Mergers and Acquisitions
Section-A
Q1. What do you mean by Corporate Restructuring? What are the methods companies adopt while going for the Corporate Restructuring? Give Corporate Examples.
Q2. Explain the treatment of goodwill in amalgamation? What are the disclosure requirements in an amalgamation?
Q3.Discuss the taxation aspects of Demergers?
Q4.Who are Merchant Bankers? What is their role in Mergers and Acquisitions?
Q5.Explain any two methods of valuation of mergers and Acquisitions?
Section-B
Q1.What do you mean by Takeover Defenses? Discuss in details the various defensive strategies adopted by companies in hostile takeovers?
Q2.Discuss the challenges faced by the companies after the merger? Explain with the help of a corporate example.
Q3.What are the advantages and disadvantages of LBOs and MBOs? Support your answer with corporate examples.
CASE-STUDY - ICICI BANK LTD
ICICI Bank was originally promoted in 1994 by ICICI limited, an Indian financial institution, and was its wholly owned subsidiary. ICICI was formed in 1955 at the initiative of the World Bank, the Government of India and representatives of the Indian industry.
The principal objective was to create a development financial institution for providing medium-term and long-term project financing to Indian businesses. In the 1990s, ICICI transferred its businesses from a development financial institution offering only project finance to a diversified financial services group offering a wide variety of product and services, both directly and through a number of subsidiaries and affiliates like ICICI Bank. In 1999, ICICI became the first Indian company and the first bank or financial institution from non-Japan Asia to be listed on NYSE.
After consideration of various corporate structuring alternatives in the context of the emerging competitive scales in the Indian banking industry, and the move towards universal banking, the management of ICICI and ICICI Bank formed the view that the manager of ICICI with ICICI Bank would be the optimal strategic alternative for both entities, and would create the optimal legal structure for the ICICI group's universal banking, strategy.
The merger would enhance the value for ICICI shareholders through the merged entity's access to low-cost deposits, greater opportunities for earning fee-based income and the ability to participate in the payment system and provide transaction-banking services.
The merger would enhance value for ICICI Bank shareholders through a large capital base and scale of operation, seamless access to ICICI's strong corporate relationship built up over five decade, entry into new business segment, higher market share in various business segment, particularly fee-based services, and access to the vast talent pool of ICICI and its subsidiaries.
In October 2001, the board of director of ICICI and ICICI Bank approved the merger of ICICI and its two wholly owned retail finance subsidiaries ICICI personnel financial services limited and ICICI Bank.
The merger was Approved by shareholder of ICICI and ICICI Bank in January 2002, by the high court of Gujarat at Ahmadabad in April 2002.Consequent to the merger, the ICICI group's financing and banking operation, both wholesale and retail, have been integrated in a single entity.
The following tables analyses the financial performance of ICICI Bank Limited from the Year 1997 TO 2004
Sales position and assets turnover of ICICI Bank
|
Year
|
Net sales
|
Increase over previous period (%)
|
Total Assts (Rs. cr.)
|
Assets Turnover Ratio
|
|
1997
|
221.76
|
-
|
1781.86
|
0.124
|
|
1998
|
344.26
|
35.58
|
3279.43
|
0.104
|
|
1999
|
634.19
|
45.71
|
6981.67
|
0.09
|
|
2000
|
1042.09
|
39.14
|
12072.62
|
0.86
|
|
2001
|
1442.48
|
27.75
|
19736.59
|
0.073
|
|
2002
|
2724.73
|
47.06
|
104959.5
|
0.025
|
|
2003
|
10771.83
|
74.7
|
107760.3
|
0.099
|
|
2004
|
11509.26
|
6.4
|
126149.6
|
0.091
|
Table 4.25 shows the Sales position and Assts Turnover of ICICI Bank.
The net Sales have been rising especially after the merger in 2001. In 2002, sales have increased by 47.06% and in 2003 by 74.71%. The percentage increase was less in 2004 i.e. 6.4% over the previous year. But overall there has been an improvement in the sales position after the merger.
The Assts turnover ratio has declined from 0.124 (1997) to 0.86 (2000) and 0.073 (2001) (pre-merger). In the year 2004 it has slightly improved to 0.091. The bank needs to further improve the ratio so that it reaches 1.0 beyond which the assets of a company are supposed to be fully utilized.
Table 4.26: Profitability Position of ICICI Bank
|
Year
|
PAT (Rs. Cr.)
|
PBDIT as % of sales (%)
|
PBIT as % of sales (%)
|
PAT as % of sales (%)
|
ROI (%)
|
|
1997
|
40.13
|
79.52
|
74.99
|
1706
|
2.25
|
|
1998
|
5.22
|
78.97
|
73.63
|
14.28
|
1.53
|
|
1999
|
63.35
|
84.08
|
80.58
|
9.17
|
0.9
|
|
2000
|
105.3
|
79.95
|
77.48
|
11.27
|
0.87
|
|
2001
|
161.1
|
74.93
|
72.38
|
9.77
|
0.81
|
|
2002
|
258.3
|
69.97
|
67.62
|
5.93
|
0.24
|
|
2003
|
1206.18
|
74.69
|
69.99
|
-507
|
1.19
|
|
2004
|
1637.11
|
82.11
|
77.42
|
14.11
|
1.29
|
Table 4.26 shows the profitability position of ICICI Bank.
The PAT has seen a significant improvement especially after the merger.
In 2001, PAT were Rs. 161.1 crore, the level went up to Rs. 258 crore in 2002. There was sizeable jump at Rs. 1206 crore in 2003 and Rs. 1637 crore in 2004.
The PBDIT as percentage of sales has also gone up from 74.93% in 2001 to 82.11% in 2004 (after the merger).
PBIT as percentage of sales has almost remained the same at around 72% in 2001 and slightly improved in 2004 at 77.42%.
The PAT as percentage of sales was 17.06% in 1997 but declined to 9.77% in 2001 (the year of the merger), reduced to 5.93% in 2002 and also a negative in 2003 but in 2004 it has gone up to 14.11%.
The ROI was 2.25% in 1997 it declined to 0.81% in 2001 (the year of the merger) and has now improved in 2004 at 1.29%.
Overall, the operational performance of the Bank has enhanced after the merger as indicate by its PAT and ROI.
The single most important reason for the merger was synergies between the two institutions. The only problem faced due to this merger was to raise lot of funds and the biggest challenge was to meet the government regulation. And after analysis that there has been an increase in sales by 50% in fee income in 2004 and by 80% in 2005 due to the merger.
Q1. Critically analyse the case and give your findings, analysis and recommendations?
Section C
(1) The purpose of corporate restructuring is :
a) To focus on asset utilization and profitable investment opportunities.
b) To reorganize or divest less profitable or loss making businesses/products.
c) The company can also enhance value through capital Restructuring, it can innovate securities that help to reduce cost of capital.
d) All Of the above
(2) ______ is not the feature of organizational restructures
a) Regrouping of business
b) Decentralization
c) Outsourcing
d) Budgeting
(3)____________________ involves fusion of one or more companies where the companies lose their individual identity and a new company comes into existence to take over the business of companies being liquidated.
a) Amalgamation
b) Demerger
c) Reverse Merger
d) Leveraged Buyouts
(4)______________ type of demerger involves division of company into wholly owned subsidiary of parent company by distribution of all its shares of subsidiary company on Pro-rata basis.
a) Spilt-ups
b) ESOPs
c) Spin-offs
d) Equity Carve outs
(5)_____________ allows a suitor to bypass a target company's management unwilling to agree to a merger or takeover.
a) Hostile Takeover
b) Friendly Takeover
c) Reverse Takeovers
d) None of the above
(6)____________ takeover where a private company acquires a public company.
a) Hostile Takeover
b) Friendly Takeover
c) Reverse Takeovers
d) None of the above
(7)___________ refers to the merger of companies, which do not either sell any related products or cater to any related markets.
a) Conglomerate Merger
b) Vertical Merger
c) Horizontal Merger
d) Product-Extension Merger
(8) The formation of Brook Bond Lipton India Ltd. through the merger of Lipton India and Brook Bond is a:
a) Conglomerate Merger
b) Vertical Merger
c) Horizontal Merger
d) Product-Extension Merger
(9) The acquisition of Mobilink Telecom Inc. by Broadcom is a proper example of:
a) Conglomerate Merger
b) Vertical Merger
c) Horizontal Merger
d) Product-Extension Merger
(10) Tata Tea's buyout of the privately held The Tetley Group for :
e) Rs 1843 crore
f) Rs.180 Crore
g) Rs.80 Crore
h) Rs. 18000 Crore
(11) Is the method of accounting for mergers:
a) The Pooling Of Interest Method
b) The Reconciliation Method
c) The Straight Line Method
d) The Written down value Method
(12) It should be appropriate to amortize goodwill over a period not exceeding:
a) 5 years
b) 10 Years
c) 7 Years
d) 15 Years
(13)__________ is used in accounting for amalgamations in the nature of purchase:
a) The Purchase method
b) The Pooling Of Interest Method
c) The Reconciliation Method
d) The Straight Line Method
(14)____________ is used in case of amalgamation in the nature of merger.
a) The Pooling of interest method
e) The Reconciliation Method
b) The Straight Line Method
c) None Of the Above
(15) Shareholders holding not less than____________________ 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.
a) 90%
b) 50%
c) 45%
d) 100%
(16) The objective of this Accounting Standard is to improve:
a) the relevance
b) reliability
c) comparability of the information
d) All Of the Above
(17) Accounting Standard establishes principles and requirements for how the acquirer:
(a) recognises and measures in its financial statements the identifiable assets
acquired, the liabilities assumed and any non-controlling interest in the
acquiree;
(b) recognises and measures the goodwill acquired in the business
combination or a gain from a bargain purchase; and
(c) determines what information to disclose to enable users of the financial statements to evaluate the nature and financial effects of the business combination.
(d) All Of The Above
(18) Under which accounting standard amalgamation is classified:
a) 16
b) 17
c) 18
d) 14
(19) Disclosure Requirement For Amalgamations is:
a) Names and general nature of business of the amalgamating companies;
b) Effective date of amalgamation for accounting purposes;
c) The method of accounting used to reflect the amalgamation; and
d) All The Above
(1) The term "Demerger" as defined in Sub-section (19AA) of Section 2 of the
a) Income-tax Act, 1961
b) Companies Act 1956
c) Contract Act
d) Competition Act
(20) ___________the transfer of one or more undertakings as a result of the sale for a lump-sum consideration without values being assigned to independent assets and liabilities.
a) Slump Sale
b) Sale
c) Purchase
d) Slump Purchase
(22)In a _________an undertaking or division of a company is spun off into an independent company
a) Spit-up
b) Equity Carve outs
c) ESOPs
d) Spin-off
(23)Ahmedabad Advanced Mills was _________into two separate companies. viz., New Ahmedabad Advance Mills and the Tata Metal Strips
a) Split up
b) Equity Carve outs
c) ESOPs
d) Spin-off
(24)In a _________ The entire firm is broken up in a series of spin-offs,the parent no longer exists and, Only the new offspring survive:
a) Split up
b) Equity Carve outs
c) ESOPs
d) Spin-off
(25)_____________ is a transaction through which a firm sells a portion of its assets or a division to another company
a) Divestitures
b) Demerger
c) Reverse Merger
d) None Of The above
(26) A transaction in which a parent firm offers some of a subsidiaries common stock to the general public, to bring in a cash infusion to the parent without loss of control.
a) Divestitures
b) Demerger
c) Reverse Merger
d) Equity Carve Outs
(27) ____________is a way by which a private company can become a public company and take advantage of the greater financing options available to public companies.
a) Divestitures
b) Demerger
c) Reverse Merger
d) None Of The above
(28)___________ means the company whose undertaking is transferred, pursuant to a demerger, to a resulting company
a) Demerged Company
b) Remerged Company
c) Transferee
d) Transferor
(29) Selling a part or all of the firm by any one of means: sale, liquidation, spin-off & so on:
a) Split up
b) Equity Carve outs
c) ESOPs
d) Sell-Off
(30)A clause in an executive's employment contract specifying that he/she will receive large benefits in the event that the company is acquired and the executive's employment is terminated:
a) Poisson Pill
b) Golden Parachute
c) Silver Parachute
d) White Knight
(31)_________is a clause in an executive employment contract that provides the executive with a significant severance package in the case that the executive loses his or her job through firing, restructuring, or even scheduled retirement
a) Poisson Pill
b) Golden Handshake
c) Golden Parachute
d) White Knight
(32)When the managers and/or executives of a company purchase controlling interest in a company from existing shareholders.
a) LBO
b) MBO
c) Golden Handshake
d) None Of the Above
(33)___________ the purchase of a controlling proportion of the shares of a company by its own management, financed almost exclusively by borrowing
a) LBO
b) MBO
c) Golden Handshake
d) None Of the Above
(34)_________ a bond that involves greater than usual risk as an investment and pays a relatively high rate of interest:
a) Zero Coupon Bonds
b) Floating Bonds
c) Fixed Bonds
d) Junk Bonds
(35)A strategy used by corporations to discourage a hostile takeover by another company,the target company attempts to make its stock less attractive to the acquirer:
a) Poisson Pill
b) Golden Handshake
c) Golden Parachute
d) White Knight
(36) A situation in which a large block of stock is held by an unfriendly company:
a) Poisson Pill
b) Golden Handshake
c) Greenmail
d) None
(37)The target firm turns around and tries to take over the company that has made the hostile bid:
a) Poisson Pill
b) Golden Handshake
c) Greenmail
d) PAC man
(38)A company that makes a friendly takeover offer to a target company that is being faced with a hostile takeover from a separate party:
a) Golden Handshake
b) Greenmail
c) White Knight
d) None
(39) A ___________monitors trading patterns in a client's stock and attempts to determine who is accumulating shares.
a) shark watcher
b) Golden Handshake
c) Greenmail
d) PAC man
(40)The ratio in which an acquiring company will offer its own shares in exchange for the target company's shares during a merger or acquisition:
a) Profit ratio
b) Swap ratio
c) Debt/Equity Ratio
d) Current Ratio