Strategic financial management is basically about the identification of the possible strategies

capable of maximizing an organization's market value. It involves the allocation of scarce capital
resources among competing opportunities. It also encompasses the implementation and
monitoring of the chosen strategy so as to achieve agreed objectives.

The key decisions falling within the scope of financial strategy include the following:

1. Financial decisions - this deals with the mode of financing or mix of equity capital and debt
capital. If it is possible to alter the total value of the company by alteration in the capital structure
of the company, then an optimal financial mix would exist - where the market value of the
company is maximized.

2. Investment decision - this involves the profitable utilization of firm's funds especially in long-
term projects (capital projects). Because the future benefits associated with such projects are not
known with certainty, investment decisions necessarily involve risk. The projects are therefore
evaluated in relation to their expected return and risk. For these are the factors that ultimately
determine the market value of the company. To maximize the market value of the company, the
financial manager will be interested in those projects with maximum returns and minimum risk.
An understanding of cost of capital, capital structure and portfolio theory is a prerequisite here.

3. Dividend decision - dividend decision determines the division of earnings between payments
to shareholders and reinvestment in the company. Retained earnings are one of the most
significant sources of funds for financing corporate growth, dividends constitute the cash flows
that accrue to shareholders. Although both growth and dividends are desirable, these goals are in
conflict with each other. A higher dividend rate means rate means less retained earnings and
consequently slower rate of growth in future earnings and share prices. The finance manager must
provide reasonable answer to this conflict.

It should be noted that the theory of corporate finance is based on the assumption that the
objective of management is to maximize the market value of the company. More specifically, it is
settled in finance that the main objective of a company should be to maximize wealth of its
ordinary shareholders.

Merger Procedure:
merger is a complicated transaction, involving fairly complex legal considerations. While
evaluating a merger proposal, one should bear in mind the following legal provisions.Sections
391 to 394 of the companies act, 1956 contain the provisions for amalgamations. The procedure
for amalgamation normally involves the following steps:
 Examination of object Clauses: The memorandum of association of both the companies
should be examined to check if the power to amalgamate is available. Further, the object clause of
the amalgamated company (transferee company) should permit it to carry on the business of the
amalgamating company (transferor company ) .If such clauses do not exists, necessary approvals
of the shareholders, boards of directors and Company Law Board are required.
 Intimation to stock Exchanges: The stock exchanges where the amalgamated and
amalgamating companies are listed should be informed about the amalgamation proposal. From
time to time, copies of all notices, resolutions, and orders should be mailed to the concerned stock
exchanges.
 Approval of the draft amalgamation proposal by the Respective Boards: The draft
amalgamation proposal should be approved by the respective boards of directors. The board of
each company should pass a resolution authorizing its directors/executives to pursue the matter
further.
 Application to the National Company Law Tribunal (NCLT): Once the draft of
amalgamation proposal is approved by the respective boards, each company should make an
application to the NCLT so that it can convene the meetings of shareholders and creditors for
passing the amalgamation proposal.
 Dispatch of notice to shareholders and creditors: In order to convene the meeting of
shareholders and creditors, a notice and an explanatory statement of the meeting, as approved by
the NCLT, 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
newspapers (one English and one vernacular). An affidavit confirming that the notice has been
dispatched to the shareholders/creditors and that the same has been published in newspapers
should be filed with the NCLT.
 Holding of Meetings of shareholders and creditors: A meeting of shareholders should be
held by each company for passing the scheme of amalgamation. At least 75 percent (in value) of
shareholders in each class, who vote either in person or by proxy, must approve the scheme of
amalgamation. Likewise, in a separate meeting, the creditors of the company must approve of the
amalgamation scheme.
 Petition to the NCLT for confirmation and passing of NCLT orders: Once the
amalgamation scheme is passed by the shareholders and creditors, the companies involved in the
amalgamation should present a petition to the NCLT for confirming the scheme of amalgamation.
The NCLT will fix a date of hearing. A notice about the same has to be published in two
newspapers. After hearing the parties the parties concerned ascertaining that the amalgamation
scheme is fair and reasonable, the NCLT will pass an order sanctioning the same. However, the
NCLT is empowered to modify the scheme and pass orders accordingly.
 Filing the order with the Registrar: Certified true copies of the NCLT order must be filed
with the Registrar of Companies within the time limit specified by the NCLT.
 Transfer of Assets and Liabilities: After the final orders have been passed by the NCLT, all
the assets and liabilities of the amalgamating company will, with effect from the appointed date,
have to be transferred to the amalgamated company.
 Issue of shares and debentures: The amalgamated company, after fulfilling the provisions
of the law, should issue shares and debentures of the amalgamated company. The new shares and
debentures so issued will then be listed on the stock exchange.

3)Financial problems:
After merger and consolidation the companies face a number of financial problems. The liquidity
of the companies has to be established afresh. The merging and consolidating companies pursue
their own financial policies when they are working independently. A number of adjustments are
required to be made in financial planning and policies so that consolidated efforts may enable to
improve short term and long term finances of the companies. Some of the financial problems of
merging and consolidating companies are discussed as follow:
Cash management. The Liquidity Problem is the usual problem faced by acquiring companies.
Before merger and consolidation, the companies had their own method of payments, cash
behavior pattern and arrangements with financial institutions. The cash pattern will have to be
adjusted according to the present needs of the business.
Credit policy. The credit policies of the companies are unified so that same term and conditions
may be applied to the customers. If the market areas of the companies are different, then same old
polices may be followed. The problem will arise only when operating areas of the companies are
the same and same credit policy will have to be pursued.
Financial planning. The companies may be following different financial plans before merger
and consolidation, a unified financial planning is followed. The divergent financial control will be
unified to suit the needs of the acquiring concerns.
Dividend policy. The companies may be following different policies for paying dividend. The
stockholders will be expecting higher rates of dividend after merger and consolidation on the
belief that financial position and earning capacity has increased after combining the resources of
the companies. This is a ticklish problem and management will have to device an acceptable pay-
out policy. In the earlier stages of merger and consolidation it may be difficult to maintain even
the old rates of dividend.
Depreciation policy. The companies follow different depreciation policies. The method of
depreciation, the rate of depreciation, and the amount to be taken to revenue accounts will be
different. After merger and consolidation the first thing to be decided will be different. After
merger and consolidation the first thing to be decided will be about the depreciable and non-
depreciable assets. The second will be about the rate of depreciation. Different assets will be in
different stages of use and appropriate amounts of depreciation should be decided.
1. Horizontal merger:
It is a merger of two or more companies that compete in the same industry. It is a merger with a
direct competitor and hence expands as the firm’s operations in the same industry. Horizontal
mergers are designed to produce substantial economies of scale and result in decrease in the
number of competitors in the industry. The merger of Tata Oil Mills Ltd. with the Hindustan lever
Ltd. was a horizontal merger.
In case of horizontal merger, the top management of the company being meted is generally,
replaced, by the management of the transferee company. One potential repercussion of the
horizontal merger is that it may result in monopolies and restrict the trade.
Weinberg and Blank define horizontal merger as follows:
“A takeover or merger is horizontal if it involves the joining together of two companies which are
producing essentially the same products or services or products or services which compete
directly with each other (for example sugar and artificial sweetness). In recent years, the great
majority of takeover and mergers have been horizontal. As horizontal takeovers and mergers
involve a reduction in the number of competing firms in an industry, they tend to create the
greatest concern from an anti-monopoly point of view, on the other hand horizontal mergers and
takeovers are likely to give the greatest scope for economies of scale and elimination of duplicate
facilities.”
2. Vertical merger:
It is a merger which takes place upon the combination of two companies which are operating in
the same industry but at different stages of production or distribution system. If a company takes
over its supplier/producers of raw material, then it may result in backward integration of its
activities. On the other hand, Forward integration may result if a company decides to take over
the retailer or Customer Company. Vertical merger may result in many operating and financial
economies. The transferee firm will get a stronger position in the market as its
production/distribution chain will be more integrated than that of the competitors. Vertical merger
provides a way for total integration to those firms which are striving for owning of all phases of the
production schedule together with the marketing network (i.e., from the acquisition of raw material
to the relating of final products).
“A takeover of merger is vertical where one of two companies is an actual or potential supplier of
goods or services to the other, so that the two companies are both engaged in the manufacture or
provision of the same goods or services but at the different stages in the supply route (for
example where a motor car manufacturer takes over a manufacturer of sheet metal or a car
distributing firm). Here the object is usually to ensure a source of supply or an outlet for products
or services, but the effect of the merger may be to improve efficiency through improving the flow
of production and reducing stock holding and handling costs, where, however there is a degree of
concentration in the markets of either of the companies, anti-monopoly problems may arise.”
3. Conglomerate merger:
These mergers involve firms engaged in unrelated type of business activities i.e. the business of
two companies are not related to each other horizontally ( in the sense of producing the same or
competing products), nor vertically( in the sense of standing towards each other n the relationship
of buyer and supplier or potential buyer and supplier). In a pure conglomerate, there are no
important common factors between the companies in production, marketing, research and
development and technology. In practice, however, there is some degree of overlap in one or
more of this common factors.
Conglomerate mergers are unification of different kinds of businesses under one flagship
company. The purpose of merger remains utilization of financial resources enlarged debt capacity
and also synergy of managerial functions. However these transactions are not explicitly aimed at
sharing these resources, technologies, synergies or product market strategies. Rather, the focus
of such conglomerate mergers is on how the acquiring firm can improve its overall stability and
use resources in a better way to generate additional revenue. It does not have direct impact on
acquisition of monopoly power and is thus favored through out the world as a means of
diversification.