CAIIB ABFM Module C Unit 5 : Merger, Acquisition And Restructuring

CAIIB Paper 3 ABFM Module C Unit 5 : Merger, Acquisition And Restructuring (New Syllabus) 

IIBF has released the New Syllabus Exam Pattern for CAIIB Exam 2023. Following the format of the current exam, CAIIB 2023 will have now four papers. The CAIIB Paper 3 (ADVANCED CONCEPTS OF FINANCIAL MANAGEMENT) includes an important topic called “Merger, Acquisition And Restructuring”. Every candidate who are appearing for the CAIIB Certification Examination 2023 must understand each unit included in the syllabus.

In this article, we are going to cover all the necessary details of CAIIB Paper 3 (ABFM) Module C (Valuation, Mergers & Acquisitions) Unit 5 : Merger, Acquisition And Restructuring, Aspirants must go through this article to better understand the topic, Merger, Acquisition And Restructuring and practice using our Online Mock Test Series to strengthen their knowledge of Merger, Acquisition And Restructuring. Unit 5 : Merger, Acquisition And Restructuring


  • Acquisition is the process of one entity buying out another and absorbing it into itself, as contrast to merger, which refers to the combination of two separate entities into one.
  • In the context of Indian law, the term “merger” is more accurately rendered as “amalgamation.” The amalgamations can be by merger of firms within the limits of the Companies Act, and acquisition through takeovers.
  • The Securities and Exchange Board of India (SEBI) oversees takeovers, although the Companies Act governs mergers and acquisitions(M&A) deals.
  • According to Halsburry’s Laws of England, an amalgamation is described as the combination of two or more pre-existing businesses, with the shareholders of each amalgamating company becoming largely the shareholders in the amalgamating company. When two or more businesses combine into a single entity, when one business merges with another, or when one business is acquired by another, this process is referred to as “amalgamation.”
  • it was determined that in the event of an amalgamation, the rights and liabilities of one company are merged into those of another company, making the transferee company vested with all of the rights and liabilities of the transferor company.
  • A Take-over occurs when both, the company doing the take-over and the company being taken-over, are able to continue operating independently following the completion of the deal. If the acquisition results in consolidation, it means the legal dissolution of both of the companies involved and the creation of a new company into which the prior entities are combined. When a merger results in the legal dissolution of only one of the corporations involved, it is called absorption.

Merger And Its Types

  • Merger is the coming together of two separate businesses into one. The process of dissolving one or more businesses, corporations, or proprietorships in order to construct another company through absorption into it, is what is meant by the phrase “merger.” The combined business would be significantly larger after the transaction was completed.

Types of Merger

  • Horizontal Merger: The two businesses that have recently merged are both operating in the same market sector. As a result, the newly consolidated company will likely have a larger market share than its predecessors. and it is possible that it will move closer to becoming a monopoly or a near monopoly in order to eliminate competition.
  • Vertical Merger:  This type of merger takes place when two organisations that have a “buyer-seller” relationship come together to form a single entity.
  • Mergers Between Conglomerates:  Mergers of this kind include companies whose lines of business are completely unconnected to one another. These types of mergers actually involve the consolidation of several distinct types of enterprises into a single parent organisation.
  • Cogeneric Merger: The acquiring company and the company it is merging with are connected in some way, whether it is through fundamental technologies, industrial methods, or market segments These mergers represent an outward shift by the acquirer from its existing business environment to other similar business activities within the overall structure of the industry as a whole.
  • Reverse Merger:  A reverse merger occurs when a smaller, unlisted company acquires a larger, publicly listed company. This allows the unlisted company to avoid the lengthy and complicated process that would be necessary to be followed in the event that it desired to issue its shares to the public through an Initial Public Offering.


This term refers to the purchase of a controlling interest in the share capital of an existing firm by one corporation from another corporation. This could happen by:

  • An arrangement with the person who holds the majority of the interest.
  • The acquisition of fresh shares through a confidential agreement.
  • Acquisition of shares through the open market (open offer)
  • The acquisition of a portion of a company’s share capital by the payment of cash and the issuing of shares.
  • Making an offer to buy out the general body of shareholders in the company.

When one company acquires another, the acquiring firm has two options:-

  • It can combine both businesses into a single entity and operate as a single entity, or
  • It can continue to run the taken-over company as an independent entity but with new management and different policies.

When a firm is “acquired,” it means that it has been bought out by another corporation, and the acquired company typically loses its identity.  This method is normally done in a cordial manner.

Purchase of Division or Plant

  • It is possible for one corporation to purchase a division or factory from another company. The acquiring company purchases the relevant division’s assets, assumes responsibility for the division’s liabilities, and makes a monetary payment of compensation to the selling company.
  • For instance, Abbott Laboratories paid $3.72 billion to acquire the pharmaceuticals business of Piramal Health Care. Abbott Laboratories was a competitor of Piramal Health Care.
  • It is important to keep in mind that only a fraction of the assets and liabilities of one company are taken over by another firm when a transaction is carried out in this manner.


  • A takeover often comprises the acquisition of a specified interest in the equity capital of a company, which grants the acquirer the ability to exert control over the operations of the company.
  • For instance, HINDALCO was able to acquire control of INDAL after purchasing a 54 percent stake in the company from its international parent company, Alcan. INDAL, on the other hand, was ultimately absorbed into HINDALCO after some time.
  • Takeover generally is used when the transaction is without the consent of the shareholders of the target company or, in other words, it is hostile takeover. Acquisition, on the other hand, refers to an amicable agreement or consent of the majority shareholders of the target company.

Leveraged Buyout 

  • A takeover or the purchase of a division can also be referred to as a leveraged buyout, which differs in that it is mostly accomplished with the assistance of loan financing.


  • Divestitures result in a smaller asset base and a loss of control.

Types of divestitures

  • Partial Selloff: A partial selloff is when one company sells a portion of its operations, like a facility or a business division, to another company.
  • The Transfer of Ownership: A sale of equity stake occurs when one investor sells an equity stake to another investor. This equity stake typically represents a controlling block in the company.
  • Demerger: A demerger is the process by which a corporation transfers one or more of its business divisions to another company that is being formed at the same time as the original firm. Both the firm whose business division is moved and the company to which it is transferred are referred to as the demerged company and the resultant company, respectively.
  • Equity Carveout: When a parent firm engages in an equity carveout, it is selling a portion of its ownership stake in a wholly owned subsidiary.
  • PSU Disinvestment: Individuals and organisations that are not affiliated with the government, might acquire ownership stakes in previously state-owned businesses through a process known as privatisation. This can either be a partial or complete transfer of ownership.

Reasons For Merger

Synergistic operating economics

V (AB) >V(A) + V (B).

  • According to Mark L. Sirower of Boston Consulting Group, who wrote “The Synergy Trap,” synergy is the increase in performance of the combined firm over what the two firms are already expected or required to accomplish as independent firms.
  • Synergy is the result of combining the resources of two or more companies. This could be due to complementary services, economies of scale, or both of these factors.


  • It is possible that the provisions of the Income Tax Act that allow for losses to be offset against other income or carried forward are yet another compelling argument for the merger and acquisition. the amalgamated company will see tax savings as well as a reduction in its tax liabilities.


  • A company is able to grow at a faster rate using the mode of mergers and acquisitions as opposed to the other mode, which is organic growth. The reduction in “Time to Market” was the driving force behind this decision.
  • The acquiring company avoids delays that would have been caused by the purchase of a building and site, the establishment of the plant, and the hiring of people, among other things.

The Consolidation of Production Capabilities and the Enhancement of Market Power: 

  • The decrease in total number of competitors results in an increase in marketing power. The merging of two or more plants can boost the output capacity of the overall operation.

Economies of Scale: 

  • Cost savings are the result of a more intensive utilization of manufacturing capabilities, distribution networks, engineering services, research and development facilities, data processing systems, and so on and so forth.

Economies of Scope

  • A company might broaden the range of its activities by making use of a certain set of capabilities or assets that it already owns.

Economies of Vertical Integration

  • Vertical integration can lead to cost savings by combining the resources of multiple enterprises operating at various stages of a value chain or production process.

Complementary Resources 

  • A merger could make sense for two companies if those companies’ resources are complementary to one another. For instance, a small company that is developing a revolutionary product could require the engineering capabilities and marketing reach of a large company.
  • It is possible that the unique product can be successfully manufactured and marketed if the two companies that created it decide to merge into one.

Utilization of Surplus Funds

  • Although a company operating in an established market might make a lot of cash, it might not have many options for making lucrative investments.
  • In circumstances like these, a merger with another company that involves cash compensation is frequently the case that reflects a more effective utilization of surplus capital.

Managerial Effectiveness

  • A company that has been plagued by managerial shortcomings can frequently benefit enormously from the superior management that is expected to emerge as a sequel to the merger of the two companies.

Industry Consolidation

  • Consolidation is required for boosting efficiency whenever there are an excessive number of players and surplus capacities.

Dubious Reasons for Mergers

  • There are instances when the desire to diversify, achieve a cheaper cost of financing, and achieve a greater rate of earnings growth will lead a company to pursue a merger. At first glance, these goals appear to be worthy; it is highly unlikely that they will increase value.


  • One of the most frequently cited goals of mergers is to lessen overall risk by increasing diversification of operations. The degree to which risk is minimized is, contingent on the degree to which the revenues of the merging firms are correlated with one another.

Lower Financing Costs

  • If two companies, A and B, decide to merge, the equity of both companies will serve to safeguard the creditors of the newly formed firm AB. Though this additional protection lowers the cost of debt, it places an additional burden on the shareholders of the companies involved.

Growth in Earnings

  • It is indeed possible that a merger will provide the impression that earnings are growing. If investors are misled, a price increase could result from this. if the market is “inefficient,” it may be susceptible to being hypnotized by the allure of earnings growth.
  • In a market that is inefficient, such an illusion might be successful for a while. The false profits are sure to vanish once the market reaches its optimal level of efficiency.

Mechanics Of Merger

  • The Companies Act is the primary legislation that governs the process of mergers and acquisitions in India. In addition to company law, the Securities and Exchange Board of India Act and the Competition Act also have provisions that regulate mergers and acquisitions.
  • The Companies Act is primarily concerned with protecting the interests of creditors, the SEBI Act is primarily concerned with protecting the interests of minority shareholders, and the Competition Act is primarily concerned with protecting the interests of consumers from being harmed as a result of diminished competition resulting from mergers.

Legal Procedure of Amalgamation

  • An In-Depth Analysis of Object Clauses: To determine whether or whether the companies have the authority to merge into one another, the memorandums of association of both businesses need to be reviewed.
  • Communication with Stock Exchanges: The proposed merger should be brought to the attention of the stock exchanges and copies of all notices, resolutions, and orders should be sent through regular mail to the stock exchanges.
  • Board Approvals of the Draft Amalgamation Proposal: The preliminary draught of the proposal to merge should be accepted by the separate boards of directors, and those boards should then issue a resolution.
  • An In-Depth Analysis of Object Clauses: To determine whether or whether the companies have the authority to merge into one another, the memorandums of association of both businesses need to be reviewed.
  • Communication with Stock Exchanges: The proposed merger should be brought to the attention of the stock exchanges and copies of all notices, resolutions, and orders should be sent through regular mail to the stock exchanges.
  • Board Approvals of the Draft Amalgamation Proposal: The preliminary draught of the proposal to merge should be accepted by the separate boards of directors, and those boards should then issue a resolution.
  • Application to the NCLT/s: Following approval from the board of directors, each company should submit an application to the NCLT of the state in which its registered office is located.
  • Notice to the shareholders and creditors of the company: After obtaining the approval of the NCLT, each company is required to send a notice and an explanatory statement to its shareholders and creditors at least 30 days in advance, along with a copy of the scheme and the prescribed details. the notice of the meetings ought to be published in two newspapers — one English and one vernacular — as well as on the websites of the company.
  • Conducting Meetings of Shareholders and Creditors: Each company needs to call a meeting of their shareholders in order to vote on whether or not to proceed with the merger. The scheme of amalgamation needs to receive approval from at least 75 percent (in value) of shareholders in each class who vote in person, by proxy, or through postal ballot.  Equally, at least seventy-five percent (in value) of the creditors who vote in favour of the plan, must be in agreement with it. Only anyone who own more than 10 percent of the company’s shares or creditors who have an outstanding debt of more than 5 percent are allowed to voice their opposition to the plan. The creditors’ meeting is not required if at least 90 percent of those owed money agree to or affirm the plan by signing an affidavit.
  • Petition to the National Company Law Tribunal (NCLT) for the Confirmation and Passing Orders
  • Filing the Order Copy with the Registrar of Companies
  • Transfer of Assets and Liabilities: the merged business will be required to take on all of the assets and liabilities of the company that was merging into it as of the appointed date.
  • Issue of Equity and Debentures: After complying with the requirements of the legislation, the merged company is required to start selling shares and debentures of the merged firm.

Competition Issues

  • The Competition Act of 2002 is the primary legal document in India that governs antitrust and competition concerns. The Competition Commission has the authority to investigate potentially monopolistic or restrictive business practices.
  • Within a period of seven days after the board of directors of concerned enterprises approve the combination, any person or enterprise that proposes to enter into a combination can approach the Commission for approval of the combination. This must be done within seven days of the board of directors of concerned enterprises approving the combination. The Commission has the authority to ban the combination if it deems that it already has or is likely to have an appreciably negative effect on the level of competition inside India.

Tax Aspects

The combined firm will have access to the following deductions, to the extent that they were available to the company that was merging, and to the extent that they are still unabsorbed or unfulfilled:

  • Investments in fixed assets devoted to scientific research
  • The cost of purchasing or acquiring patent rights, copy rights, and technical know-how
  • The cost of acquiring a licence to provide telecommunications services as an operating expense
  • Depreciation of the costs incurred in the planning stage
  • The ability to carry forward losses as well as unused depreciation

Cost And Benefits Of Merger

The advantage of the merger is the difference between the present value (PV) of the combined entity PVAB and the present value of the two entities if they are kept separate (PVA + PVB). Hence,

Benefit = PVAB – (PVA+PVB)

Compensation in Cash

  • If we assume that the compensation to firm B will be paid in cash, then the cost of the merger, when viewed from the perspective of business A, is equal to the cash payment made for purchasing firm B, less the present value of firm B . Cost = Cash – PVB
  • the difference between the benefits and the costs constitutes the net present value (NPV) of the merger from the perspective of firm A. So NPV to A = Benefit – Cost or
  • NPV to B = Cash – PVB

Compensation in Stock

  • The company A intends to acquire the other company B and compensation is delivered in the form of shares rather than cash. The true cost, when B’s shareholders get a fraction α of the share capital of the combined firm, is equal to: Cost = α * PVAB – PVB

Where α = shares offered by A / (shares offered + no. of shares of M).

Benefit = PVAB – (PVA+PVB)

NPV to A = Benefit – Cost

NPV to B = Cost

Cash vs. Stock Compensation

The decision of whether to be compensated in cash or shares is primarily determined by four different criteria.

  • Overvaluation: If the stock of the acquiring company is overvalued in comparison to the stock of the company being bought, then making payments in stock rather than cash can be the more cost-effective option.
  • Taxes: transaction including cash compensation constitutes taxable income, whereas a transaction involving stock compensation does not.
  • Sharing of Risks and Rewards: shareholders of the acquired firm take part in the risks as well as the profits of the merger if stock compensation is given out.
  • Discipline: The empirical evidence reveals that cash-financed acquisitions have a higher rate of success compared to stock-financed purchases in terms of overall success. It is possible that cash buyers evaluate properties with a greater sense of discipline, circumspection, and rigour.

Exchange Ratio In Merger

In a merger, the acquiring company would often offer the shares of its own company in exchange for those of the target company. The offer is presented in the form of an exchange ratio, also known as a swap ratio, which is the number of shares that the acquiring company is prepared to give up in return for one share of the target company.

Factors involved in Determining the Exchange Ratio

Book Value Per Share:

It is possible to calculate the exchange rate by comparing the book values of each share held in each of the two companies.

Disadvantages include

  • The valuations of books do not take into account shifts in the relative purchasing power of money.
  • Book values and genuine economic values frequently diverge significantly from one another.

Earnings Per Share: 

Let’s say that the EPS of the acquiring firm is Rs. 10.00, while the EPS of the acquired firm is Rs. 5.00. The exchange ratio, calculated based on earnings per share, will be 0.5, which is written as 5/10. This indicates that ten shares of the target company will be acquired in return for five shares of the acquiring company.

Ratio does not take into consideration the following:

  • The disparity in the pace of increase in earnings that the two companies have experienced.
  • The increases in earnings that were a direct result of the merger.
  • The distinct risks that are connected with the financial outcomes of the two businesses.

Market Price Per Share:

The exchange ratio could be determined by looking at how the share prices of the acquiring company and the target company compare to one another on the market.

For illustration purposes, if the target company’s equity shares are selling for Rs. 25 and the acquiring company’s equity shares are selling for Rs. 100, the market price-based exchange ratio would be 0.25 (25/100). This indicates that one share of the acquiring firm will be traded for four shares of the acquired firm. They are an accurate reflection of the company’s existing profitability, growth potential, and risk characteristics.

Dividend Discounted (DD) Value Per Share:

  • The current value of the anticipated stream of dividends is what is meant to be represented by the dividend discounted value per share. It is possible to calculate the exchange ratio by comparing the relative DD values per share of the two companies that are merging.

Discounted Cash Flow (DCF) Value Per Share:

The DCF value per share is equal to:

  • (Firm value using DCF Method – Debt Value)/No. of Equity shares. The exchange rate can be calculated using the relative DCF values per share of the companies that are merging. When fairly solid business plans and cash flow estimates are provided for a period of five to ten years for the merging companies, the DCF value approach is a good choice for determining the worth of the combined company.

Purchase Of A Division/ Plant

When one company buys the division of another company or when one company takes over another company by gaining a controlling equity share, the acquiring company needs to put a value on the ownership position that it has obtained. In the event of the purchase of a division, the bidder company obtains one hundred percent ownership

  • Status Quo Value: The discounted cash flow (DCF) method and the market multiple method are the two most popular approaches that are taken when determining the value of the status quo.
  • DCF Method: The present value of the free cash flows that will be generated in the future is what is meant by the DCF value of a company (or business division).
  • There are three primary stages involved in the DCF technique of company valuation.  First, determine the value, in present terms, of the free cash flow that will result from the transaction.  In the second step, the horizon value is calculated and then discounted to the current time.  The third step involves calculation of the worth of the transaction, by adding together the “present value” of “free cash flow” and the “horizon value.”
  • Market Multiple Method: Similar assets should be sold for values that are comparable to one another, you can determine the value of a firm by looking at the value placed on other businesses that are comparable to it.
  • Value of Control: The importance of Control Acquiring is that Companies are frequently willing to pay a price that is greater than the worth of the status quo in order to get the right to control the management of the businesses that they are acquiring. Value of Control = Value of Firm, if it is optimally managed – Value of firm with current management.
  • Value of Synergy: The vast majority of acquisitions have the potential to result in synergy, which can manifest itself in one or more of the following ways:
  • Decreased overhead expenses as a result of economies of scale.
  • Decreased costs associated with research and development, advertising, marketing etc.
  • A faster rate of growth as a result of the combined entity’s increased influence in the market.
  • A more extended period of growth as a result of improved competitive advantages.
  • A decrease in the cost of capital as a result of increased debt capacity
  • Increased efficiency in the use of tax havens.


A takeover often entails the acquisition of a certain block of a business’s equity capital, which grants the acquirer the ability to exert control over the operations of the company. In order to obtain full control of the acquired firm, an acquirer typically needs to purchase more than fifty percent of the paid-up equity of the target company.

A takeover may be done through the following ways:

  • Open market purchase: The shares of the publicly traded company are purchased on the stock market by the acquirer.
  • Negotiated Acquisitions: In a transaction that has been arranged, the acquirer purchases shares of the target firm from one or more current owners, the majority of whom are likely to be promoter shareholders.
  • Preferential allotment: This type of purchase is obviously a friendly acquisition that is carried out with the intention of providing the acquirer with a strategic position in the firm as well as injecting finances into the organisation.

SEBI Takeover Code

  • Disclosure: Any acquirer that purchases stock or voting rights in a company that, when combined with the acquirer’s already-held holdings in the company, total more than 5 percent of the company’s total stock, is required to make full disclosure of their holdings to both the company and the relevant stock exchange at each stage of the acquisition process (s). The stock exchanges are obligated to instantly make this information visible to the general public.
  • Trigger Point: No acquirer shall be permitted to acquire holdings that, when combined with the acquirer’s already existing stock in the company, would equal or exceed 25 percent of the total, unless the acquirer first makes a public announcement to acquire shares through a public offer to the extent that is specified in the code
  • Merchant Banker: The acquirer is required to hire a Category I merchant banker who is registered with SEBI before making an announcement about a public offer.
  • Public Announcement: Within four business days following the agreement or the decision to purchase shares or voting rights in excess of the stipulated percentages, the merchant banker is obligated to make a public notification about the transaction.
  • Offer Price: The pricing that will be offered to the general public is contingent on meeting a number of criteria.
  • The Responsibilities of the Acquirer: The acquirer is responsible for ensuring that the letter of offer is delivered to shareholders within forty-five days of the date of the public announcement, and that shareholders who have accepted the offer receive payment within a period of thirty days beginning on the date that the offer period comes to a close.
  • Obligations of the Board of the Target Company: During the time period of the public offer, the Board of Directors of the target company is not allowed to dispose of assets, issue capital, enter into significant contracts, or appoint additional directors unless they first obtain the approval of the general body of shareholders, which can only happen after the public announcement of the offer has been made.
  • Bids from Competitors: Within a period of twenty-one days of the public release of the initial offer, competitive bids can be made, and in response, the acquirer who made the earlier offer can revise the offer.
  • Establishment of an Escrow Account: The acquirer is obligated to place at least 25 percent of the consideration payable for the public offer up to Rs. 100 crore and 10 percent of the consideration above Rs. 100 crore in an escrow account. This is done to ensure that the acquirer will fulfil their obligations.
  • Creeping Acquisition: No acquirer, together with persons acting in concert, is allowed to acquire more than 5 percent of holdings in any financial year ending on the 31st of March without complying with the open offer requirements if the existing holdings are between 15 percent and 75 percent.

Anti Takeover Defences

Pre-Offer Defences 

  • Staggered board: The board of directors consists of three sections of equal number of directors each. One group is selected to lead each year.
  • The provision of Super Majority Clause: In order for a merger to be approved, an extremely high percentage of votes, typically over 80 percent, is required.
  • Poison pills: Existing shareholders are given the right to buy bonds or preference stock that, in the case of a merger, are converted into stock of the acquiring firm on very favourable terms.
  • Poison Puts: A poison put is an anti-hostile takeover defence tactic. It entails the target company issuing redeemable bonds that can be purchased before they mature.
  • Dual class: A new class of equity shareholders, that has better voting rights, is created. These shareholders are given preference in the voting process.
  • Golden parachute: If the current management is retained after a takeover, they are eligible to obtain a very generous remuneration package.

Post-offer Defences

  • Greenmail: The target firm makes a deal with the bidder in which it promises not to engage in a hostile takeover in exchange for the target company agreeing to buy the shares acquired by the bidder at a premium.
  • Pacman defence: The stock that was being bid on is then subject to a counterbid from the company that is being targeted.
  • Litigation: The corporation being targeted initiates legal action against the company doing the bidding, alleging that the latter broke anti-trust or securities laws
  • Restructuring of Assets: The bidder demands that the target firm sell its most valuable assets, also known as the “crown jewels,” and/or that the target company buy assets that the bidder does not want or that may cause anti-trust issues for the bidder.
  • Restructuring of the liabilities: Either the target firm buys back its own shares at a significant premium or it issues new shares to a third party who is friendly with the company.

Anti-takeover Defences in India

  • Make Preferential Allotment: In order to increase the promoter group’s equity holding, a corporation could provide the promoter group preferred treatment when it comes to the allocation of equity shares or convertible securities.
  • Creeping Enhancement: The promoter group is permitted by the guidelines issued by SEBI to increase its equity ownership through creeping upgrades.
  • Amalgamate Group Companies: A larger company could be formed by the combination of two or more businesses that were all fostered by the same organisation.
  • Sell the Crown Jewels: In the event that the raider is enticed by certain valuable assets held by the target company, the target company can decide to sell such assets in order to make itself less desirable to the raider
  • Search for a White Knight: A business that is under attack may turn to its allies for moral and financial assistance. It is possible for it to ask a white knight to come to its help and save it from the grasp of the raider.

Leveraged Buyouts

  • A leveraged buyout is the process of transferring control of a company while primarily using debt as financing.
  • While some leveraged buyouts entail the acquisition of an entire company, others focus on purchasing only a portion of an existing company’s operations.
  • A management buyout is the term used to describe a transaction in which the management of a business unit purchases the business unit outright (MBO). Following the completion of the buyout, the company (or the business unit) will in all likelihood transition into a private company.

Value Creation in LBO

There appear to be three primary variables that contribute to the creation of value in an LBO:

  • The value of the firm is increased as a result of operational improvements.
  • Cash generated from operations is put toward paying down debt, which results in an increase in the proportion of enterprise value held by equity shareholders.
  • A tax shield is provided by the interest on the debt.

Qualities of Good LBO Candidate

  • Good management team.
  • Consistent Cash flows.
  • The opportunity for enhancing operational effectiveness.
  • Adaptability with regard to the sale of assets that are no longer needed.
  • Requirements for capital expenditures are quite low.
  • Easy Exit.

Acquisition Financing

It is the funding a company specifically for the purpose of acquiring another company in the form of equity, debt or hybrid practices. transactions.

The following is a list of characteristics that are typical of purchase financing:

  • Either the overseas subsidiary of the Indian company or a special purpose entity formed overseas for the purpose of acquisition receives the loan. The loan is issued for the purpose of acquisition.
  • On the basis of the guarantee offered by the Indian parent company, financing is offered by international financial institutions and by overseas branches of Indian banks.
  • When deciding whether or not to provide financial assistance, lenders look at the acquirer’s cash flow. The amount of financing is typically between three and six times EBITDA
  • The cost of financing is determined by a number of factors, including the robustness of the acquisition target, the ingenuity of the parent company, the availability of legal recourse to the lenders, and the type of debt that the bank is participating in

Business Alliances

  • There has been a considerable increase in the number of different types of business alliances, such as joint ventures, strategic alliances, equity partnerships, licencing, franchising alliances, and network alliances.
  • For example: In 1999, IBM established business collaborations with firms such as Cisco and Dell PCs that were worth a combined total of $30 billion.
  • The desire to share risks and gain access to new markets, cut expenses, achieve favourable regulatory treatment, or purchase (or exit) a business is one of the primary drivers behind the formation of business partnerships.

Managing Acquisitions

A corporation needs to fulfil the following requirements in order to improve its chances of creating value:

  • Keep your attention on the Right Targets: an acquirer might decide not to pursue a deal with a company because it is either too large, too small, involved in an unrelated business, quoting at a high price-earnings multiple, not amenable to acquisition, culturally alien, or any combination of these factors.
  • Ensure that synergies are accurately estimated: Each potential acquisition should be evaluated based on the most accurate information possible.
  • Negotiate in a disciplined manner
  • Organize and exercise command over the integrating: A conscientious effort needs to be made to think through the consequences of the merger, predict problems that may occur, comprehend the nature of these problems, and work out a solution to these problems that is reasonable and mutually acceptable.


  • It refers to the act of a corporation selling one of its divisions or undertakings to another firm or forming an entirely new company out of the remaining elements of its business.

There are many different motivations behind divestiture and demerger, including the following:

  • To focus on the most important aspects of the business
  • It is possible that the Division’s or Business’ contributions to the total income are insufficient.
  • The size of the company can be too great to be managed effectively
  • The company might have an immediate need for funds since it is considering alternative investment opportunities.

Different Forms Of Divestitures or Demerger

  • Complete or Partial Sale of Assets: A sell off is the process by which one organisation transfers ownership of an asset, factory, division, product line, or subsidiary to another organisation in exchange for a purchase consideration paid in the form of cash or securities. Partial sell off is a type of divestment in which the corporation sells a business unit or a subsidiary to another entity because the subsidiary is determined to be incompatible with the primary business strategy of the parent company.
  • Spin-off: In this scenario, a portion of the business is segmented off and spun off into its own independent company. The company’s current stockholders will each get a proportionate ownership stake in the business. The management of the spin-off subsidiary, on the other hand, has been replaced. A spin-off does not result in new financial gain.

One possible motive for spinning off an entity is to:

  • Provide a component or division its own distinct identity.
  • Prevent a hostile takeover of the company by a potential acquirer by making the company less appealing to the potential acquirer by spinning off a profitable segment.
  • Split regulated and uncontrolled business lines into their own distinct entities.


  • Split-up: This necessitates the division of the entire company into a number of independent spin-off companies (by creating separate legal entities). Only the newly established entities continue to exist today, as the parent company does not exist legally any longer.
  • Equity Carve Outs: When one of a parent company’s subsidiaries is expanding at a faster rate and carries a greater valuation than other firms owned by the parent, the parent company may choose to pursue a strategic option known as a carve-out. The sale of shares in the subsidiary to the general public results in the generation of cash from a carve-out. Although a carve-out creates a new legal corporation with its own board of directors, the parent company typically maintains some level of control over the new entity.
  • The Demerger of Two Family-Owned Businesses or Their Division: A collection of enterprises that are run by the same family can decide to reorganise their business in order to concentrate on just their most important activities. To do this, the first thing that will likely need to be done within the group is to differentiate between core and non-core processes. The second phase may involve lowering the burden of interest payments by reorganising the debt and selling any assets that are in surplus. The money gained by selling assets could be invested in the business’s future growth through new acquisitions
  • Partial Selloff:   A partial sell-off, also known as a slump sale, is the process by which one company transfers ownership of a business unit or asset to another company. It is a form of contraction when viewed from the standpoint of the seller, but it is a form of expansion when viewed from the perspective of the buyer.

Holding Company

A holding company is a corporation that owns the equity of multiple other companies in order to exert influence over those companies. A holding company does not necessarily have to own one hundred percent of the investee business’s equity.

The following are some of the other benefits that come with running a holding company:

  • Central control
  • Flexibility for growth
  • Continuity and succession planning
  • Tax planning
  • Risk mitigation
  • Legal protection for valuable assets of the group
  • Optimum utilisation of funds


  • A demerger is the process by which one business transfers one or more of its undertakings to another company. It is common practice to refer to the company whose undertaking is transferred as the demerged company, and the business to whom the undertaking is transferred as the resultant company.
  • A demerger is an efficient method for splitting a large company empire and finding a solution to the problem of succession. Demerger of Reliance Industries Ltd (RIL) is the biggest such example in Indian corporate history which was a spin-off and not split-up

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CAIIB Paper 3 (ABFM) Module C Unit 5- Merger, Acquisition And Restructuring ( Ambitious_Baba )




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