In today’s era Mergers, Amalgamations, takeovers has become day to day activity. Many mergers and amalgamations are taking place all over the world. We all are well acquainted to these words. When two or more companies are added together to form a new entity for better synergy, we terms it as merger or amalgamation. But there are many types of corporate restructuring which people combine under the umbrella of words mergers and amalgamation. Let us try to understand the difference between these terms.
The words merger and amalgamation are always interchangeably used. Many interpret mergers and amalgamations as synonyms. Indian Companies Act, 1956 does not differentiate between the words Merger and Amalgamation, however there is slight difference in merger and amalgamation. Merger is combination of two or more companies which can be done either by way of amalgamation or by way of absorption. Amalgamation is the process where two or more companies dissolve their identity to form a new entity. For example, merger of Brooke Bond and Lipton has formed a new entity called Brooke Bond Lipton India Limited.
Absorption, the other type of merger, is nothing but dissolution of a company’s identity into other company’s identity. As the name suggest, in absorption a company absorbs other company to form a new larger entity.
Demerger is also a type of corporate restructuring which results in formation of two entities. The entity which undertakes demerger is termed as Demerged Company and the new entity formed is called as Resulting Company. Companies adopt demerging strategy to sell subsidiaries or to get rid of non-profit making division of company. Demerger takes place in the form of spin off, split off, split up, sale off, etc. In spin-off, company distributes its shareholding in subsidiary to its shareholders thereby not changing the ownership pattern. For example, Air India formed Air India Engineering Services Limited by spinning off its engineering department. Split-off is the form of demerger where shareholders of existing company form a new company to takeover specific division of existing company. When existing company is dissolved to form few new companies, it is called as Split-up. Sell-off takes place when company sells its non-profit making division.
When financially weak company absorbs financially strong company it is corporate restructuring made in the form of Reverse Merger. Merging of large sized company into small sized company is also form of Reverse Merger. For example ,merger of Corus with Tata. Now-a-days, public companies opt route of reverse merger for merging with private companies to avoid lengthy procedure of merger.
Takeover is another type of restructuring. When a bidder company takeover the management of target company with permission of its Board, it is termed as Friendly takeover. When a company secretly acquires the control over Target Company against wish of their management, it is termed as Hostile takeover.
Joint Venture is an entity formed by two or more companies for a specific period with a specific objective. Joint ventures are useful for a company to enter into new segment of market. Joint venture creates a new entity, however Strategic Alliance allows companies to remain independent while perusing agreed goal.
When a group of people buy the controlling stake in a company through leveraged (borrowed) funds, it is Leveraged Buyout. When such buyout is carried out by management, strategy is termed as Management Buyout.
In addition to above methods of restructuring, Buy-back is also used as restructuring strategy so as to increase earning per share of the company. Strategy used to increase market price of share is called as Subdivision ofshares, which is also type of corporate restructuring.
Thus the minute differences between various restructuring techniques must be considered while opting best suitable technique of restructuring for a company.
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Source : Corporate Restructuring Module for CS Final
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