44

Chapter – II

Law relating to Amalgamation of

Companies - Historical Perspective

Introduction

Mergers and amalgamations are very important features of the modern capitalist.

The history of big modern corporations is a clear testimony of the importance of

mergers and amalgamations in the corporate world and has unquestionably played

an important part in the growth of most of the leading corporations of the world.

Statistics have shown that almost 2/3rd

of large public corporations in the USA have

had a merger and amalgamation in their history and the top 200 corporations in the

USA are known to own about half of the total corporate wealth of the USA1. That is

why, from time to time, companies have preferred the external means of growth by

way of merger and amalgamations. Indeed mergers and amalgamations have tended

to follow a historic pattern of ‘waves with periods of frenetic takeover activity

punctuating periods of relative sedateness.’2

TIME SERIES OF MEGER AND ACQUISITIONS IN INDUSTRIES:

From past decades, there exist five time-series statistics of merger in manufacturing

and mining industries. Each of these series covers a different and largely non

overlapping period. These are:

Nelson Series (1959) for 1895-1920.

Thorp Series (1941) for 1919-1939.

Federal Trade Commission (FTC, 1972) for 1940-1971.

1 Sen S.C, Merger, Amalgamation and Takeover, 1969, Pg.10. 2 Sudarsanam, P.S., Essence of Merger and Acquisitions, 1997, Pg.1

45

Federal Trade Commission (1981) ‘overall merger series’ for 1972-

1979.

Federal Trade Commission (1981)’larger merger series’ for 1948-

1979.

The W.T. Grimm Series Since 1963

Merger and Acquisition, Magazine Series since, 1972

(i) NELSON SERIES FOR 1895-1920

This series includes the acquisitions that were greater than $ 35,000 for the

1895-1914 period, of $ 64,000 for the later period. In this series the size of

acquisition is measured as the authorized capitalization of firm resulting from a

multiform merger by acquisition. For the 1895-1920 period of merger activity,

approximately 70 percent of the firms that disappeared were absorbed into

multiform consolidation, while the remaining 30 percent disappeared through

merger by acquisition. This series was complied on a quarterly series basis. The rule

used in assigning dates was to record the date of transfer of control of the acquired

firm.

(ii) THE THROP SERIES FOR 1919-1939

This series overlaps the Nelson series in 1919 and 1920 and includes about three

times as many firms disappearances as the Nelson series. According to Nelson the

information source for the Thorp series was the Standard Daily Trade service which

probably reported small mergers more completely than the one on which Nelson

relied on. This series gives only the number of disappearances and not by size, in the

mining and manufacturing industries.

46

(iii) THE FEDERAL TRADE COMMISSION 1940-1971

The Federal Trade Commission continued to compile merger series after 1939,

which maintained comparability to Throp Series. This series was discontinued in

1972 after the introduction of Overall merger Series by Federal Trade Commission.

(iv) THE FEDERAL TRADE COMMISSION OVERALL MERGER

SERIES FOR 1972-1979

In 1972 the Federal Trade Commission introduced overall merger series which was

compiled from a number of sources and included the acquisition of firms outside

manufacturing and mining industries. This new series included the completed

acquisitions only.

(v) THE FEDERAL TRADE COMMISSION LARGE MERGER SERIES

FOR 1948-1979

According to this series the acquiring firm must be a manufacturing or mining

concern having assets of at least $ 10 million at the time of acquisition. Sources used

in compiling that series were Moody’s Manuals, Standard and Poor’s Stock

Exchange reports, newspapers, company annual report and Federal Trade

Commission premerger notification information. This series gives a detailed

information with respect to acquired and the acquiring company names, assets, profit

data, industry classification, date of consummation and type of acquisition

(horizontal, vertical or conglomerate).

In addition this series of Federal Trade Commission shows the extent of acquisition

(partial or whole), the medium of exchange (cash and securities) and the

consideration paid by the company. This series shows that the number of mergers as

well as the size of merger is increased because of inflation.

(vi) THE W.T. GRIMM SERIES SINCE 1963

This series represents formal transfers of ownership of at least 10 percent of a

company’s assets or equity. The purchase price must be at least $ 500,000 and one

47

of parties must be a United States firm or company. The number and size of

transactions are recorded as they are announced, not as they are completed. This

makes the series unique and more useful.

The Grimm statistics also record divestitures, medium of payment, industry

classification, and foreign acquisition of United States companies and United States

acquisitions of foreign companies. The series includes tender offers since 1972.

(vii) THE MERGER AND ACQUISITION, MAGAZINE SERIES SINCE

1972

This magazine reports transactions valued at $ 1 million or more in cash, market

value of capital stock exchanged, or debt securities. Partial acquisitions of 5 percent

or more of company’s capital stock are included if the size requirement is met.

Included in the ‘Roster’ are the merger/acquisition activity of United States firms,

takeovers of United States companies by foreign companies and acquisition of the

foreign companies by American corporations.

Historical Pattern of United Kingdom Takeover Activity

In 1968, 1972 and 1989 the UK witnessed peaks of takeover activity in terms of

value and average size of takeover. Britain experienced the transition from a sense

of war to a sense of peace during the war years. The interruption to the world trade

affecting some of the major market, the decline of many of its important 19th

century

industries and the effect of the great depression was bound to have effect on many

companies and upon old and new amalgamations. Thus even where larger

companies have combined, many of them declined absolutely or relatively and then

were replaced by new firms in new industries.

According to the Stock Exchange Year Book 1947, on the whole, the successful

mergers were of firms in the same trade where the one process activity was carried

out on a large scale, unlike many of the post war mergers covering a multitude of

different activities during the war years.

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The successful merger movement that occurred in pre-war years in Britain was

Associated Biscuit Manufacturers (1921), British Match Corporation (1927), British

Plaster Board (1932), Great Universal Stores (1931) and Rugby Portland Cement

(1935) and so on.

(i) Post war mergers and amalgamations in the UK

In the UK the most recent surge in takeover activity was in the period of 1984 to

1989 where the average size of an acquisition increased from $9.64 million to

$20.38 million.3 The reasons for the enormous volume of acquisitions in the post-

war period are manifold. Some of them are listed as under:

- The stock market in the UK, in harmony with markets in other countries,

experienced a strong bull phase which culminated in the October crash of

1987.

- The government held a more relaxed, lenient attitude to mergers and

acquisitions embodied in the new vision of Thatcherism

- In the early post-war world the government followed the policy of

encouraging dividend restraint as a part of anti-inflationary policy. This

policy was in accordance with the philosophy of paying as little as possible.

No doubt post profits are a major source of capital for an expanding

company. Many companies retained a large portion of their profits for capital

expenditure thereby according with anti-inflationary policy as a result

became more liquid, with large amounts of cash and tax reserve certificates.

As the share price tended to reflect the dividends paid shares in these

companies were comparatively ‘cheap’ relative to their actual earning. This

provided good opportunity to bidders who could offer a price which was

high to the existing shareholder. The policy was adopted. Dividend restraints

gave the other liquid resources to buy other companies.

3 Acquisitions and Mergers within U.K., Central Statistical Office Bulletin, London , May 1993.

49

- In the post-war world some entrepreneurs could see greater opportunities

than others. As wars have always been followed by depression during that

period, where the directors were not using their resources and where the

management was considered to be sluggish, they were given the opportunity

to offer a price which was relatively high in relation to current prospects and

were worthwhile.

- Bidding for other companies gave an easy way of acquiring needed assets

when official policy made this difficult. During that period the work of the

capital issues committee, the operation of building licences and the control

over the location of industries all made it difficult for firms to undertake

physical expansion directly. But by buying other firms with suitable

accommodation in the right place the company’s problems could be solved.

The effect of these post-war circumstances was to force the ‘board room revolution’

where directors recognised that paying inadequate dividends could lead to their

displacements by people who offer the shareholder brighter prospects for the future.

In the 1950s this bid disappeared but in the late 1960s it became active again and

ideas of ‘rationalisation’ were revised, these were prevalent in the 1920s.

During that period it was believed that when a company is facing bad times, it is

vulnerable to a bid, even though it has taken measures to bring about a recovery and

this is an ideal situation for the bidder because if such a recovery takes place it can

attributed to the new management. For example, Courtaulds reduction in dividend

was the opportunity for the ICI bid and the ups and downs in the electricity profits

gave General Electric Company (GEC) the opportunity to acquire Associated

Electric Company.

(ii) Famous mergers in Britain

British history is the living evidence of the mergers of three of the largest firms in to

one group namely:

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- General Electric Company, Associated Electric Company and English

Electric Company merged famously in a merger called the electric merger.

- Motor merger which is the merger of Austin and Morris in 1957 to for

British Motor Corporation

- Textile merger of ICI with Courtaulds.

Mergers in the United States of America

Several merger movements have occurred in the USA and each one was more or less

dominated by a particular type of merger. All the merger movements occurred when

the economy experienced sustained a high rate of growth and coincided with

particular developments in the business environment.

One reason of merger activity in the periods of high business activity may be that the

firms are not motivated to make large investment outlays when the business

prospects are not favourable. Only when future benefits accruing to a business

endeavour exceeds its costs in the action warranted and when such favourable

business prospects are joined with changes in competitive conditions directly

motivating a new business strategy does merger and amalgamation activity get

simulated.4

An insight into the history of American Business strategy shows that merger activity

in the USA is associated over the last century and runs in cycles.5 The peaks of these

cycles typically accompany peaks in either economic activity or the stock prices.6

Merger activities have been classified by various authors into so called ‘waves’ by

clustering activities during various periods. Weston (1953) has identified three major

periods of merger movements while studying the US business behaviour.

- First merger wave between 1895-1904

4 J. Fred Weston and Kwang S.Chung, Merger Restructuring and Corporate Control, 1997 Pg.8. 5 Shiva Ramu S., Corporate Growth through Merger and Acquisition 1998, Pg.16. 6 Makan S. and Wolf A Weinhold, Diversification through Acquisition, 1979, Pg.10.

51

- Second merger wave between 1922-1929

- Third merger wave between 1940-1960

(i) First Merger wave (1895-1904)

The first wave was characterised by horizontal mergers, this increased concentration

in a number of industries. Before 1890 there existed a predominance of ‘poly

market’ structure which reduced with the passage of time thereby increasing partial

monopolies. The motivation for mergers was to expand operations, achieve

economies of scale and counter competition more effectively. This period appears to

have been a period of consolidation and horizontal diversification and resulted in the

emergence of a number of companies dominant in industries which were formerly,

before the mergers, a number of small enterprises. Thus the characteristic feature of

mergers during this period was the simultaneous consolidation of produces within

numerous industries. These mergers were typically made in search of market

dominance. George Stingler has characterised this merger wave as ‘merging for

monopoly’.

Many of today’s industrial giants including several descendants of Standard Oil

Trust, US Steel, General Electric, United Fruit, Eastman Kodak, American Can,

American Tobacco, US Rubber, and US Gypsum have originated in this period. The

relaxation of corporate laws in the USA helped mergers in this period.

Transportation Networks and National Markets were developed which increased the

possibility of achieving economies of size. The movement peaked in 1899 and ended

in 1903 when a severe economic recession set in.

The decision of the Supreme Court in the USA in the leading case of Northern

Securities 7 has contributed a lot in ending this merger wave, wherein it was

established that merger could be successfully attacked under the then antitrust law.

Thus the merger wave during 1895-1904 involved an estimated 15% of all

manufacturing assets and the employees and accompanied major changes in the

7 U.S. vs. Northern Securities Co.120 fed. 721.

52

nation’s social and technological infrastructure. Over 80% of these combinations

occurred in the shorter period of 1897 through 1904. This merger movement

accompanied major changes in the economic infrastructure and protection

technologies and followed the completion of the transcontinental railroad system,

the advent of electricity and increased use of coal.

(ii) Second Merger wave (1922-1929)

This wave appeared to have been characterised by a higher incidence of vertical

integration and diversified mergers. However the immediate post-war merger boom

was relatively smaller. The difference between these two periods can be described as

‘mergers for monopoly’ and ‘mergers for oligopoly.’

The second merger movement witnessed greater merger movements and began with

an upturn in business activity in 192 and ended with the onset of a severe economic

slowdown in 1929. The merger movement involved either small market share

additions or vertical integration. The motive behind these mergers was to achieve

technical gains from integration and to avoid dependence on other firms for raw

materials. Mergers were also formed to consolidate sales and distribution networks

as well as to save the advertising expenditure.

This period was affected by the formation of holding companies especially gas,

electric and water utility holding companies which acquired the controlling share of

a large number of small companies over a relatively broad range of products. Thus,

many combinations in this period occurred outside the previously consolidated

heavy manufacturing industries. The public utilities and the banking industries were

among the most active.

As 60% of the mergers occurred in the still fragmented food processing chemicals

and mining sectors the question of monopoly was not applicable in most case and

there existed transformations of near monopoly to an oligopoly. George Stingler has

characterised this period of merger as an activity of ‘Merger for oligopoly.’

53

A large portion of mergers in the 1920s represents product extension merger and in

the case of IBM, General Goods and Allied Companies Chemical, market extension

mergers in food retailing, departmental stores, motion pictures, theatre, Radio

Corporation of America and national dairy products. The motivating factors of these

mergers are transportation, communication and merchandising. Mergers in such

industries accompanied the rise of automobile transportation. The rise of home

radios facilitated product of differentiation through national branch advertising. By

the 1920s mass distribution with low profit margins became the new method of

merchandising which encouraged mergers. The end of this wave activity came with

a stock market crash in 1929 and the worldwide depression from 1930 to 1933.

During the 1930s most of the recently created utility holding companies collapsed

into bankruptcy and major segments of American industry underwent severe

contraction.

(iii) Third Merger wave (1940–1947)

This was smaller than the earlier movements. According to a study done by the

Federal Trade Commission there existed disappearing of 2500 firms during this

period. The surge in the merger activity in this period can be credited to economic

growth that occurred during the Second World War and early post-war years. This

merger movement lacked any significant changes in technological and business

environment. Thus there existed simply conventional motives for this merger. It has

been noticed that government regulations and tax policies motivated mergers during

this period. According to George Stingler large numbers of firms merged vertically

to circumvent price control and allocation during war time and post-war periods.

During this period, there existed growth of eight of the largest steel corporations.

(iv) The Conglomerate Merger movement of the 1960s

The third wave of merger activity started after World War II and peaked in the late

1960s. In contrast to the previous merger periods this merger didn’t involve the

nation’s largest companies or resulted in a substantial degree of intra-industry

54

concentration. Most of the acquirers in this period were small to medium sized

companies whose acquisitions were operating outside the acquiring company’s

narrowly defined industry.

During the 1960s the merger wave developed what was a new class of firms known

as ‘conglomerates’ with their activities in several unrelated product markets.

Moreover the Cellar Kefauver Act 1950 amended Section 7 of Clayton Act of 1914

thus closing the ‘asset-purchase’ loophole and granting the Federal Government

additional power to declare illegal those mergers that tended to increase the

concentration.8 The Clayton Act had prohibited a corporation from acquiring the

stock of another corporation (if competition were to the substantially lessened).

All this resulted in declining the importance of horizontal and vertical mergers and

the increase of conglomerate mergers. The growing importance of conglomerates in

American industries during this period can be accessed from the fact that in the

1960s the term ‘conglomerates’ and ‘unrelated business’ were roughly equivalent.

The most important characteristic of the third merger and acquisition wave was

diversification which was being adopted into business activities outside their

traditional areas of interest. The acquired firms were also small or medium sized and

‘operating in either fragmented industry or periphery of major industrial sectors’.

Reasons for the conglomerates to diversify were as follows:

- Avoid sales and profit instability

- Adverse growth developments

- Technological adolescence

- Increased uncertainties associated with their industries.

As a result of diversification, although the continuing concentrations of the nation’s

industrial assets occurred, it did not result in significantly increased concentration

within industries.

8 The Clayton Act, 1914 Sec. 7

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As the wave of activity brought corporate growth but not concentrated market

power, this merger wave was referred by many economists as ‘merging for growth.’

The famous firms which come under conglomerate mergers were Textron and The

American Machine Foundry Aerospace Industry and Autoparts companies.

Low growth prospects were associated with a major long term decline in some

markets especially railway equipment industry, textile and tobacco industry. Not

only this, a number of firms sought to diversify during this period in the attempt to

acquire access to new technologies that had developed after World War II. A large

category of conglomerates were firms originally based in the natural resource

industries.

Defensive diversification was a strong motivation among the conglomerate firms. In

additions to factors such as tax considerations, some of the conglomerates pursued

positive programme like applying advanced technology in industries and firms

where technology has lagged for e.g. the Litton industry. Others were attempting to

utilise effectively the special capabilities in financial planning and control like ITT

and Transamerica Defensive Diversification also provided a motive for merger in

which research, manufacturing and marketing and other managerial capabilities

were extended and complemented.

For conglomerates, the wave subsided in 1969-70 with the collapse of the stock

market. During 1967-69 the conglomerates were responsible for most of the

acquisition activities as a result of which large numbers of mergers took place in the

UK, USA, Japan and Italy. Many of the mergers in the above mentioned countries

were with the view to form big and giant units with the ultimate saving of overheads

and also for avoiding unnecessary competition side by side. Many of the mergers

were affected with a view to obtain the utilised resource of acquired units.

According to statistics concerning conglomerate merger activity in 1966 merger

activity outpaced the previous record of the year 1965. The federal trade commission

56

records indicate 1893 mergers in 1965 compared to 1345 in 1960 and 1245 in 1929,

the peak year during the second wave of mergers.9

According to W.T. Grimm and Co. a Chicago based financial consulting firm

reported in early 1968 that merger activity in 1967 was over 25% higher than in

1966. About 2975 mergers were consummated in 1967 as compared to 2377 in the

preceding year.10

One of the interesting features of the merger activity in 1966 is that much of that

year was categorised by soft stock prices, relatively tight money conditions,

substantial budgets for capital involvements and apparently renewed interest by the

government in the antitrust activities. Several institutional business groups got

involved in the post World War II merger period.

Merger trends since 1976

The most recent merger and acquisitions stretch from the peak in the market of the

later 1960s through the economic slowdown of the 1970s. Following the recession

in 1974-75 the USA economy entered a long period of expansion during which

mergers and amalgamations moved upward.

According to the federal commission report there were small to medium sized

acquisitions in the 1967-73 period. During 1967-69 the conglomerates were

responsible for most of the acquisition activity whereas during 1970-73 the

industrial firms expanding their product market commitments tended to be more

acquisitive. In 1976-78 the number of large and very large acquisitions increased

although the total number of recorded acquisitions remained relatively leveled. The

statistics also confirm the notion that during the late 1970s although the two hundred

largest industrial companies were making fewer acquisitions they were making

larger acquisitions than before. From 1961 to 1978 over 70% of the total assets

9 Bureau of Economics, FTC Statistical Report on Mergers & Acquisitions, December 1978 and

Bureau of Economics FTC Current Trends in Merger Activity, 1971, May 1972 as quoted in Wyatt &

Kieso, Business Combinations, Planning & Action, 1969, Pg.1 10 W.T. Grimm & Co, Merger State Review, 1989

57

acquired by the industrial companies have resulted from the acquisition falling into

the federal trade commission’s ‘broad definition’ of the diversifying acquisitions.

These acquisitions include all acquisitions extending operations beyond present

products or the geographic market. The data above clarifies that during the height of

the activity in the late 1960s a special interest in ‘pure conglomerate’ or ‘unrelated

mergers’ developed. There was a decline in interest during 1972-74. In 1975 again a

dramatic resurgence of investment in unrelated diversifying acquisitions took place.

When judged from the historical perspective the acquisition activity during 1975-78

was reaching the 1967-69 peaks but the amount of acquired assets relative to the

existing assets was just approaching the average acquisitions rate for the 1960-66

period. The background data shows that the years 1955-56 and 1963-71 had higher

mergers and acquisition activity. 11

The upswing in the merger and acquisitions activity beginning in 1975 indicated a

wave of corporate marriages. Many leading firms were acquired during this period

from 1975-78. Many of the acquisitions oriented companies in the late 1970s were

well established, conservative, old-line giants with a substantial bulk of their

activities concentrated in a few closely related businesses.

Companies in the USA such as Mobil, General Electric, Atlantic, Richfield, United

Technologies, RJ Reynold, PepsiCo and Continental Groups all fall into this class.

The types of mergers that occurred in this period were horizontal integration,

unrelated, related complementary, supplementary and vertical integration. None of

these companies were considered to be acquisitive diversifiers in the 1960s. Not to

be undone were the foreign acquirers of the US companies such as Bayer, Nestlé,

British Oxygen, Imetal, Saboz, Ciba-Giegy and INCO.

When the foreign companies could not obtain total ownerships substantial minority

interest was brought as in the case of Kobert Busch’s 9.9% interest in Bory-Warner

and Flick Groups’ 30% in W.R. Grace.

11 Bureau of Economics, FTC, Statistical Report on Mergers & Acquisitions, December 1978

58

Most of the mergers during the period involved payments of cash or packages of

cash and cash equipments which is in contrast to the 1960s when the common stock

or convertibles where the principle medium of exchange. In addition to the hostile

tender offers were much more common than during earlier periods.

In 1975 and 1976 almost twice as many hostile offers were initialised than in 1968.

A further increase in the number of hostile offers as well as a degree of hostility

occurred in 1977-78. Open bidding was between two, three of even four corporate

suitors developed for particularly desirable properties.

The nature and size of assets involved in mergers and acquisitions during 1975-78

also gave the period a distinctive profile. In 1976 divestitures involved only half of

all acquisitions versus approximately 10% in the 1960s. These divestitures as well as

outright corporate acquisitions also tended to be much larger than before.

Acquisitions over $100 million grew nine fold.12

According to the statistics since

1976 over 20 transactions have fallen into the $300 million class.

The merger movement between 1980 and 1990

While mergers and acquisitions are a constant feature in the modern business world

the activity is sometimes higher than other times. The speed of this activity seems to

be greater during the period when business activity and natural growth of industries

is high pitch. This means mergers occur at rapid growth when a particular industry

goes through a period of rapid activity.

The basic motivation behind most mergers during the 1980s and 1990s appears to be

either on account of acquisitions of assets including managerial skills below their

value or saving time.

A company always strives to acquire the assets of some of the company at

undervalue if it is possible. The assets may be in the shape of managerial skills

where a small corporation has a very efficient management and organisation which

12 Merger and Acquisitions: The Journal of Corporate Value, 1975-1979

59

the other large company finds it useful to acquire. The second motivation viz. saving

time arises out of impatience which is dormant in human nature. Rather than

organise something in a new field it is very common for management of large

corporations to decide to acquire an existing business which saves its time and a lot

of arrangements are necessary for building up of an industry or business right from

the beginning.

In 1980s and 1990s companies in the USA were responding to a common set of

environmental and macro factors by opting for restructuring exercises. Many of

these exercises were due to the following three macro-trends:

- Globalisation of industries

- De-regularisation of industrial sectors

- Increasing threat to takeover bids

All these factors gave led to the reconfiguration of business. Restructuring activities

of the 1980s also took place due to the ‘bandwagon’ effect. As a result many

companies followed the lead of early corporate restructuring strategy.

The structure of an industry depends on factors such as the technology, Government

strategy and demand and supply conditions. A stock in any factor causes a shift in

the industry structure. It can range from de-regulation and input price volatility to

technological change. In the 1980s the steel industry resorted to downsizing and

achieving economies of scale in response to a decline in demand.

For instance de-regulation affected air transport, natural gas, transport and foreign

textile effected textiles, steel, tyre and rubber and OPEC oil prices affected the

energy dependant industries.

All this resulted in clustering of takeover activity by industry during the 1980s in the

USA. There was clustering occurring in a narrow range of two years in original

equipment auto parts, home appliances and drugstore industry. According to WT

Grimm and co-research department the net number of mergers acquisition

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announcement in 1985 was only about half of what happened in 1969. During 1985

the constant dollar consideration in the merger-acquisition was 40% higher than the

level of 1968. In 1984, 1985 and 1988 merger and amalgamation activity exceeded

one percent of total assets of all corporations.

In 1981 for the first time merger and amalgamation exceeded 5% of all equities. But

a decline took place in 1982 and 1983 before beating the all time high of 6.9% in

1988.

According to the economic report of the president both merger and amalgamation

data and total equity values have been pushed upwards by the bull market. In

equities that began in the late summer of 1982 and appeared to end on 19 October

1987 and there was the effect of shrinking the denominator in their ratio. It has been

estimated by Salmon Bros and financial research organisation that during the years

1984-85 the total amount of equity values that have disappeared as a consequence of

merger and amalgamation activity has totalled $110 billion per year. In 1985, 1986

and 1988 the merger and amalgamation activity has risen to over 45% of plant and

equipment expenditures. During this period the level of investment activity is a

strong casual factor which has influenced the merger and amalgamation activity.

Thus it can be said that merger and amalgamation activity since 1976 has been

concentrated in such service industries as commercial and investment banking,

finance, insurance, wholesale, retails, broadcasting and healthcare as well as in

natural resources area. Especially the financial service industry which represents

over 15% of all mergers since 1976 has been undergoing changed caused by de-

regulation of industry. Moreover the changes in regulatory conditions have helped

increase the merger activity in broadcasting and health service industries.

Acquisition in broadcasting increased sharply in 1984 due to less restrictive federal

commission rules governing the ownership of television and radio-stations. Due to

revised medical guidelines and private efforts to control medical costs hospital

occupancy rates declined.

61

Both the wholesale and retailers and have been merging to improve operational

efficiency. Customer and supplier pressure on the distribution to become more

sophisticated in their operations such as automation, more service and large

inventories has led them to merge with larger firms for professional management

and financial assistances. Retail companies have faced limits in their internal growth

due to the new construction of major shopping malls and opted for the growth

through the acquisitions.

Acquisition activity in the natural resources area significantly increased since the

increase in prices of energy and minerals, oil, gas and mining properties represented

more than 20% of dollar value paid in all transactions during the 10 year period

since 1975.

Large oil companies were engaged in vertical integration by acquiring additional oil

reserves and also acquired other natural resources. Another character of the current

wave of merger activity is that divestitures become a substantial portion of

acquisition activity.

According to W.T. Grimm and Co financial report divestitures increased following

the 1981-82 recession. Throughout the 1980s they have represented over 35% of all

mergers and acquisition transactions.

In 1993 the merger and acquisitions were largely limited to few industries such as

banking, broadcasting, communication, leisure, wholesales and distribution. These

industries were responding to de-regulation, technological advances and other

fundamental factors. According to statistics the takeover activity is driven in part by

industry shocks rather than by actual sources of performance changes.

Conclusion

Indian industries experienced such shocks after the initiation of liberalisation of

economy in 1991. Therefore Indian companies have started responding to shocks

such as liberalisation and de-regulation. A few attempts in the merger and

62

amalgamation activities during the initial period were more in the nature of testing

environment.

The actual wave in Indian context has started after 1994 when the necessity of

formulating a new takeover code was felt by the regulatory agencies. Although

merger and amalgamations have taken place even before 1994 but those were few

and far between. Mergers between larger business firms have been negotiated and

concluded right through the post-independence period in India, a full list of mergers

and amalgamations settled during each year has been published only since 1972-73.

However the constrained choice of the years 1972-73 as the cut off period is not

wholly inappropriate because a number of significant changes in government

policies became operative immediately before or in that year. These changes were

heralded through the abolition of the managing agency system, the passage of the

MRTP Act 1969, the nationalisation of the banking system and the announcement of

the new provision granting tax relief in finance bill for 1967.13

All these initiatives

were aimed at curtailing the power of the big business houses and dealing with the

adverse consequences of the absence of price competition among the established

business groups. They, therefore, affected the process of growth through mergers as

well.

In 1994 companies like Morgan Group and RPG sought to build industrial empires

through acquisitions. This followed the prevailing industrial structure of building a

conglomerate of diverse into one group.

The recent trend is more of restructuring firms through consolidation to face the

likely competition from the foreign companies.

In the years 1997-2000 takeover wars heated up in the Indian sub-continent.

Between April 1997 and September 2000 there had been 894 cases of takeovers,

mergers and acquisitions. Out of these 894 cases 221 companies made an open offer

13 The Income Tax Act 1961, contains special provisions for some type of amalgamation and provides

for some tax reliefs subject to certain conditions. The tax relief relates to development rebate and

development allowance. The Finance Act 1967 extended the sphere of relief in tax matters in relation

to amalgamation.

63

involving a sum of Rs. 5468.06 millions. Investors response to these 189 offers bid

was valued at Rs. 1714.77 millions 14

Apart from the open offer route there have

been 637 cases of acquisitions under the automatic exemption route and 71

additional cases that have been referred to the takeover panel. Out of these 36

companies 25 have been granted exemption from open offers. Interestingly 7 hostile

takeover cases are under SEBI’s Takeover Regulations 1997.15

In 1997-98 many

companies either changed hands or divested parts of their business. In all these cases

the promoters took the initiative. They did so because the slowdown had plunged so

many companies into liquidity crunch, a complete or partial sell off was keen as a

way out of an ineluctable crisis. Year 2000 has been the year of takeover for the

Indian insurance. As many as 72 companies fell prey to takeovers. The list includes

small firms like Selfridges Auto to giants such as Coates of Indian Aluminium

Corporation.

According to the data provided by SEBI 72 companies launched public offers to

acquire equities from ordinary shareholders. The offers followed acquisition of over

15% stakes from erstwhile promoters, a mandatory rule under the SEBI norms.

In India the takeover activity has also been active due to prevailing capital market

conditions wherein love for the technology shares coupled with an economic

slowdown in which the prices of old economy stocks started quoting at ridiculous

valuations. The real estate holding and liquid investments of many of these old

economy companies attracted corporate raiders. Thus capital market scenario

provided fertile ground for the raiders.

For example:

- The takeover of Saurashtra Cement of Autoriders in March 1998

involving an open offer of Rs.180 millions was the first hostile

takeover under the new takeover code.

14 Bhatia N.L., Takeover Games & SEBI Takeover Regulations, October 2002, Pg.154 15 SEBI (Acquisition of Shares & Takeover) Regulations, 1997.

64

- The takeover of Raasi Cement by India cement in May 1998 involving

an open offer of Rs.100 millions. In the financial year 2000-2001 there

had been 40 such cases in only the first 6 months.

- The prominent cases were BSES by Reliance Industries, Indian

Aluminium Company by Hindalco, Polyester and Aryan Pesticides by

Deepak Nitrite.

Further Calcutta based jute baron acquiring stake in Nusli Wadia controlled textile

firm was alarm bells for the promoters managing companies with minority holdings.

Promoters consolidating their stake in companies include American Remedies,

Rossel Industries and Philips India while the firms witnessing change of

management control include DLF Cement, Charminar Breweries, Coates of India,

International Bestfoods and Jindal Group.

In the last three and a half years the retail investors have gained about Rs. 5000

millions from the new takeover code on account of these takeovers, mergers and

acquisitions.

Thus it is observed that mergers and amalgamations were considered to occur in

waves since time immemorial. Accordingly the US merger and amalgamation

activities were previously classified into three waves. In 1990s scholars classified

the merger and amalgamation movements in five periods based characteristic

environment shocks which influenced the restricting firm in particular industrial

groups.

- 1890s for monopoly

- 1920s for oligopoly

- 1960s for conglomerate takeovers

- 1980s for hostile bust up takeovers

- 1990s driven by strategic synergistic factors

65

While one can classify the US mergers and amalgamation activities there were some

individual attempts in India towards adopting the acquisition mode of expansion in

the 1980s. As such there was no wave akin to that in the US. But after liberalisation

of the economy in 1991 there have been initial steps towards merger and

amalgamation activities which have picked up since 1995.