The Hindu Business Line : When mergers emerge by the hour

Tata Steel is considering merger with Corus rather than takeover. An Alcatel-Lucent merger predicted by end of 2006. Google merger ups pressure on Yahoo to strike deal. And Indian Hotels seeks board nod for merger. These are only a few of the nearly 1,500 headlines that show up in response to a search for `merger India'. Almost double that number may show for `acquisition'; but that can include stories about `land' or `aircraft' acquisitions too, apart from those of businesses.

At the time of writing, an October 12 update on www.forbes.com says, "Corus fell 2.17 per cent on the back of reports Tata Steel is weighing up the possibility of a `pure merger' as opposed to a straight takeover of the Anglo-Dutch group," signalling that the market is not able to come to terms with the prospect of merger. But, come to terms, we may, with the word, even as merger deals emerge by the hour!

The word refers to "the act of merging two things, especially companies, into one," says Concise Oxford English Dictionary. "There is talk of a merger between the two banks," reads an example in the New Oxford Business English Dictionary. "Analysts expect the retailer to seek a merger with a rival company. She works in the mergers and acquisitions (M&A) department of a well-known investment bank," are other examples.

Oxford Dictionary of Business has a more elaborate entry for merger, which appears after `merchant wholesaler'. "A combination of two or more businesses on an equal footing that results in the creation of a new reporting entity formed from the combining businesses," it begins. "The shareholders of the combining entities mutually share the risks and rewards of the new entity and no one party to the merger obtains control over another."

This decision is usually mutual between both firms, enlightens www.investopedia.com. More like marriage, one may say. "Marriage, in life, is like a duel in the midst of a battle," says Edmond About. Much like mergers, which are deals in the midst of corporate wars.

Merger of equals, they say, when companies are of similar size. However, "In India, relative size of combining enterprises is not relevant in classifying amalgamations into `merger' and `amalgamation in the nature of purchase'," comments Asish K. Bhattacharyya in Indian Accounting Standards: Practices, Comparisons, and Interpretations, a recent publication of Tata McGraw-Hill.

Five conditions

Accounting Standard (AS) 14 of the Institute of Chartered Accountants of India, titled `Accounting for Amalgamations,' specifies five conditions for `amalgamation in the nature of merger', all of which need to be satisfied. One, "all the assets and liabilities of the transferor company become, after amalgamation, the assets and liabilities of the transferee company." For example, a merger of Corus into Tata Steel would mean the transfer of all assets and liabilities of Corus to Tata Steel.

"Combining Corus' production of 15 million tonnes with Tata's 5 million would create the world's fifth largest producer, based on 2005 figures, but one still far behind, say, Arcelor-Mittal with 101 million tonnes or 10 per cent of global production," noted an October 5 article in Financial Times. Continuing our Tata-Corus example, condition No 2 is that shareholders holding not less than 90 per cent of the face value of the equity shares of Corus become equity shareholders of Tata. In which case, all that cash lined up for the deal may not be needed?

Thirdly, consideration for the amalgamation receivable by Corus' equity shareholders is discharged by Tata `wholly by the issue of equity shares in the transferee company except that cash may be paid in respect of any fractional shares.' A graphic description from http://dictionary.law.com is about what happens in a merger: "In effect one corporation `swallows' the other, but the shareholders of the swallowed company receive shares of the surviving corporation."

A merger is distinguished from a `consolidation,' in which both companies join together to create a new corporation, says the reference. That Tata is looking at a 20-24 per cent stake in the combined holding, as the media reports, reflects the consideration of both merger and consolidation, as possible options.

Fourth condition in AS-14 is that the business of Corus `is intended to be carried on, after the amalgamation' by Tata.

And, lastly, `no adjustment is intended to be made to the book values of the assets and liabilities' of Corus when they are incorporated in the financial statements of Tata `except to ensure uniformity of accounting policies.'

When these conditions are not met, the amalgamation will be `in the nature of purchase'.

Foreign `transferor'

These conditions apply even if the transferor company is outside India, as in the case of Corus. Because, the accounts of the transferee company, that is, Tata Steel, will still be drawn up as per our Companies Act, and so the Indian GAAP (generally accepted accounting principles) will come into play.

Interestingly, the US GAAP doesn't classify amalgamations into mergers and purchase. The phrase used is `business combination', to refer to "the bringing together of separate entities or businesses into one reporting entity," as PricewaterhouseCoopers explains in Similarities and Differences: A Comparison of IFRS, US GAAP and Indian GAAP, a July publication.

Merger of two or more companies with similar product lines is `horizontal', while merger of a vendor and a customer is `vertical', as www.investorwords.com defines. Reverse merger isn't `regrem' but "the acquisition of a public company by a private company, allowing the private company to bypass the usually lengthy and complex process of going public." Much like marriage that can break, mergers too may stand dissolved, which is what is called demerger, defined as "separation of one company from a larger company or group," by Encarta.

Then, what is emerger? "An immature insect that is `emerging' - i.e. moving up - towards the water's surface, where it will hatch into its adult stage," says Hunting Glossary on www.dto.com. There is more to merger that we can hunt out, but let's see what emerges from the ongoing Tata-Corus deal.

ComingToTerms@TheHindu.co.in

More Stories on : Mergers & Acquisitions | Coming to Terms | Tata Steel Ltd

Article E-Mail :: Comment :: Syndication :: Printer Friendly Page

Stories in this Section
Let the net remain

Why a sentence should not be disturbed?

Ensuring activism leads to action

India-EU Bacchanalian cup runneth over

Tarapore Report II — Little light on deficit, gold

Power theft short-circuiting growth

When mergers emerge by the hour

Checking corruption

Urban chaos