This article is written by Abhishek Dubey student of a 2nd-year student of BBA LL.B. This article deals with the details of different types of merger and acquisition structure and the difference between them.

Introduction

Mergers and acquisitions have become very popular in the corporate sector today. Both the terms look similar but there is the key difference between them. A merger occurs when two separate companies combine and form a new entity which results in new management and ownership.

An acquisition refers to the takeover of one entity by another, in acquisition small entity becomes part of the new entity. In an acquisition, one entity takes over the management of other entity and then all the further decisions are taken by them together as one company.  A merger and acquisition structure is an agreement between the two parties which lays down the rights and obligations of both parties. It lays down the duty and the rights of each party for carrying out in entity.

Basics of merger and acquisition structure

Merger and acquisition occur when two companies come together to form a new entity due to economic, social, personal reasons. It is possible only when two entities or parties mutually agree with each other. The terms and conditions on which they agree is known as a merger and acquisition deal structure. Deal structure is one of the steps which must be taken in a merger or acquisition. In deal structure, the objective of the entity is specified and every party involved are satisfied with the objective and also the risks are initiated and each party must bear that risk. The deal structure process involves:

• Negotiation.
• Observation of risk and how they will be managed.
• The condition under which negotiation will be cancelled.
• Amount of risk that can be tolerated.

Different Kinds of Merger and Acquisition Structure

There are five types of merger and acquisition structure:

1. Asset Sale

Asset sale refers to the sale of assets when a buyer purchases the assets of the company, where the individual value of assets is assigned to each asset. It is the best deal structure when it involves a cash transaction. The buyer chooses the assets that he wants to buy and can also acquire existing liabilities he wants to take up. Sometimes companies use this method when they have a lot of debt. When entities have a large amount of debts and they don’t pay it, their assets becomes a non-performing asset. To recover the loans, banks force companies to sell their assets.

Advantages of an Asset sale

• It gives a choice to the buyer the assets to purchase and not to purchase.
• The selling company continue to exist until and unless it winds up completely.

Disadvantages of an Asset Sale

• It restricts the buyer to purchase non-tangible assets.
• This may cost a high amount of tax to both buyer and seller.

Cases where banks forced the companies to sell their assets:

1. Reliance Group: Anil Ambani owes Rs.1,21,000 crore and had an annual interest liability of Rs. 8,299 crore asset put on sale by Reliance Group which included a telecommunication tower and optic fibre which together amounts to Rs.30,000 crore.
2. Ruia’s Essar Group: It has a gross debt of Rs.1,01,461 crore. The group is looking to sell its Essar oils which amounts to Rs 20 million tonnes per annum and also the Vadinar refinery, for Rs.25000 crore.

2. Slump Sale

As the name suggests, slump sale is the transfer of the whole business on ‘Going Concern Basis’ i.e the operation of entity will continue only the entity assets will be liquidated. In a slump sale, sale acquirer is interested not only in assets but the whole operation of the business. The operation continues as usual but under the arm of the acquirer.

Examples of Slump sale in India

1. Tata steel acquired the Usha Martin Ltd for Rs. 4300-4700 crore that would help in the reduction of debt of Usha Martin Ltd.
2. Tata Chemicals Ltd. acquired the business of precipitated silica for a consideration of Rs.123 crore.

Advantages of Slump Sale

• The motive for acquiring is that the purchaser is either to expand its existing business or diversify a new business.
• The entity continues to exist and only assets become liquidated.

Disadvantages of Slump Sale

• No values are assigned to individual assets and liabilities.
• If an entity has been undertaken for less than 36 months prior to slump sale then short capital gains interest will be laid down and the rate of which will be 34%.

3. Share Sale 

As the name suggests, it refers to a complete underlying of assets and liabilities. The acquisition of shares is the most common method of acquiring a company.

When the target has made a good image in the market and established a loyal customer base then it acquires the company along with the business.

Example of a Share sale in India

• Walmart’s acquisition of Flipkart is the biggest acquisition in India and it acquired 77% of Flipkart share which amounts to $16 million.
• In 2007, Tata acquired a share of 52 percent in Hutchison Essar Ltd. which amounts to $10 million.
• Tata Motor in the year 2008 acquired Jaguar Land Rover which amounted to $2.6 million.
• In 2009, ONGC acquired Imperial Energy, the UK based operating in Russia which amounted to $1.3 billion.  

Advantages of the share sale

• When a share is sold the seller is benefited from tax.
• A share sale is one of the simplest and cleanest methods from the seller’s point of view.
• If there are losses in the company then, in that case, the sale of shares are the best method to write off against corporate tax liabilities according to the buyer’s point of view.
• The relationship of the customer, supplier, banks after share sale is also transferred but the business continues to operate.

Disadvantages of the Share sale

• Third-party approval is sometimes required which can result in creating problems and results in delay or even sometimes completely destroy the structure.
• The value of some assets may result in loss such as transfer of patents and license.
• If a business sells on gain then tax is also deducted.
• The tax calculation sometimes is very complex.

4. Amalgamation 

It refers to a situation when the assets of the two companies are vested in one company. It is also known as the combination of one or more companies as one entity. It is also a process of absorption, where one powerful company acquires the weaker entity. But it differs from a merger that neither of the two companies is considered as a legal entity but in amalgamation, the assets and liabilities of the two companies are combined and they are considered a legal entity.

Example of Amalgamation in India

1. Maruti operating in India and Suzuki operating in Japan amalgamated to form a new company i.e. Maruti Suzuki Pvt.Ltd.
2. Satyam computers and Tech Mahindra Ltd.is an examples of an Amalgamated company.

Advantages of Amalgamation

• Competition between the two companies gets eliminated.
• Research and development are increased.
• Operating costs are reduced.
• The prices of goods are stable.

Disadvantages of Amalgamation

• This may result in a reduction of employees.
• Reduction in competition.
• Goodwill and image of the company lost.

5. Demerger

As the name suggests, when a large company breaks into small pieces or one or more entity and form a new one. It is also a manner of forming the business through the court-driven process. Demerger allows a company to work in a systematic manner which increases efficiency and effectiveness. It also gives shareholders an opportunity to participate in the management, operation, decision-making process.

Demerger also happens when a shareholder decides to unlock its core business into one new entity.

Example of Demerger in India

Wipro Ltd. the third-largest IT industry in India demerged into 3 subunits, Wipro consumer care, and lighting, Wipro product and services and lastly, Wipro infrastructure medical and engineering diagnosis all three companies together contributed to 14 percent of revenue.

The IT business contributes to 86 percent of revenue. In the financial year 2012, the company earned an operating profit of a total of 94 percent.

Global investment business USB said that shareholders have only one option to directly receive a share from the owner.

Barclay says that shareholders will get 12-15 percent in terms of compensation from demerger etc.

Advantages of Demerger 

• Demerger results in smooth operation when one entity split into two or more companies.
• When the company is big there will be a lot of chaos and confusion in and each department will blame each other when it will split then the responsibility will be limited and fixed.
• When demerger happens then the efficiency of operation of companies increases due to the specialisation.

Disadvantages of Demerger

• The companies lose their economies of scale when the company is big and there is a large economy of scale but after they split the economies of scale reduces.
• This also results in a clash of interests and egos because of the presence of more than one top management.
• This will also result in dissatisfaction of employees because they may be asked to move from one entity to another otherwise it may also result in loss of employees’ job due to the requirement of fewer employees after being split.

Difference between the structures of Merger and Acquisition

Manner of undertaking asset sale and slump sale

Asset sale and slump sale can be undertaken through a business transfer agreement. In Business Transfer Agreement the terms and conditions for sale of assets as well as consideration and liabilities attached are to be laid down.

Manner of undertaking share purchase

In a share purchase, the valuation of a share is done by a chartered accountant and deed which governs the share purchase is a share purchase agreement. In a share purchase agreement, the value of a share, terms and conditions and rights of acquirer and acquiree are governed and in case the acquirer is a foreign entity then the policy of FDI are governed.

Manner of undertaking amalgamation and demerger

1. Conducting a board meeting for consideration of the proposal for amalgamation and demerger.
2. Submitting the application to the NCLT with relevant documents such as

• Notice of admission in form no NCLT-2.
• An affidavit in form No. NCLT-6.
• A copy of the scheme of amalgamation.

3. The scheme of amalgamation should contain all relevant information such as the current financial position of the company, audit reports, any proceeding of company pending in court if any.
4. It may also contain information regarding the reduction of share capital etc.
5. Any scheme of corporate debts, if any consented by not less than 70 per cent of the creditor.
6. On receiving such an application tribunal may call the creditor for the meeting.
7. The copy of the scheme needs to be submitted to central government authorities, income tax authorities, etc.
8. For the approval of the scheme, the meeting is called in a manner as the tribunal may direct  and when 3/4th of creditors approve it the scheme becomes effective.
9. If any modification is necessary the tribunal makes arrangements or compromises are done as deemed to be fit by the tribunal.

Conclusion

A deal structure steps in merger and acquisition structure methods are asset sale, share sale, etc. Each structure has its own advantages and limitations and structuring a proper deal structure can be complicated and challenging sometimes. Employing the right kind of financial, legal advice can convert it into less complicated. The two important documents required for a good deal structure letter of intent and term sheet. The term sheet is not legally binding until and unless stated by every party it states the terms and conditions of financial statement and letter of intent it is a document stating the intention of buyer and seller.

Students of Lawsikho courses regularly produce writing assignments and work on practical exercises as a part of their coursework and develop themselves in real-life practical skill.