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A µtakeover¶ is acquisition and both the terms are used interchangeably.

Takeover differs from merger in approach to business combinations i.e. the process of
takeover, transaction involved in takeover, determination of share exchange or cash price and the
fulfillment of goals of combination all are different in takeovers than in mergers. For example,
process of takeover is unilateral and the offeror company decides about the maximum price.
Time taken in completion of transaction is less in takeover than in mergers, top management of
the offeree company being more co-operative.


 


   


 


To make a public announcement an acquirer shall follow the following procedure:

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ublic announcement of offer is mandatory as required under the
SEBI Regulations. Therefore, it is required that it should be prepared showing therein the
following information:
(1)? paid up share capital of the target company, the number of fully paid up and
partially paid up shares.

(2)? Total number and percentage of shares proposed to be acquired from public
subject to minimum as specified in the sub-regulation (1) of Regulation 21
that is:
 a)? The public offer of minimum 20% of voting capital of the company to the
shareholders;
b)? The public offer by a raider shall not be less than 10% but more than 51%
of shares of voting rights. Additional shares can be had @ 2% of voting
rights in any year.

(3)? The minimum offer price for each fully paid up or partly paid up share;

(4)? Mode of payment of consideration;

(5)? The identity of the acquirer and in case the acquirer is a company, the identity
of the promoters and, or the persons having control over such company and
the group, if any, to which the company belong;

(6)? The existing holding, if any, of the acquirer in the shares of the target
company, including holding of persons acting in concert with him;

(7)? Salient features of the agreement, if any, such as the date, the name of the
seller, the price at which the shares are being acquired, the manner of
payment of the consideration and the number and percentage of shares in
respect of which the acquirer has entered into the agreement to acquirer the
shares or the consideration, monetary or otherwise, for the acquisition of
control over the target company, as the case may be;

(8)? The highest and the average paid by the acquirer or persons acting in concert
with him for acquisition, if any, of shares of the target company made by him
during the twelve month period prior to the date of the public announcement;

(9)? Objects and purpose of the acquisition of the shares and the future plans of
the acquirer for the target company, including disclosers whether the acquirer
proposes to dispose of or otherwise encumber any assets of the target
company:
rovided that where the future plans are set out, the public announcement
shall also set out how the acquirers propose to implement such future plans;

(10)? The µspecified date¶ as mentioned in regulation 19;

 (11)? The date by which individual letters of offer would be posted to each of the
shareholders;

(12)? The date of opening and closure of the offer and the manner in which and the
date by which the acceptance or rejection of the offer would be
communicated to the share holders;

(13)? The date by which the payment of consideration would be made for the
shares in respect of which the offer has been accepted;

(14)? Disclosure to the effect that firm arrangement for financial resources required
to implement the offer is already in place, including the details regarding the
sources of the funds whether domestic i.e. from banks, financial institutions,
or otherwise or foreign i.e. from Non-resident Indians or otherwise;

(15)? rovision for acceptance of the offer by person who own the shares but are
not the registered holders of such shares;

(16)? Statutory approvals required to obtained for the purpose of acquiring the
shares under the Companies Act, 1956, the Monopolies and Restrictive Trade
ractices Act, 1973, and/or any other applicable laws;

(17)? Approvals of banks or financial institutions required, if any;

(18)? Whether the offer is subject to a minimum level of acceptances from the
shareholders; and

(19)? Such other information as is essential fort the shareholders to make an

informed design in regard to the offer.


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Before a bidder makes an offer for another company, it usually first informs the company's board
of directors. If the board feels that accepting the offer serves shareholders better than rejecting it,
it recommends the offer be accepted by the shareholders.

In a private company, because the shareholders and the board are usually the same people or
closely connected with one another, private acquisitions are usually friendly. If the shareholders
agree to sell the company, then the board is usually of the same mind or sufficiently under the
orders of the equity shareholders to cooperate with the bidder. This point is not relevant to the
UK concept of takeovers, which always involve the acquisition of a public company.

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A hostile takeover allows a suitor to take over a target company whose management is unwilling
to agree to a merger or takeover. A takeover is considered "hostile" if the target company's board
rejects the offer, but the bidder continues to pursue it, or the bidder makes the offer directly after
having announced its firm intention to make an offer.

A hostile takeover can be conducted in several ways. A tender offer can be made where the
acquiring company makes a public offer at a fixed price above the current market price. Tender
offers in the United States are regulated by the Williams Act. An acquiring company can also
engage in a proxy fight, whereby it tries to persuade enough shareholders, usually a simple
majority, to replace the management with a new one which will approve the takeover. Another
method involves quietly purchasing enough stock on the open market, known as a creeping
tender offer, to effect a change in management. In all of these ways, management resists the
acquisition but it is carried out anyway.

The main consequence of a bid being considered hostile is practical rather than legal. If the board
of the target cooperates, the bidder can conduct extensive due diligence into the affairs of the
target company, providing the bidder with a comprehensive analysis of the target company's
finances. In contrast, a hostile bidder will only have more limited, publicly-available information
about the target company available, rendering the bidder vulnerable to hidden risks regarding the
target company's finances. An additional problem is that takeovers often require loans provided
by banks in order service the offer, but banks are often less willing to back a hostile bidder
because of the relative lack of information about the target available to them.

? Π

 

A reverse takeover is a type of takeover where a private company acquires a public company.
This is usually done at the instigation of the larger, private company, the purpose being for the
private company to effectively float itself while avoiding some of the expense and time involved
in a conventional IO. However, under AIM rules, a reverse take-over is an acquisition or
acquisitions in a twelve month period which for an AIM company would:

i? exceed 100% in any of the class tests; or

i? result in a fundamental change in its business, board or voting control; or
i? in the case of an investing company, depart substantially from the investing strategy
stated in its admission document or, where no admission document was produced on
admission, depart substantially from the investing strategy stated in its pre-admission
announcement or, depart substantially from the investing strategy.

An individual or organization-sometimes known as corporate raider-can purchase a large fraction

of the company's stock and in doing so get enough votes to replace the board of directors and the
CEO. With a new superior management team, the stock is a much more attractive investment,
which would likely result in a price rise and a profit for the corporate raider and the other
shareholders.

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A back flip takeover is any sort of takeover in which the acquiring company turns itself into a
subsidiary of the purchased company. This type of a takeover rarely occurs.

Takeover Defenses
Successful takeovers:target stockholders gain 20-35% or more Unsuccessful takeovers:target
stockholders gain little if noteventually taken over
Question: Why would target management resist a premium offer?Is entrenchment the only
answer?
Types of Takeover Defenses
(1) Charter amendments must be approved by stockholders supermajority: 67% or more of votes
necessary to approve control change can be avoided by board ("board out") fair-price:
supermajority clause can beavoided if price is high enough (/E or /B)
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(1) Charter amendments staggered board: Senate vs. House only 1/K of board is elected each
year, so it takes K years to turnover board completely poison pills: something to kill sharks that
are eager to eat rights to buy cheap shares if a control event occurs (only hostile deals)
(2) Legal/Regulatory/Antitrust Defenses state corporation/anti-takeover laws impose rules that
are similar to stringent charter amendments for all corporations
chartered in that state changing state of incorporation can improve defense
Types of Takeover Defenses
 (2) Legal/Regulatory/Antitrust Defenses if some activities of target (or bidder) firm are
regulated, that may slow down successful bid CBS used FCC regulation of broadcast licenses to
ward off Ted Turner
Types of Takeover Defenses
(2) Legal/Regulatory/Antitrust Defenses Antitrust investigation can slow down bid
cases frequently start from someone in the industry (e.g., the target) Security Trust tried to ward
off Norstar by buying some branches near Albany Norstar promised to divest those branches if
the takeover succeeded
Types of Takeover Defenses
(2) Legal/Regulatory/Antitrust Defenses Mobil's bid for Conoco failed, even though it had the
highest nominal price ignored by the market because the
robability of a successful takeover was small for Antitrust reasons
Types of Takeover Defenses
(2) Legal/Regulatory/Antitrust Defenses interfere litigation can be effective
e.g., target charges that bidder failed to disclose something material in SEC filings ask a judge to
enjoin bidder stall tactic Kaufman's bought McCurdy's, and was challenged by BonTon.
Types of Takeover Defenses
(3) Asset Restructuring "Crown Jewel" defense: contract to sell attractive assets to a third bidder
contingent on hostile bid e.g., Revlon "ac Man" defense: make competing tender offer for
shares of bidder Bendix/Martin Marietta (eventually acquiredby United Tech).
Types of Takeover Defenses(4) Leveraged Recapitalizations partial LBO leaving equity holders
with much riskier claims hillips etroleum after ickens/Mesa bid,followed by Icahn interest
generally increase stock value.
(5) ESO:semployees get equity claim in the firm, but management votes the shares of the stock
in the ESO olaroid after Shamrock attack
Types of Takeover Defenses
(6) Golden arachutes lump sum payments to target management if fired due to takeover usually
small relative to size of deal, so probably not much deterrence effect aligns the interests of target
management with shareholders but you don't want them taking just any bid
Types of Takeover Defenses
(7) "Greenmail" (targeted share repurchases, usually at a premium) often linked with "standstill
agreements" -- bidder will go away Bradley & Wakeman find that share repurchases ending
takeover attempts have negative announcement returns reducing the probability of a control
premium is bad news
Should greenmail be outlawed?
Types of Takeover Defenses:
Summary
Defenses where stockholders get to approve do not have large negative effects
management may not try anything too aggressive if shareholders have veto
power Defenses where target management has sole discretion have larger negative
effects"Crown Jewel", early pills

Uses of Takeover Defenses

Target management has to try to get a higher bid from bidder like buying cars or appliances --
negotiation is assumed to be important if target saw a good bid and took it without resisting at all
they are likely to be sued by stockholders because they should have gotten an even better deal
Uses of Takeover Defenses
Benefits from using defenses are:
(1) stall for more time to find a "WhiteKnight"
(2) directly compete with bidder (LBO,leveraged recap, ac Man)
(3) threaten high transaction costs (litigation, etc.) as part of bargainingstrategy

Uses of Takeover Defenses

Costs of using defenses are:
(1) transaction costs (lawyers, investmentbankers, etc.)
(2) may deter some deals that would have been profitable with weaker defenses, but aren't now
entrenchment is easier hard (impossible) to measure deals that
never get tried.

c

 

An advisory committee of SEBI has come out with a wholly re-written set of regulations for
takeover of listed companies. While it is refreshing that the regulations simplify the dozens of
convoluted provisions and numbers in the previous regulations into 2 or 3 numbers, the
committee has taken its task too seriously. There was more need to clean up the regulations, than
re-writing it ground up. A re-writing means the jurisprudence acquired over the past decade and
a half will be lost and there will be new sets of court rulings. The American regulations have
been untouched (except for form and some detail) since they were passed in the 1960s.

On the substance, the committee recommends that the existing provision of a compulsory 20%
tender offer after crossing 15% be replaced by a 100% offer on crossing 25%. The logic of
moving to a 100% offer seems compelling - why exclude shareholders from an open offer? But
on a careful study, there are two fatal flaws with the increase.

First, takeovers will become incredibly expensive. While people had a committment to buy only
a minimum of 20% after acquiring shares or control, they now need to shell out a multiple of that
amount. This will chill takeover activity - there will be fewer takeovers. With fewer takeovers,
shareholders (who are supposed to benefit from the 100%) will get nothing as most people will
avoid crossing the 25% threshold.
Second, all statistics point towards a reduction of promoter holding percentage in India. Given
that, it is illogical to raise the minimum threshold from 15%. If shareholders are getting more
widely dispersed, there is logic for reducing the threshold, not increasing it.

There are many things the report gets right like doing away with the non compete fee (which
permitted paying money for what is prohibited by the Contract Act) and reducing the timeline of
the public announcement. But copying the regulations of more developed markets where capital
is more plentify and where regulations are a lot more lenient to leveraging, will seriously
jeopardise the number of takeover bids happening under the new proposed regulations. Given the
presence of senior SEBI officials, it seems like SEBI will probably accept the recommendations
which have been nearly a year in the making.

6
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?

A  
(or , or highly-leveraged transaction (HLT), or "bootstrap"
transaction) occurs when an investor, typically financial sponsor, acquires a controlling interest
in a company's equity and where a significant percentage of the purchase price is financed
through leverage (borrowing). The assets of the acquired company are used as collateral for the
borrowed capital, sometimes with assets of the acquiring company. Typically, leveraged buyout
uses a combination of various debt instruments from bank and debt capital markets. The bonds or
other paper issued for leveraged buyouts are commonly considered not to be investment grade
because of the significant risks involved.[1]

Companies of all sizes and industries have been the target of leveraged buyout transactions,
although because of the importance of debt and the ability of the acquired firm to make regular
loan payments after the completion of a leveraged buyout, some features of potential target firms
make for more attractive leverage buyout candidates, including:

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Leveraged buyouts involve an investor,      
 


) making
large acquisitions without committing all the capital required for the acquisition. To do this, a
financial sponsor will raise acquisition debt which is ultimately secured upon the acquisition
target and also looks to the cash flows of the acquisition target to make interest and principal
payments. Acquisition debt in an LBO is therefore usually non-recourse to the financial sponsor
and to the equity fund that the financial sponsor manages. Furthermore, unlike in a hedge fund,
where debt raised to purchase certain securities is also collateralized by the fund's other
securities, the acquisition debt in an LBO is recourse only to the company purchased in a
particular LBO transaction. Therefore, an LBO transaction's financial structure is particularly
attractive to a fund's limited partners, allowing them the benefits of leverage but greatly limiting
the degree of recourse of that leverage.

This kind of acquisition brings leverage benefits to an LBO's financial sponsor in two ways: (1)
the investor itself only needs to provide a fraction of the capital for the acquisition, and (2)
assuming the economic internal rate of return on the investment (taking into account expected
exit proceeds) exceeds the weighted average interest rate on the acquisition debt, returns to the
financial sponsor will be significantly enhanced.

As transaction sizes grow, the equity component of the purchase price can be provided by
multiple financial sponsors "co-investing" to come up with the needed equity for a purchase.
Likewise, multiple lenders may band together in a "syndicate" to jointly provide the debt
required to fund the transaction. Today, larger transactions are dominated by dedicated private
equity firms and a limited number of large banks with "financial sponsors" groups.

As a percentage of the purchase price for a leverage buyout target, the amount of debt used to
finance a transaction varies according to the financial condition and history of the acquisition
target, market conditions, the willingness of lenders to extend credit (both to the LBO's financial
sponsors and the company to be acquired) as well as the interest costs and the ability of the
company to cover those costs. Typically the debt portion of a LBO ranges from 50%-85% of the
purchase price, but in some cases debt may represent upwards of 95% of purchase price.
Between 2000-2005 debt averaged between 59.4% and 67.9% of total purchase price for LBOs
in the United States.[2]

To finance LBO's, private-equity firms usually issue some combination of syndicated loans and
high-yield bonds. Smaller transactions may also be financed with mezzanine debt from insurance
companies or specialty lenders. Syndicated loans are typically arranged by investment banks and
financed by commercial banks and loan fund managers, such as mutual funds, hedge funds,
credit opportunity investors and structured finance vehicles. The commercial banks typically
provide revolving credits that provide issuers with liquidity and cash flow while fund managers
generally provided funded term loans that are used to finance the LBO. These loans tend to be
senior secured, floating-rate instruments pegged to the London Interbank Offered Rate (LIBOR).
They are typically pre-payable at the option of the issuer, though in some cases modest
prepayment fees apply.[3] High-yield bonds, meanwhile, are also underwritten by investment
banks but are financed by a combination of retail and institutional credit investors, including
high-yield mutual funds, hedge funds, credit opportunities and other institutional accounts. High-
yield bonds tend to be fixed-rate instruments. Most are unsecured, though in some cases issuers
will sell senior secured notes. The bonds usually have no-call periods of 3±5 years and then high
prepayment fees thereafter. Issuers, however, will in many cases have a "claw-back option" that
allows them to repay some percentage during the no-call period (usually 35%) with equity
proceeds.

Another source of financing for LBO's is seller's notes, which are provided in some cases by the
entity as a way to facilitate the transaction.

‰ 


A special case of a leveraged acquisition is a management buyout (MBO), which occurs when a
company's managers buy or acquire a large part of the company. The goal of an MBO may be to
strengthen the managers' interest in the success of the company. In most cases when the
company is initially listed, the management will then make it private. MBOs have assumed an
important role in corporate restructurings beside mergers and acquisitions. Key considerations in
an MBO are fairness to shareholders, price, the future business plan, and legal and tax issues.
One recent criticism of MBOs is that they create a conflict of interest²an incentive is created for
managers to mismanage (or not manage as efficiently) a company, thereby depressing its stock
price, and profiting handsomely by implementing effective management after the successful
MBO, as aul Newman's character attempted in the Coen brothers' film c


 .

Of course, the  

 
      
    



It is fairly easy for a top executive to   the price of his/her company's stock - due to
information asymmetry. The executive can accelerate accounting of expected expenses, delay
accounting of expected revenue, engage in off balance sheet transactions to make the company's
profitability appear temporarily poorer, or simply promote and report severely  
 (e.g.
pessimistic) estimates of future earnings. Such seemingly adverse earnings news will be likely to
(at least temporarily) reduce share price. (This is again due to information asymmetries since it is
more common for top executives to do everything they can to window dress their company's
earnings forecasts).

A reduced share price makes a company an easier takeover target. When the company gets
bought out (or taken private) - at a dramatically lower price - the takeover artist gains a windfall
from the former top executive's actions to surreptitiously reduce share price. This can represent
10s of billions of dollars (questionably) transferred from previous shareholders to the takeover
artist. The former top executive is then rewarded with a golden parachute for presiding over the
firesale that can sometimes be in the 100s of millions of dollars for one or two years of work.
(This is nevertheless an excellent bargain for the takeover artist, who will tend to benefit from
developing a reputation of being very generous to parting top executives).

Similar issues occur when a publicly held asset or non-profit organization undergoes
privatization. Top executives often reap tremendous monetary benefits when a government
owned or non-profit entity is sold to private hands. Just as in the example above, they can
facilitate this process by making the entity appear to be in      - this reduces the sale
price (to the profit of the purchaser), and makes non-profits and governments more likely to sell.
Ironically, it can also contribute to a public perception that private entities are more efficiently
run reinforcing the political will to sell of public assets.

Again, due to asymmetric information, policy makers and the general public see a government
owned firm that was a financial 'disaster' - miraculously turned around by the private sector (and
typically resold) within a few years.

Nevertheless, the incentive to artificially reduce the share price of a firm is higher for
management buyouts, than for other forms of takeovers or LBOs.




‰

Merger is defined as combination of two or more companies into a single company where
one survives and the others lose their corporate existence. The survivor acquires all the assets as
well as liabilities of the merged company or companies. Generally, the surviving company is the
buyer, which retains its identity, and the extinguished company is the seller. 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:

i? Equity shares in the transferee company,

i? Debentures in the transferee company,
i? Cash, or
i? A mix of the above modes.

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Merger or acquisition 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 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.
0 
 
 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.

   
 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.

  
 
  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 ES, 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.

Π  

Generally, a company with the track record should have a less profit earning or loss
making but viable company amalgamated with it to have benefits of economies of scale of
production and marketing network, etc. As a consequence of this merger the profit earning
company survives and the loss making company extinguishes its existence. But in many cases,
the sick company¶s survival becomes more important for many strategic reasons and to conserve
community interest. The law provides encouragement through tax relief for the companies that
are profitable but get merged with the loss making companies. Infact this type of merger is not a
normal or a routine merger. It is, therefore, called as a Œ ‰ 
The allurement for such mergers is the tax savings under the Income-tax Act, 1961.
Section 72A of the Act ensures the tax relief which becomes attractive for amalgamations of sick
company with a healthy and profitable company to take the advantage of carry forward losses.
Taking advantage of the provisions of section 72A through merger or amalgamation is known as
reverse merger, which gives survival to the sick unit by merging it with the healthy unit. The
healthy unit extincts loosing its name and the surviving sick company retains its name.
Companies to take advantage of the section follow this route but after a year or so change their
names to the one of the healthy company as were done amongst others by Kirloskar neumatics
Ltd. The company merged with Kirloskar Tractors Ltd, a sick unit and initially lost its name but
after one year it changed its name as was prior to merger.
Œ ‰ c  ! 
Section 72A of the Income-tax Act, 1961 is meant to facilitate rejuvenation of sick
industrial undertaking by merging with healthier industrial companies having incentive in the
form of tax savings designed with the sole intention to benefit the general public through
continued productive activity, increased employment avenues and generation of revenue.
As it can be now understood, a reverse merger is a method adopted to avoid the stringent
provisions of Section 72A but still be able to claim all the losses of the sick unit. For doing so, in
case of a reverse merger, instead of a healthy unit taking over a sick unit, the sick unit takes over/
amalgamates with the healthy unit.
High Court discussed 3 tests for reverse merger:

a.? assets of transferor company being greater than transferee company;

b.? equity capital to be issued by the transferee company pursuant to the acquisition
exceeding its original issued capital, and
c.? the change of control in the transferee company clearly indicated that the present
arrangement was an arrangement, which was a typical illustration of takeover by
reverse bid.
Court held that ! 
 
 the scheme of merging a prosperous unit with a sick unit
could not be said to be offending the provisions of section 72A of the Income Tax Act, 1961
since the object underlying this provision was to facilitate the merger of sick industrial unit with
a sound one.