a similar position in that industry.
♦ It offers a special timing advantage because the merger
alternative enables the firm to ‘leap frog’ several stages in the
process of expansion.
♦ It may entail less risk and even less cost
♦ In a ‘saturated market’, simultaneous expansion and
replacement (through merger) makes more sense than creation
of additional capacity through internal expansion

» Economies of scale:

When two or more firms combine, certain economies are realized due to
larger volume of operations of the combined entity. These economies
arise because of more intensive utilization of production capacity,

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 distribution networks, and research and development facilities, data
processing systems and so on. Economies of scale are prominent in
horizontal mergers where the scope of more intensive utilization of
resources is greater. Even in conglomerate mergers there is scope for
reduction of certain overhead expenses.

» Economies of scope:

A company may use a specific set of skills or assets that it possesses to

widen the scope of its activities. For example: proctor and gamble can
enjoy economies or scope if it acquires a consumer product company
that benefits from its highly regarded consumer marketing skills.

» Economies of vertical integration:

When companies engaged at different stages of production or value

chain merge, economies of vertical integration may be realized. For
example, the merger of a company engaged in oil exploration and
production (like ONGC) with a company engaged in refining and
marketing (like HPCL) may improve co-ordination and control.
Vertical integration, however, is not always a good idea. If a company
does everything in-house it may not get the benefit of outsourcing from
independent suppliers who may be more efficient in their segments of
the value chain.

» Complementary resources:

If two firms have complementary resources, it may make sense for them
to merge. A good example of a merger of companies which
complemented each other well is the merger of Brown Bovery and Asea
that resulted in AseaBrownBovery (ABB). Brown Bovery was
international, where as Asea was not. Asea excelled in management,
whereas Brown Bovery did not. The technology, markets, and cultures of
the two companies fitted well.

» Tax shields:

When a firm with accumulated losses and/or unabsorbed depreciation

merges with a profit making firm, tax shields are utilized better. The firm
with accumulated losses and/or unabsorbed depreciation may not be
able to derive tax advantages for a long time. However, when it merges
with a profit making firm, its accumulated losses and/or unabsorbed
depreciation can be set off against the profits of the profit making firm
and the tax benefits can be quickly realized.

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» Utilization of surplus funds:

A firm in a mature industry may generate a lot of cash but may not have
opportunities for profitable investment. Such a firm ought to distribute
generous dividends and even buy back its shares, if the same is
possible. However, most managements have a tendency to make further
investments, even though they may not be profitable. In such a
situation, a merger with another firm involving cash compensation often
represents a more efficient utilization of surplus funds.

» Managerial effectiveness:

One of the potential gains of merger is an increase in managerial

effectiveness. This may occur if the existing management team, which is
performing poorly, is replaced by a more effective management team.
Another allied benefit of a merger may be in the form of greater
congruence between the interests of the managers and the share
holders.

Dubious Reasons:

Often mergers are motivated by a desire to diversify and lower financing

costs. Prima facie, these objectives look worthwhile, but they are not
likely to enhance value.

» Diversification:

A commonly stated motive for mergers is to achieve risk reduction

through diversification. The extent, to which risk is reduced, of course,
depends on the correlation between the earnings of the merging
entities. While negative correlation brings greater reduction in risk,
positive correlation brings lesser reduction in risk.
Corporate diversification, however, may offer value in at least two
special cases
1) If a company is plagued with problems which can jeopardize its
existence and its merger with another company can save it from
potential bankruptcy.
2) If investors do not have the opportunity of ‘home made’
diversification because one of the companies is not traded in the
marketplace, corporate diversification may be the only feasible
route to risk reduction.
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 » Lower financing costs:

The consequence of larger size and greater earnings and stability, many
argue, is to reduce the cost of borrowing for the merged firm. The
reason for this is that the creditors of the merged firm enjoy better
protection than the creditors of the merging firms independently.

» Increase Supply-Chain Pricing Power:

By buying out one of its suppliers or one of the distributors, a business

can eliminate a level of costs. If a company buys out one of its
suppliers, it is able to save on the margins that the supplier was
previously adding to its costs; this is known as a vertical merger. If a
company buys out a distributor, it may be able to ship its products at a
lower cost.

» Eliminate Competition:

Many M&A deals allow the acquirer to eliminate future competition and
gain a larger market share in its product's market. The downside of
this is that a large premium is usually required to convince the target
company's shareholders to accept the offer. It is not uncommon for the
acquiring company's shareholders to sell their shares and push the price
lower in response to the company paying too much for the target
company.
» Synergy:

The most used word in M&A is synergy, which is the idea that by
combining business activities, performance will increase and costs will
decrease. Essentially, a business will attempt to merge with another
business that has complementary strengths and weaknesses.

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 Motivations for mergers
Mergers are permanent form of combinations which vest in
management complete control and provide centralized
administration which are not available in combinations of holding
company and its partly owned subsidiary. Shareholders in the
selling company gain from the merger and takeovers as the
premium offered to induce acceptance of the merger or takeover
offers much more price than the book value of shares.
Shareholders in the buying company gain in the long run with the
growth of the company not only due to synergy but also due to
“boots trapping earnings”.
Mergers are caused with the support of shareholders, manager’s ad
promoters of the combing companies. The factors, which motivate
the shareholders and managers to lend support to these
combinations and the resultant consequences they have to bear,
are briefly noted below based on the research work by various
scholars globally.

(1) From the standpoint of shareholders

Investment made by shareholders in the companies subject to

merger should enhance in value. The sale of shares from one
company’s shareholders to another and holding investment in
shares should give rise to greater values i.e. the opportunity gains
in alternative investments. Shareholders may gain from merger in
different ways viz. from the gains and achievements of the
company i.e. through
 Realization of monopoly profits;
 Economies of scales;
 Diversification of product line;
 Acquisition of human assets and other resources not available
otherwise;
 Better investment opportunity in combinations.
One or more features would generally be available in
each merger where shareholders may have attraction and favor
merger.
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(2) From the standpoint of managers

Managers are concerned with improving operations of the

company, managing the affairs of the company effectively for all
round gains and growth of the company which will provide them
better deals in raising their status, perks and fringe benefits.
Mergers where all these things are the guaranteed outcome get
support from the managers. At the same time, where managers
have fear of displacement at the hands of new management in
amalgamated company and also resultant depreciation from the
merger then support from them becomes difficult.

(3) Promoter’s gains

Mergers do offer to company promoters the advantage of

increasing the size of their company and the financial structure and
strength. They can convert a closely held and private limited
company into a public company without contributing much wealth
and without losing control.

(4) Benefits to general public

Impact of mergers on general public could be viewed as aspect of

benefits and costs to:
 Consumer of the product or services;
 Workers of the companies under combination;
 General public affected in general having not been user or
consumer or the worker in the companies under merger plan.

(a) Consumers

The economic gains realized from mergers are passed on to consumers

in the form of lower prices and better quality of the product which
directly raise their standard of living and quality of life. The balance of
benefits in favor of consumers will depend upon the fact whether or not
the mergers increase or decrease competitive economic and productive
activity which directly affects the degree of welfare of the consumers
through changes in price level, quality of products, after sales service,
etc.

(b) Workers community

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The merger or acquisition of a company by a conglomerate or other
acquiring company may have the effect on both the sides of increasing
the welfare in the form of purchasing power and other miseries of life.
Two sides of the impact as discussed by the researchers and
academicians are: firstly, mergers with cash payment to shareholders
provide opportunities for them to invest this money in other companies
which will generate further employment and growth to uplift of the
economy in general. Secondly, any restrictions placed on such mergers
will decrease the growth and investment activity with corresponding
decrease in employment. Both workers and communities will suffer on
lessening job opportunities, preventing the distribution of benefits
resulting from diversification of production activity.

(c) General public

Mergers result into centralized concentration of power. Economic power

is to be understood as the ability to control prices and industries output
as monopolists. Such monopolists affect social and political environment
to tilt everything in their favor to maintain their power ad expand their
business empire. These advances result into economic exploitation. But
in a free economy a monopolist does not stay for a longer period as
other companies enter into the field to reap the benefits of higher prices
set in by the monopolist. This enforces competition in the market as
consumers are free to substitute the alternative products. Therefore, it is
difficult to generalize that mergers affect the welfare of general public
adversely or favorably. Every merger of two or more companies has to
be viewed from different angles in the business practices which protects
the interest of the shareholders in the merging company and also serves
the national purpose to add to the welfare of the employees, consumers
and does not create hindrance in administration of the Government
polices.

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 Types of mergers:
Merger depends upon the purpose of the offeror company it wants to
achieve. Based on the offerors’ objectives profile, combinations could be
vertical, horizontal, circular and conglomeratic as precisely described
below with reference to the purpose in view of the offeror company.

(A) Vertical combination:

A company would like to takeover another company or seek its merger

with that company to expand espousing backward integration to
assimilate the resources of supply and forward integration towards
market outlets. The acquiring company through merger of another unit
attempts on reduction of inventories of raw material and finished goods,
implements its production plans as per the objectives and economizes
on working capital investments. In other words, in vertical combinations,
the merging undertaking would be either a supplier or a buyer using its
product as intermediary material for final production.

The following main benefits accrue from the vertical combination to the
acquirer company i.e.

1. It gains a strong position because of imperfect market of the

intermediary products, scarcity of resources and purchased
products;

2. Has control over products specifications.

(B) Horizontal combination:

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It is a merger of two competing firms which are at the same stage of
industrial process. The acquiring firm belongs to the same industry as
the target company. The mail purpose of such mergers is to obtain
economies of scale in production by eliminating duplication of facilities
and the operations and broadening the product line, reduction in
investment in working capital, elimination in competition concentration
in product, reduction in advertising costs, increase in market segments
and exercise better control on market.

(C) Circular combination:

Companies producing distinct products seek amalgamation to share

common distribution and research facilities to obtain economies by
elimination of cost on duplication and promoting market enlargement.
The acquiring company obtains benefits in the form of economies of
resource sharing and diversification.

(D) Conglomerate combination:

It is amalgamation of two companies engaged in unrelated industries

like DCM and Modi Industries. The basic purpose of such amalgamations
remains utilization of financial resources and enlarges debt capacity
through re-organizing their financial structure so as to service the
shareholders by increased leveraging and EPS, lowering average cost of
capital and thereby raising present worth of the outstanding shares.
Merger enhances the overall stability of the acquirer company and
creates balance in the company’s total portfolio of diverse products and
production processes.

Some more types of mergers:

 Market-extension Merger

This involves the combination of two companies that sell the same
products in different markets. A market-extension merger allows for the
market that can be reached to become larger and is the basis for the
name of the merger.

 Product-extension Merger

This merger is between two companies that sell different, but somewhat
related products, in a common market. This allows the new, larger

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company to pool their products and sell them with greater success to
the already common market that the two separate companies shared.

 Accretive mergers
Those in which an acquiring company's earnings per share (EPS)
increase. An alternative way of calculating this is if a company with a
high price to earnings ratio (P/E) acquires one with a low P/E.

Concerns of mergers

Horizontal, vertical, and conglomerate mergers each raise distinctive

competitive concerns.

Horizontal Mergers Horizontal mergers raise three basic competitive

problems. The first is the elimination of competition between the
merging firms, which, depending on their size, could be significant. The
second is that the unification of the merging firms' operations might
create substantial market power and might enable the merged entity to
raise prices by reducing output unilaterally. The third problem is that, by
increasing concentration in the relevant market, the transaction might
strengthen the ability of the market's remaining participants to
coordinate their pricing and output decisions. The fear is not that the
entities will engage in secret collaboration but that the reduction in the
number of industry members will enhance tacit coordination of behavior.

Vertical Mergers Vertical mergers take two basic forms: forward

integration, by which a firm buys a customer, and backward integration,
by which a firm acquires a supplier. Replacing market exchanges with
internal transfers can offer at least two major benefits. First, the vertical
merger internalizes all transactions between a manufacturer and its
supplier or dealer, thus converting a potentially adversarial relationship
into something more like a partnership. Second, internalization can give
management more effective ways to monitor and improve performance.
Vertical integration by merger does not reduce the total number of
economic entities operating at one level of the market, but it might
change patterns of industry behavior. Whether a forward or backward
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integration, the newly acquired firm may decide to deal only with the
acquiring firm, thereby altering competition among the acquiring firm's
suppliers, customers, or competitors. Suppliers may lose a market for
their goods; retail outlets may be deprived of supplies; or competitors
may find that both supplies and outlets are blocked. These possibilities
raise the concern that vertical integration will foreclose competitors by
limiting their access to sources of supply or to customers. Vertical
mergers also may be anticompetitive because their entrenched market
power may impede new businesses from entering the market.

Conglomerate Mergers Conglomerate transactions take many forms,

ranging from short-term joint ventures to complete mergers. Whether a
conglomerate merger is pure, geographical, or a product-line extension,
it involves firms that operate in separate markets. Therefore, a
conglomerate transaction ordinarily has no direct effect on competition.
There is no reduction or other change in the number of firms in either
the acquiring or acquired firm's market.
Conglomerate mergers can supply a market or "demand" for firms, thus
giving entrepreneurs liquidity at an open market price and with a key
inducement to form new enterprises. The threat of takeover might force
existing managers to increase efficiency in competitive markets.
Conglomerate mergers also provide opportunities for firms to reduce
capital costs and overhead and to achieve other efficiencies.
Conglomerate mergers, however, may lessen future competition by
eliminating the possibility that the acquiring firm would have entered
the acquired firm's market independently. A conglomerate merger also
may convert a large firm into a dominant one with a decisive
competitive advantage, or otherwise make it difficult for other
companies to enter the market. This type of merger also may reduce the
number of smaller firms and may increase the merged firm's political
power, thereby impairing the social and political goals of retaining
independent decision-making centers, guaranteeing small business
opportunities, and preserving democratic processes.

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 Steps in bringing about mergers of
companies
Due diligence:

It’s a term used for a number of concepts involving either the

performance of an investigation of a business or person, or the
performance of an act with a certain standard of care. It can be a legal
obligation, but the term will more commonly apply to voluntary
investigations. A common example of due diligence in various industries
is the process through which a potential acquirer evaluates a target
company or its assets for acquisition.

Origin of the term "Due Diligence":

The term "Due Diligence" first came into common use as a result of the
US Securities Act of 1933.
The US Securities Act included a defense referred to in the Act as the
"Due Diligence" defense which could be used by broker-dealers when
accused of inadequate disclosure to investors of material information
with respect to the purchase of securities.
So long as broker-dealers conducted a "Due Diligence" investigation into
the company whose equity they were selling, and disclosed to the
investor what they found, they would not be held liable for nondisclosure
of information that failed to be uncovered in the process of that
investigation.

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The entire broker-dealer community quickly institutionalized as a
standard practice, the conducting of due diligence investigations of any
stock offerings in which they involved themselves.
Due diligence in capstone refers to performing the needful amount of
effort, as in 'doing diligence'.
Originally the term was limited to public offerings of equity investments,
but over time it has come to be associated with investigations of private
mergers and acquisitions as well. The term has slowly been adapted for
use in other situations.

Due diligence in business transactions:

In business transactions, the due diligence process varies for different

types of companies. The relevant areas of concern may include the
financial, legal, labor, tax, environment and market/commercial situation
of the company. Other areas include intellectual property, real and
personal property, insurance and liability coverage, debt instrument
review, employee benefits and labor matters, immigration, and
international transactions.

Approval by shareholders:

A meeting of share holders should be held by each company for passing

the scheme of mergers at least 75% of shareholders who vote either in
person or by proxy must approve the scheme of merger.

Authorization of the scheme by the court:

Once the drafts of merger proposal is approved by the respective

boards, each company should make an application to the high court of
the state where its registered office is situated so that it can convene
the meetings of share holders and creditors for passing the merger
proposal
Once the mergers scheme is passed by the share holders and creditors,
the companies involved in the merger should present a petition to the
HC for confirming the scheme of merger. However the HC is empowered
to modify the scheme and pass orders accordingly. A notice about the
same has to be published in 2 newspapers.

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Legal Procedure for bringing about merger
of companies

» Examination of object clauses:

The MOA of both the companies should be examined to check the power
to amalgamate is available. Further, the object clause of the merging
company should permit it to carry on the business of the merged
company. If such clauses do not exist, necessary approvals of the share
holders, board of directors, and company law board are required.

» Intimation to stock exchanges:

The stock exchanges where merging and merged companies are listed
should be informed about the merger proposal. From time to time,
copies of all notices, resolutions, and orders should be mailed to the
concerned stock exchanges.

» Approval of the draft merger proposal by the respective

boards:

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The draft merger proposal should be approved by the respective BOD’s.
The board of each company should pass a resolution authorizing
its directors/executives to pursue the matter further.
» Application to high courts:

Once the drafts of merger proposal is approved by the respective

boards, each company should make an application to the high court of
the state where its registered office is situated so that it can convene
the meetings of share holders and creditors for passing the merger
proposal.

» Dispatch of notice to share holders and creditors:

In order to convene the meetings of share holders and creditors, a

notice and an explanatory statement of the meeting, as approved by the
high court, should be dispatched by each company to its shareholders
and creditors so that they get 21 days advance intimation. The notice of
the meetings should also be published in two news papers.

» Holding of meetings of share holders and creditors:

A meeting of share holders should be held by each company for passing

the scheme of mergers at least 75% of shareholders who vote either in
person or by proxy must approve the scheme of merger. Same applies
to creditors also.

» Petition to High Court for confirmation and passing of HC

orders:

Once the mergers scheme is passed by the share holders and creditors,
the companies involved in the merger should present a petition to the
HC for confirming the scheme of merger. A notice about the same has to
be published in 2 newspapers.

» Filing the order with the registrar:

Certified true copies of the high court order must be filed with the
registrar of companies within the time limit specified by the court.

» Transfer of assets and liabilities:

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After the final orders have been passed by both the HC’s, all the assets
and liabilities of the merged company will have to be transferred to the
merging company.

» Issue of shares and debentures:

The merging company, after fulfilling the provisions of the law, should
issue shares and debentures of the merging company. The new shares
and debentures so issued will then be listed on the stock exchange.

Corporate merger procedure

State statutes establish procedures to accomplish corporate mergers.
Generally, the board of directors for each corporation must initially pass
a resolution adopting a plan of merger that specifies the names of the
corporations that are involved, the name of the proposed merged
company, the manner of converting shares of both corporations, and
any other legal provision to which the corporations agree. Each
corporation notifies all of its shareholders that a meeting will be held to
approve the merger. If the proper number of shareholders approves the
plan, the directors sign the papers and file them with the state. The
secretary of states issues a certificate of merger to authorize the new
corporation.
Some statutes permit the directors to abandon the plan at any point up
to the filing of the final papers. States with the most liberal corporation
laws permit a surviving corporation to absorb another company by
merger without submitting the plan to its shareholders for approval
unless otherwise required in its certificate of incorporation.
Statutes often provide that corporations that are formed in two different
states must follow the rules in their respective states for a merger to be
effective. Some corporation statutes require the surviving corporation to
purchase the shares of stockholders who voted against the merger.

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 Why Mergers Fail?
Revenue deserves more attention in mergers; indeed, a failure to focus
on this important factor may explain why so many mergers don’t pay
off. Too many companies lose their revenue momentum as they
concentrate on cost synergies or fail to focus on post merger growth in a
systematic manner. Yet in the end, halted growth hurts the market
performance of a company far more than does a failure to nail costs.

Cases of mergers of prominent companies

in the recent past

 Case 1: Arcelor Mittal merger details

(Merger success)
The Merger Process

2006 was a very exciting and challenging year for Arcelor Mittal. The
new company was at the forefront of the consolidation process, leading
the industry through mergers and acquisitions.

January 2006 Historic moment for the Global Steel Industry

The year started with the historic launch of the Mittal Steel offer to the
shareholders of Arcelor to create the world's first 100 million tonne plus
steel producer. The aim of increasing globalization and consolidation,
necessary in the steel industry, defines the deal and sets the pace for
the industry.

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February 2006 - Expansion and strong results

Mittal Canada completes the acquisition of three Stelco subsidiaries, the

Norambar and Stelfil plants, located in Quebec, and the Stelwire plant in
Ontario. Stelfil and Stelwire will add 250,000 tones of steel wire to the
company's annual production capacity, providing a wider product mix to
better meet customers' needs.

Arcelor acquires a 38.41% stake in Laiwu Steel Corporation, in China.

Laiwu Steel Corporation is China's largest producer of sections and
beams, and will further boost its operational excellence thanks to this
partnership. It is still awaiting approval with the Beijing authorities.

April 2006 - Renewal after Hurricane Katrina and new galvanized

line

Out of the devastation of Hurricane Katrina, arose a revitalized

Mississippi youth baseball field, rebuilt with the help of Mittal Steel USA
and Arcelor. The company provides money towards the purchase of
lighting fixtures and steel cross bar support. It also arranges for and
donates the labor costs for their installation.

Mittal Steel USA places a new line into operation in Cleveland to provide
top-quality galvanized sheet steel to automakers and other demanding
customers. The new line is designed to produce in excess of 630,000
tones of corrosion-resistant sheet annually, using the hot-dip galvanizing
process.

May 2006 - US clears the way for bid

Mittal Steel announces US antitrust clearance for Arcelor bid and the
approval of the offer documents by European regulators. The
acceptance period starts in Luxembourg, Belgium and France on 18 May
2006 (some days later for Spain and the United States) and lasts until 29
June 2006.

Arcelor contributes to the first anti-seismic school building in Izmit

(Turkey), where a school building had been destroyed by an earthquake
in 1999.

June 2006 - Historic agreement to create the No.1 Global Steel

Company

Creating the world's largest steel company, Mittal Steel and Arcelor
reach an agreement to combine the two companies in a merger of

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equals. The terms of the transaction were reviewed by the Boards of
Arcelor and Mittal Steel which each recommended the transaction to
their shareholders. The combined group, domiciled and headquartered
in Luxembourg, is named Arcelor Mittal.

Demonstrating the commitment to extend markets in developing

nations, a strategic partnership between Arcelor Mittal and SNI (Société
Nationale d'Investissement) is concluded concerning the development of
Sonasid. This consolidates and develops the position of Sonasid on the
Moroccan market, allowing the company to benefit from the transfer of
Arcelor Mittal's technologies and skills in the long carbon steel product
sector

 Case 2: Deutsche – Dresdner Bank

(Merger Failure)
The merger that was announced on March 7, 2000 between Deutsche
Bank and Dresdner Bank, Germany’s largest and the third largest bank
respectively was considered as Germany’s response to increasingly
tough competition markets.

The merger was to create the most powerful banking group in the world
with the balance sheet total of nearly 2.5 trillion marks and a stock
market value around 150 billion marks. This would put the merged bank
for ahead of the second largest banking group, U.S. based Citigroup,
with a balance sheet total amounting to 1.2 trillion marks and also in
front of the planned Japanese book mergers of Sumitomo and Sukura
Bank with 1.7 trillion marks as the balance sheet total.

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The new banking group intended to spin off its retail banking which was
not making much profit in both the banks and costly, extensive network
of bank branches associated with it.

The merged bank was to retain the name Deutsche Bank but adopted
the Dresdner Bank’s green corporate color in its logo. The future core
business lines of the new merged Bank included investment Banking,
asset management, where the new banking group was hoped to outside
the traditionally dominant Swiss Bank, Security and loan banking and
finally financially corporate clients ranging from major industrial
corporation to the mid-scale companies.

With this kind of merger, the new bank would have reached the no.1
position of the US and create new dimensions of aggressiveness in the
international mergers.
But barely 2 months after announcing their agreement to form the
largest bank in the world, had negotiations for a merger between
Deutsche and Dresdner Bank failed on April 5, 2000.

The main issue of the failure was Dresdner Bank’s investment arm,
Kleinwort Benson, which the executive committee of the bank did not
want to relinquish under any circumstances.

In the preliminary negotiations it had been agreed that Kleinwort Benson

would be integrated into the merged bank. But from the outset these
considerations encountered resistance from the asset management
division, which was Deutsche Bank’s investment arm.

Deutsche Bank’s asset management had only integrated with London’s

investment group Morgan Grenfell and the American Banker’s trust. This
division alone contributed over 60% of Deutsche Bank’s profit. The top
people at the asset management were not ready to undertake a new
process of integration with Kleinwort Benson. So there was only one
option left with the Dresdner Bank i.e. to sell Kleinwort Benson
completely. However Walter, the chairman of the Dresdner Bank was not
prepared for this. This led to the withdrawal of the Dresdner Bank from
the merger negotiations.

In economic and political circles, the planned merger was celebrated as

Germany’s advance into the premier league of the international financial
markets. But the failure of the merger led to the disaster of Germany as
the financial center.

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 References:

Bibliography:

i. Chandra, P.C., 2006, Financial Management, Tata McGraw-hill

Webliography:
i. http://www.arcelormittal.com/index.php?lang=en&page=539
ii. http://law.jrank.org/pages/8550/Mergers-Acquisitions.html

iii. http://law.jrank.org/pages/8543/Mergers-Acquisitions-Types-
Mergers.html
iv. http://law.jrank.org/pages/8545/Mergers-Acquisitions-Competitive-
Concerns.html

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 v. http://law.jrank.org/pages/8544/Mergers-Acquisitions-Corporate-Merger-
Procedures.html
vi. http://www.learnmergers.com/mergers-types.shtml
vii. http://www.learnmergers.com/mergers-mergers.shtml
viii. http://en.wikipedia.org/wiki/Mergers_and_acquisitions
ix. http://en.wikipedia.org/wiki/Due_diligence
x. http://www.investopedia.com/ask/answers/06/m&areasons.asp

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