Investment Banking Tutorials
- Mergers and Acquisitions
- What is Mergers and Acquisitions?
- Mergers vs Acquisitions
- Acquisitions Examples
- Horizontal Merger
- Vertical Merger
- Synergy in M&A
- Successful Mergers and Acquisitions
- Financing Acquisitions
- Acquisition Premium (Takeover)
- Statutory Merger
- Joint Venture
- Advantages of Joint Venture
- Types of Joint Venture
- White Knight
- Hostile Takeover
- Golden Parachute
- Poison Pills
- Killer Bees Defense Strategy
- Show Stopper in M&A
- What is Amalgamation?
- Spin off vs Split Off
- Forward Integration
- Backward Integration
- Horizontal vs Vertical Integration
- What is Divesting / Divestiture?
- Bootstrap Effect
- PAC MAN Defense
- Flip-In Poison Pill
- Flip-Over Poison Pill
- Scorched Earth Defense Policy
- Tender Offer
- Friendly Takeover
- Amalgamation vs Merger
- Lobster Trap Defense
- Asset Purchase vs Stock Purchase
- Joint Venture vs Strategic Alliance
- Greenshoe Option
- Dawn Raid Takeovers
- Crown Jewels Defense
- Best Mergers and Acquisitions Books
- What is Asset Restructuring?
- Investment Banking Basics (44+)
- Investment Banking Careers (25+)
- Investment Banking Firms (27+)
- Top Banks (42+)
- Cryptocurrency Basics (10+)
This article on Amalgamation discusses the following –
- What is Amalgamation?
- Types of Amalgamation
- Methods of Accounting
- Need for amalgamation
- Process of Amalgamation
- Problems of Amalgamation
- Some terminologies which are used in Mergers / Amalgamation
- Examples of Amalgamation in Recent Times
- Heinz and Kraft Foods
- Toyota Mergers
- E-Bay and Paypal
- Dow Chemical & Dupont
- Citicorp and Travelers Group
What is Amalgamation?
To start with the basics, the most commonly adopted definition of Amalgamation is
- Amalgamation is combination of two or more companies into an new entity. Company A and B combine together to form a new entity C.
- Amalgamation also includes Absorptions. Absorption basically means that company A takes over company B and the B is wound up.
The two most commonly used terms in amalgamation while referring the companies are ‘transferor company’ and ‘transferee company’.
The transferor company is the amalgamating company and the transferee company is the amalgamated company.
Types of Amalgamation
Amalgamation in nature of merger
This is said to be in nature of merger on satisfaction of the following five conditions:
- All the assets and liabilities of the transferor company become, after amalgamation, the assets and liabilities of the transferee company.
- Shareholders holding not less than 90% of the face value of the equity shares of the transferor company (other than the equity shares already held therein, immediately before the amalgamation, by the transferee company or its subsidiaries or their nominees) become equity shareholders of the transferee company by virtue of the amalgamation.
- The consideration for the amalgamation receivable by those equity shareholders of the transferor company who agree to become equity shareholders of the transferee company is discharged by the transferee company wholly by the issue of equity shares in the transferee company, except that cash may be paid in respect of any fractional shares.
- The business of the transferor company is intended to be carried on, after the amalgamation, by the transferee company.
- No adjustment is intended to be made to the book values of the assets and liabilities of the transferor company when they are incorporated in the financial statements of the transferee company except to ensure uniformity of accounting policies.
Amalgamation in nature of purchase
If any of the above conditions is not met, then it is said to be in nature of purchase.
Methods of Accounting
- The Amalgamation in nature of merger is accounted on the basis of ‘pooling of interest’ method.
- The Amalgamation in nature of purchase is accounted on the basis of ‘purchase’ method.
Need for amalgamation
As mentioned in the first para of this article, there are various motives behind the amalgamation. Briefly,
- It helps in availment of various tax benefits. Many a times amalgamation takes place as a measure of tax planning.
- By uniting through way of amalgamation, companies take advantage of large economies of scale.
- It also helps in elimination of competition amongst similar group of industries. Sometimes, it also helps in creation of monopoly in the market.
- It is always viewed as an icon of growth, it generally increases the value of the companies.
- It carries future prospects of financial and capital- growth & development.
- It provides ‘synergy benefits’, quite a popular word related with amalgamations. In simple terms, it means the benefits derived due to the combination.
Process of Amalgamation
The following procedures are adopted for amalgamation-
During the entire process of amalgamation, one has to take care of the various set of laws, rules, regulations, legislations, etc. The applicability of different laws changes from case to case. Every amalgamation has to be considered separately for determining the ambit of the applicable laws. Also it varies from country to country. For eg.: In India, Company Law, SEBI Law, RBI Rules & Regulations, FEMA, Income Tax Law, etc. has to be followed. These laws provide a legal framework to all the activities carried out under the scheme of amalgamation. Drafting the scheme of amalgamation , conducting board meetings, getting board’s approval, consent of shareholders, filing various forms with ROC , informing the Stock Exchanges, Advertisements in newspapers, etc. are few of the legal steps involved in amalgamation. Everything needs to be done within the legal horizons of the respective countries.
There are various other procedures involved in the process of amalgamation. Few can be enumerated as follows-
- Due diligence is conducted for the corporate restructuring reforms like amalgamation which gives a fair idea about the deals are viable or not. It considers various aspects and so there exists different kinds of due diligence such as financial due diligence, legal due diligence, operational due diligence, etc.
- Valuation is done for the businesses which are getting amalgamated. Basically, pre amalgamation valuation and post amalgamation valuation is done and compared to know the value or worth of amalgamation. Now, valuation is altogether a very broad area which is a subjective exercise based upon numerous facts and assumptions.
- Next comes the deal which is presented by one to the other/(s) which whom it intends to get amalgamated. The structuring of this deal is a tedious task. Many negotiations takes place in the process of amalgamation. Negotiation is also a very important skill as it is very much required to come upon a successful conclusion and finalization of deal.
- The costs of amalgamation are very high, so one needs to conduct a cost benefit analysis before entering into any amalgamation. The sharing or bearing of such costs has to be decided in advance.
- Finally, a legal agreement is signed between parties for amalgamation. The real test starts after the commencement of amalgamation. The successful deal should not confine itself only to papers, but the post amalgamation operations should work as well for the results the companies were expecting from such amalgamation.
Problems of Amalgamation
- Though change is the law of nature. We all would agree with this point that changes are difficult and not easily welcomed by us, same goes for mergers.
- There are cultural differences especially in case of cross border merger. People don’t work in harmony, there are signs of discontentment.
- It is not possible everytime that one gets a win-win situation out of amalgamations. One has to be ever ready for facing trial and tribulations.
- The attitude of the management is not always friendly, the hostile kind of attitude of the management is a sign of danger for any amalgamation.
Some terminologies which are used in Mergers / Amalgamation
A Godfather offer is a lucrative offer which nobody can refuse.
This is the only remedy in last resort. The killer bees are the legal firms, public relations firms and the investment bankers who helps to deal with the forced/ unfriendly/ hostile takeovers.
Radar Alert in simple terms is the watchman of the company. It keeps a watch on market for the continuous updates on the trading and price of the stock. If any suspicious transaction like over purchase of company’s share takes place, it immediately takes action against the same as this may be a sign of silent takeover or acquisitions.
Merger between companies who have similar lines of businesses.
Merger between companies who have common lines of production, but different stages of production.
Mergers between unrelated companies having different lines of business.
Having understood the concept , now let’s have a look on some significant amalgamations in the recent past which will provide us a glimpse on the real happenings in this world.
Following are some interesting reasons behind some fascinating mergers in the recent past-
Examples of Amalgamation in Recent Times
Heinz and Kraft Foods
- Most interesting merger to study for many of us, is Heinz and Kraft food wondering why? Because we love food, don’t we? Apart from this, following are some noteworthy points w.r.t this merger-
- This merger was important for the reason that it involved combination of two giants in the food industry.
- The merger helped in augmentation of annual sales and establishing the major market share in the world and more specifically in United States.
- The synergy benefits were expected out of merger in form of International Growth and the economies of scale.
- Cost savings were expected as a results of combined operations. Different strategies were adopted to cut the costs.
- The cost of merger was approximately $42 billion. The merger was a horizontal merger.
- The Toyota mergers are peculiar kind of mergers, the unique kind of feature observed in their mergers is that they believe in expansion through internal means.
- Mergers took place between two subsidiaries of the same parent company.
- The motive behind these kind of mergers is improvement of internal processes, utilizing strengths of each other and strengthening the communication.
E-Bay and Paypal
- The reason behind this E-Bay and Paypal merger was dependency on each other.
- The Paypal was dependent on E-bay for majority of its income.
- The payment businesses are dependent on the volume of transactions & the Paypal was dependent on E-bay for this volume.
- This merger could not continue for a long and again E-bay and Paypal parted their ways approximately after 12 years of its unity.
- The cost of merger was approximately $1.5 billion.
Dow Chemical & Dupont
- This merger took place because the investors wanted to have a better diversified portfolio for their investments.
- The dupont was into the seeds industry and the Dow was into chemicals industry.
- A merger of these rare industries was strategically planned to achieve the best position in the field of agriculture.
- The cost of merger was approximately $130 billions. The merger is a kind of vertical merger.
Citicorp and Travelers Group
- This merger was meant to create one of the biggest merger in the sector of financial services of banking, insurance and investment operations.
- This was done to bring various clients together who make use of the financial services and who are keen to invest in the markets. This move would increase their client base on individual levels.
- Through this measure, the investments products were made available to all kinds of customers.
- The cost of merger was approximately $140 billion.
In a nutshell, we can arrive at a conclusion that mergers are dependent on various factors and there is a reason behind every merger. The activity of merger is a long exercise wherein multiple course of actions have to be conducted to arrive at a decision whether the merger will be fruitful or not. A little mistake costs heavily both to the transferor as well as transferee company.It is also a bitter truth that all mergers don’t prove to be successful. Just like some marriages head towards divorce, mergers can also sometimes lead to separation, there’s no ‘happily ever after’ every time.
Not every merger or takeover is supported by the shareholders and management. When they are not convinced about the idea of merger, they feel insecure against the proposal of amalgamation. To depict their disapproval, they take help of various takeover defence mechanisms such as Poison Pills, Golden Parachutes, Packman Defense, White Knight Defense, White Squire Defence, Crown Jewels, Greenmail, etc; these strategies are equally interesting as their names.
The work doesn’t ends when the two companies get amalgamated, but a new journey starts from this very point. To make this a sure shot of success, efforts have to be taken at the post amalgamation stage. The amalgamation should bring about the optimum utilization of resources. The companies have to continuously strive for continuous growth and development.