CU-MCOM-SEM-IV-Merger and Acquisition-Second Draft

Different Types of Preference Shares? There are many types of preference shares prevalent in India; enumerated below:-  Cumulative Preference Share: Cumulative shares have a provision that allows investors to be paid dividends in arrears. It so happens that a company doesn’t have the financial capacity to pay dividends to its shareholders. Unless dividends are not paid to preference shareholders, they cannot be paid to common shareholders. In such a scenario, the company decides to pay cumulative dividends in the next year. Sometimes, interest earned by the shareholders on arrear dividends is also given to the cumulative preferred stock holders. The calculation is as follows – Quarterly Dividend = [Rate of dividend * Par Value] divided by 4 Cumulative dividends paid per share = Quarterly dividend * Total Number of payments missed.  Non-Cumulative Preference Shares: Non-cumulative preferred shareholders are eligible to be paid dividends only from a year’s profit. So a non-cumulative preferred stock does not issue unpaid dividends to the shareholders neither can holders of such stock claim unpaid dividends in the future.  Redeemable Preference Shares: In case of redeemable shares, a company has the right to buy back the shares for its own use from shareholders at a fixed date or by giving prior notice after a period of time.  Irredeemable Preference Shares: These shares can only be redeemed by the company at the time of liquidation or when the company winds up operations.  Participating preference shares: Participating preference shares is where the company issuing the dividends pays increased dividends to the shareholders along with the preference dividend. This is done at a fixed rate. Additionally, participating preference shareholders have rights on the surplus asset of the company at the time of its liquidation.  Non-Participating Preference Shares: In case of non-participating preference shares the shareholders are entitled only to the dividends at a fixed rate and not to the surplus profit. The extra profit is distributed among the common shareholders. 201 CU IDOL SELF LEARNING MATERIAL (SLM)

 Convertible Preference Shares: Shareholders of such shares have the option to convert the common shares to preferred shared. These shares are opted by investors who wish to receive preferred share dividend as well as want to benefit from an increase in the common shares. So the benefits are two fold- fixed returns by means of preferred dividends as well as the opportunity to earn higher returns as the common stock price increases. This conversion can happen within a certain period as per prior agreement, stated in the memorandum.  Non-Convertible Preference Shares: Shareholders of these shares do not hold the rights to convert to issuer’s common shares.  Preference shares with a callable option: For shareholders having preference shares with a callable option, the issuing company holds the right to call in or buy back the stocks at a predetermined price after a set date. The call price, date post which the shares can be called and the call premium are mentioned in the prospectus.  Adjustable Rate Preference Shares: For such shareholders, the dividend rate depends on the prevailing interest rates in the market, and hence are not fixed. Why Should You Consider Investing in Preference Shares? Several reasons exist as to why these shares are preferred over other types. If you are an investor, opting for these shares is the way to future-proofing your investments, thus helping you reap the advantages of preference shares. For example, if by chance the corporation announces bankruptcy; all holders of preferential stocks will get the first and privileged access to the assets going under the hammer. Such advantages are bound to attract those who have low-risk appetites when it comes to investments in uncertain times. Besides, if the company’s ordinary shares start performing extraordinarily well, the preferred shareholders can easily transfer some of the shares into standard ones and benefit therein. One great feature which companies offer is callable preference shares. The nomenclature means that the investor has a right to repurchase the shares whenever he or she likes. In short, there are several advantages which most investors can only benefit from. Risks Associated with these Shares? 202 CU IDOL SELF LEARNING MATERIAL (SLM)

Like all other financial instruments, these shares have certain inherent risks as well, highlighting the disadvantages of preference shares. During significant market fluctuations, there are doubts about how much dividends the shares will yield. Thus, those with slightly lower risk appetite may not prefer taking too many chances in this specific investment option. Moreover, some types of preference shares which may initially guarantee greater returns as they are associated with PAT. However, the risks associated with the same may also be very high. Lastly, these shares are issued primarily by companies that have a substantial market capitalisation and can provide substantial dividends to a very large subscriber base for a sustained period. It might seem a risk-mitigating factor but may or may succeed in the real world. 11.3 DEBENTURES What are Company Debentures? When it comes to corporate finance, company debentures are loan instruments for medium to a long term of period. These are offered by both large companies and the government. Debentures mainly work on the reputation of the issuing authorities and at a fixed interest rate. Authority bodies issue debentures when they seek to borrow money from the public at a predetermined rate of interest. Types of Debentures There are several types of debentures available in the market.  Secured debentures When company debentures are secured against assets of the concerned company, these are called secured or mortgage debenture. If the security is on assets of the issuing company, then it is called fixed charge debentures. Contrarily, if the security is not specific but generic assets of the organization, it is called a floating charge debenture. Secured debentures examples are such as company or factory building. If the company gets insolvent, the loan amount needs to be cleared before selling the property. These are divided into two further categories –  First mortgage or preferred debenture 203 CU IDOL SELF LEARNING MATERIAL (SLM)

First mortgages or preferred debentures’ obligations are justified first with preference in time of realisation of the assets.  Second mortgage or ordinary debenture After fulfilling the first mortgage debentures debt, second mortgage or ordinary company debentures will be serviced in the event of realisation.  Unsecured debentures Unsecured debentures are created only out of the credibility of the company, and they don’t carry securities against any assets of the concerned company. Therefore, the relevant organisation doesn’t offer any protection on the rate of paying interest or on paying off the loan amount to the holders.  Convertible debentures Convertible debentures are mixed financial tools carrying the benefits of both debt and equity shares. Individuals who hold company debentures like convertible debenture are allowed to convert their assets into stocks. This conversion will be done with a specific ratio and after a certain period depending on the terms and conditions of the contract. Furthermore, convertible debentures have two types – partly convertible and fully convertible. As the name suggests, fully convertible debentures are allowed to be converted entirely into equities. However, with party convertibles, only a limited part can be converted into stocks as per the norms of the contract. Here is a convertible debenture example – A company authorises convertible debentures with a 15:1 rate, and the conversion can be done after 2 years. Now, after 2 years, the stock price of the company goes up from Rs. 40 to Rs. 100. Now, the convertible debenture holders can convert their debenture into stock at the ratio of 15:1. Here, one debenture will convert into the stock worth of Rs. 100 X 15 = Rs. 1500.  Non-convertible debentures Debentures that don’t allow the holders to opt for the conversation of debt to stock are called non-convertible debentures. This type of debenture endures as debt only.  Redeemable debentures 204 CU IDOL SELF LEARNING MATERIAL (SLM)

If the company debentures issuing authorities are legally mandated to redeem the debenture certificate on a particular date and pay the return to the investors, then those are called redeemable debentures.  Irredeemable debentures Contrary to the previous one, irredeemable debentures don’t carry along a redemption date with it. Therefore, these debentures can be redeemed either when the company will liquefy its assets or as per the terms and condition of the debenture contract. Another name of these debt instruments is a perpetual debenture. In the Indian security market, this type of debenture is not allowed to be sold.  Registered debentures Registered debentures are those debt tools where the credentials of the holders such as their name, bank details, residential address, etc. are legally enrolled with the issuing authority. Hence, the investors must notify the organisation if the company debentures have already been transferred to another individual. Or else, the accumulated return will be credited to the previous holder.  Bearer debenture Differently, bearer debentures don’t carry any registration with any specific investor’s details. With a mere delivery process, the debentures are transferred to any new holders. Moreover, the accumulated interest is paid at the exchange of coupon attached to the debenture certificate. Features of Debentures As an investment avenue, debentures carry some lucrative features. Few features of debenture include –  As the return is determined with a fixed rate of income and the investment is secured with the charge of the company’s assets, this is a preferred investment option. Fixed return at lower risk is the preferred investment avenue for all.  Holding company debentures don’t imply any ownership of the company. Therefore, debenture holders don’t possess the right to vote or control the management of the issuing authority. Yet, in case of default return, they can avail legal steps against the organisation. 205 CU IDOL SELF LEARNING MATERIAL (SLM)

 With a higher face value, debentures come with a better return than share investment.  In the event of liquefying the company, debenture holders get preferences in terms of repaying the borrowing amount.  Irrespective of having profit or loss, the concerned company is bound to return the obligations at a predetermined rate of interest to the debenture holders. Differences between Shares and Debentures Even though both debenture shares can raise capital for a company, they are different from each other in every other aspect. Here are some differences between them in a nutshell – Particulars Debenture Share Definition Company debentures are the loan The fund raised by share selling contract by that company borrow fund is the company’s assets. from the public. Status of Investors who buy debentures from a Individuals who own shares of a the holders company are entitled as debenture company are determined as holders, and they are creditors to the shareholders, and they are company. owners of the concerned organisation. Payment Debenture carries security on return. Shares don’t carry any security security on return. Return Companies repay the borrowings at a Shareholders get a return by fixed rate of interest to the debenture dividend payment. holders. Operation In case of debentures, the holders get Shareholders’ payments are 206 CU IDOL SELF LEARNING MATERIAL (SLM)

method interest regardless of the profit of the made from the profit earned by company. the concerned company. Controlling Company debenture holders are not As owners, shareholders carry rights allowed to vote or control the the power to vote and control management. the management to some extent. Conversion Shares don’t carry the option to Debentures can be converted into shares. be converted into debentures. option Trust deed At the time of issuing debentures, a trust Shares don’t carry any trust deed is mandated to be circulated as well. deed. This is to protect the investment as there is no collateral against the loan. Debenture Stock Often, debenture and debenture stocks are treated similarly. However, they are not similar. Companies and government bodies issue debt instruments or securities to accumulate funds at times via debentures. On the other hand, debenture stocks are loan contracts between a company and the holders. Here, the holders are paid dividends from the profit earned by the company, at predetermined intervals. As per the operation of debenture stock, it works similar to the way preferred stocks operate. Also, when it comes to the risk factor of an investment, debenture stocks carry a similar risk of any other kind of equities. However, these are backed by the trust deed. Hence, the trust acts as a protector to the shareholders. And, the stockholders can appoint receivers who will help them to realise the assets to keep the holder’s money safe. To sum up, debentures are safe investment avenues where the money will be protected. Also, the return is determined at a fixed rate of interest regardless of the loss and profit of the issuing company. Furthermore, in the event of realisation of the assets of the concerned organisation, debentures holders are preferred to receive the return. However, 207 CU IDOL SELF LEARNING MATERIAL (SLM)

issuing company debentures regularly can lead the company to disable the balance sheet, which leads to the company gradually losing its creditworthiness. 11.4 SECURITIES WITH DIFFERENTIAL RIGHTS, SWAPS, STOCK OPTIONS, MANAGEMENT BUYOUTS/LBOS Rights Issues Cash-strapped companies can turn to rights issues to raise money when they really need it. In these rights offerings, companies grant shareholders the right, but not the obligation, to buy new shares at a discount to the current trading price. We explain how rights issues work and what they mean for the company and its shareholders. Defining a Rights Issue A rights issue is an invitation to existing shareholders to purchase additional new shares in the company. This type of issue gives existing shareholders securities called rights. With the rights, the shareholder can purchase new shares at a discount to the market price on a stated future date. The company is giving shareholders a chance to increase their exposure to the stock at a discount price. Until the date at which the new shares can be purchased, shareholders may trade the rights on the market the same way that they would trade ordinary shares. The rights issued to a shareholder have value, thus compensating current shareholders for the future dilution of their existing shares' value. Dilution occurs because a rights offering spreads a company’s net profit over a larger number of shares. Thus, the company’s earnings per share, or EPS, decreases as the allocated earnings result in share dilution. Stock Rights Issue Why Issue a Rights Offering? Companies most commonly issue a rights offering to raise additional capital. A company may need extra capital to meet its current financial obligations. Troubled companies typically use rights issues to pay down debt, especially when they are unable to borrow more money. However, not all companies that pursue rights offerings are in financial trouble. Even companies with clean balance sheets may use rights issues. These issues might be a way to raise extra capital to fund expenditures designed to expand the company's business, such as acquisitions or opening new facilities for manufacturing or sales. If the company is using 208 CU IDOL SELF LEARNING MATERIAL (SLM)

the extra capital to fund expansion, it can eventually lead to increased capital gains for shareholders despite the dilution of the outstanding shares as a result of the rights offering. For reassurance, a company will usually, but not always, have its rights issue underwritten by an investment bank. How Rights Issues Work So, how do rights issues work? Let's say you own 1,000 shares in Wobble Telecom, each of which is worth $5.50. The company is in financial trouble and needs to raise cash to cover its debt obligations. Wobble, therefore, announces rights offering through which it plans to raise $30 million by issuing 10 million shares to existing investors at a price of $3 each. But this issue is a three-for-10 rights issue. In other words, for every 10 shares you hold, Wobble is offering you another three at a deeply discounted price of $3. This price is 45% less than the $5.50 price at which Wobble stock trades. As a shareholder, you have three options with a rights issue. You can (1) subscribe to the rights issue in full, (2) ignore your rights, or (3) sell the rights to someone else. Below we explore each option and the possible outcomes. 1. Take up the Rights to Purchase in Full To take advantage of the rights issue in full, you would need to spend $3 for every Wobble share that you are entitled to purchase under the issue. As you hold 1,000 shares, you can buy up to 300 new shares (three shares for every 10 you already own) at the discounted price of $3 for a total price of $900. However, while the discount on the newly issued shares is 45%, the market price of Wobble shares will not be $5.50 after the rights issue is complete. The value of each share will be diluted as a result of the increased number of shares issued. To see if the rights issue does, in fact, give a material discount, you need to estimate how much Wobble's share price will be diluted. In estimating this dilution, remember that you can never know for certain the future value of your expanded shareholding since it can be affected by business and market factors. But the theoretical share price that will result after the rights issue is complete—which is the ex- rights share price—is possible to calculate. This price is found by dividing the total price you will have paid for all your Wobble shares by the total number of shares you will own. This is calculated as follows: 209 CU IDOL SELF LEARNING MATERIAL (SLM)

1,000 existing shares at $5.50 $5,500 300 new shares for cash at $3 $900 Value of 1,300 shares $6,400 Ex-rights value per share $4.92 ($6,400.00/1,300 shares) So, in theory, as a result of the introduction of new shares at the deeply discounted price, the value of each of your existing shares will decline from $5.50 to $4.92. But remember, the loss on your existing shareholding is offset exactly by the gain in share value on the new rights: the new shares cost you $3, but they have a market value of $4.92. These new shares are taxed in the same year as you purchased the original shares and carried forward to count as investment income, but there is no interest or other tax penalties charged on this carried- forward, taxable investment income.1 2. Ignore the Rights Issue You may not have the $900 to purchase the additional 300 shares at $3 each, so you can always let your rights expire. But this is not normally recommended. If you choose to do nothing, your shareholding will be diluted thanks to the extra shares issued by the company. 3. Sell Your Rights to Other Investors In some cases, rights are not transferable. These are known as non-renounceable rights. But in most cases, your rights allow you to decide whether you want to take up the option to buy the shares or sell your rights to other investors or the underwriter. Rights that can be traded are called renounceable rights. After they have been traded, the rights are known as nil-paid rights. To determine how much you may gain by selling the rights, you can estimate the value of the nil-paid rights ahead of time. Again, a precise number is difficult, but you can get a rough value by taking the value of the ex-rights price and subtracting the rights issue price. At the adjusted ex-rights price of $4.92 less $3, your nil-paid rights are worth $1.92 per share. Selling these rights will create a capital gain. 210 CU IDOL SELF LEARNING MATERIAL (SLM)

Investors may be tempted by the prospect of buying discounted shares with a rights issue. But it is not always a certainty that you are getting a bargain. In addition to knowing the ex-rights share price, you need to know the purpose of the additional funding before accepting or rejecting a rights issue. Be sure to look for a compelling explanation of why the rights issue and share dilution are necessary as part of a company's strategic plan. A rights issue can offer a quick fix for a troubled balance sheet, but that does not mean that management will address the underlying problems that weakened the balance sheet in the first place. Shareholders should be cautious. Swaps Derivatives contracts can be divided into two general families: 1. Contingent claims (e.g., options) 2. Forward claims, which include exchange-traded futures, forward contracts, and swaps A swap is an agreement between two parties to exchange sequences of cash flows for a set period of time. Usually, at the time the contract is initiated, at least one of these series of cash flows is determined by a random or uncertain variable, such as an interest rate, foreign exchange rate, equity price, or commodity price. Conceptually, one may view a swap as either a portfolio of forward contracts or as a long position in one bond coupled with a short position in another bond. This article will discuss the two most common and most basic types of swaps: interest rate and currency swaps. The Swaps Market Unlike most standardized options and futures contracts, swaps are not exchange-traded instruments. Instead, swaps are customized contracts that are traded in the over-the-counter (OTC) market between private parties. Firms and financial institutions dominate the swaps market, with few (if any) individuals ever participating. Because swaps occur on the OTC market, there is always the risk of a counterparty defaulting on the swap. Credit Default Swaps (CDS) The first interest rate swap occurred between IBM and the World Bank in 1981.1However, despite their relative youth, swaps have exploded in popularity. In 1987, the International Swaps and Derivatives Association reported that the swaps market had a total notional value of $865.6 billion.2by mid-2006, this figure exceeded $250 trillion, according to the Bank for 211 CU IDOL SELF LEARNING MATERIAL (SLM)

International Settlements.3That’s more than 15 times the size of the U.S. public equities market. Plain Vanilla Interest Rate Swap The most common and simplest swap is a plain vanilla interest rate swap. In this swap, Party A agrees to pay Party B a predetermined, fixed rate of interest on a notional principal on specific dates for a specified period of time. Concurrently, Party B agrees to make payments based on a floating interest rate to Party A on that same notional principal on the same specified dates for the same specified time period. In a plain vanilla swap, the two cash flows are paid in the same currency. The specified payment dates are called settlement dates, and the times between are called settlement periods. Because swaps are customized contracts, interest payments may be made annually, quarterly, monthly, or at any other interval determined by the parties. For example, on Dec. 31, 2006, Company A and Company B enter into a five-year swap with the following terms:  Company A pays Company B an amount equal to 6% per annum on a notional principal of $20 million.  Company B pays Company A an amount equal to one-year LIBOR + 1% per annum on a notional principal of $20 million. LIBOR, or London Interbank Offered Rate, is the interest rate offered by London banks on deposits made by other banks in the Eurodollar markets. The market for interest rate swaps frequently (but not always) used LIBOR as the base for the floating rate until 2020. The transition from LIBOR to other benchmarks, such as the secured overnight financing rate (SOFR), began in 2020. For simplicity, let's assume the two parties exchange payments annually on December 31, beginning in 2007 and concluding in 2011. At the end of 2007, Company A will pay Company B $1,200,000 ($20,000,000 * 6%). On Dec. 31, 2006, one-year LIBOR was 5.33%; therefore, Company B will pay Company A $1,266,000 ($20,000,000 * (5.33% + 1%)). In a plain vanilla interest rate swap, the floating rate is usually determined at the beginning of the settlement period. Normally, swap contracts allow for payments to be netted against each other to avoid unnecessary payments. Here, Company B pays $66,000, and Company A pays nothing. At no point does the principal 212 CU IDOL SELF LEARNING MATERIAL (SLM)

change hands, which is why it is referred to as a \"notional\" amount. Figure 1 shows the cash flows between the parties, which occur annually (in this example). Figure 11.1: Cash flows for a plain vanilla interest rate swap Plain Vanilla Foreign Currency Swap The plain vanilla currency swap involves exchanging principal and fixed interest payments on a loan in one currency for principal and fixed interest payments on a similar loan in another currency. Unlike an interest rate swap, the parties to a currency swap will exchange principal amounts at the beginning and end of the swap. The two specified principal amounts are set so as to be approximately equal to one another, given the exchange rate at the time the swap is initiated. For example, Company C, a U.S. firm, and Company D, a European firm, enter into a five- year currency swap for $50 million. Let's assume the exchange rate at the time is $1.25 per euro (e.g., the dollar is worth 0.80 euro). First, the firms will exchange principals. So, Company C pays $50 million, and Company D pays 40 million euros. This satisfies each company's need for funds denominated in another currency (which is the reason for the swap). Figure 11.2: Cash flows for a plain vanilla currency swap, Step 1 As with interest rate swaps, the parties will actually net the payments against each other at the then-prevailing exchange rate. If at the one-year mark, the exchange rate is $1.40 per euro, then Company C's payment equals $1,400,000, and Company D's payment would be $4,125,000. In practice, Company D would pay the net difference of $2,725,000 ($4,125,000 213 CU IDOL SELF LEARNING MATERIAL (SLM)

– $1,400,000) to Company C. Then, at intervals specified in the swap agreement, the parties will exchange interest payments on their respective principal amounts. To keep things simple, let's say they make these payments annually, beginning one year from the exchange of principal. Because Company C has borrowed euros, it must pay interest in euros based on a euro interest rate. Likewise, Company D, which borrowed dollars, will pay interest in dollars, based on a dollar interest rate. For this example, let's say the agreed-upon dollar-denominated interest rate is 8.25%, and the euro-denominated interest rate is 3.5%. Thus, each year, Company C pays 1,400,000 euros (40,000,000 euros * 3.5%) to Company D. Company D will pay Company C $4,125,000 ($50,000,000 * 8.25%). Figure 11.3: Cash flows for a plain vanilla currency swap, Step 2 Finally, at the end of the swap (usually also the date of the final interest payment), the parties re-exchange the original principal amounts. These principal payments are unaffected by exchange rates at the time. Figure 11.4: Cash flows for a plain vanilla currency swap, Step 3 Who Would Use a Swap? The motivations for using swap contracts fall into two basic categories: commercial needs and comparative advantage. The normal business operations of some firms lead to certain types of interest rate or currency exposures that swaps can alleviate. For example, consider a bank, which pays a floating rate of interest on deposits (e.g., liabilities) and earns a fixed rate of interest on loans (e.g., assets). This mismatch between assets and liabilities can cause tremendous difficulties. The bank could use a fixed-pay swap (pay a fixed rate and receive a floating rate) to convert its fixed-rate assets into floating-rate assets, which would match up well with its floating-rate liabilities. 214 CU IDOL SELF LEARNING MATERIAL (SLM)

Some companies have a comparative advantage in acquiring certain types of financing. However, this comparative advantage may not be for the type of financing desired. In this case, the company may acquire the financing for which it has a comparative advantage, and then use a swap to convert it to the desired type of financing. For example, consider a well-known U.S. firm that wants to expand its operations into Europe, where it is less known. It will likely receive more favorable financing terms in the U.S. By using a currency swap, the firm ends up with the euros it needs to fund its expansion. Exiting a Swap Agreement Sometimes one of the swap parties needs to exit the swap prior to the agreed-upon termination date. This is similar to an investor selling exchange-traded futures or options contracts before expiration. There are four basic ways to do this: 1. Buy out the Counterparty: Just like an option or futures contract, a swap has a calculable market value, so one party may terminate the contract by paying the other this market value. However, this is not an automatic feature, so either it must be specified in the swaps contract in advance, or the party who wants out must secure the counterparty's consent. 2. Enter an Offsetting Swap: For example, Company A from the interest rate swap example above could enter into a second swap, this time receiving a fixed rate and paying a floating rate. 3. Sell the Swap to Someone Else: Because swaps have calculable value, one party may sell the contract to a third party. As with Strategy 1, this requires the permission of the counterparty. 4. Use a Swaption: A swaption is an option on a swap. Purchasing a swaption would allow a party to set up, but not enter into, a potentially offsetting swap at the time they execute the original swap. This would reduce some of the market risks associated with Strategy 2. Stock Option What Is a Stock Option? A stock option gives an investor the right, but not the obligation, to buy or sell a stock at an agreed-upon price and date. There are two types of options: puts, which is a bet that a stock will fall, or calls, which is a bet that a stock will rise. 215 CU IDOL SELF LEARNING MATERIAL (SLM)

Options are a type of financial instrument known as a derivative—their worth is based on or derived from, the value of an underlying security or asset. In the case of stock options, that asset is shares of a company's stock. Essentially, the option is a contract, an agreement between two parties to sell/buy the stock; the option contract sets the date of the transaction (usually a few months into the future) and the price. When a contract is written, it determines the price that the underlying stock must reach in order to be \"in the money\", known as the strike price. An option's value is determined by the difference between the underlying stock price and the strike price. Stock options come in two basic categories:  Call options allow the holder to buy the asset at a stated price within a specific timeframe.  Put options allow the holder to sell the asset at a stated price within a specific timeframe. Styles There are two different styles of options: American and European. American options can be exercised at any time between the purchase and expiration date. European options, which are less common, can only be exercised on the expiration date. Expiration Date Options do not only allow a trader to bet on a stock rising or falling but also enable the trader to choose a specific date when they expect the stock to rise or fall. This is known as the expiration date. The expiration date is important because it helps traders to price the value of the put and the call, which is known as the time value, and is used in various option pricing models. Strike Price The strike price determines whether an option should be exercised. It is the price that a trader expects the stock to be above or below by the expiration date. If a trader is betting that International Business Machine Corp. (IBM) will rise in the future, they might buy a call for a specific month and a particular strike price. For example, a trader is betting that IBM's stock will rise above $150 by the middle of January. They may then buy a January $150 call. Contracts 216 CU IDOL SELF LEARNING MATERIAL (SLM)

Contracts represent the number of options a trader may be looking to buy. One contract is equal to 100 shares of the underlying stock.1 using the previous example; a trader decides to buy five call contracts. Now the trader would own five January $150 calls. If the stock rises above $150 by the expiration date, the trader would have the option to exercise or buy 500 shares of IBM’s stock at $150, regardless of the current stock price. If the stock is worth less than $150, the options will expire worthless, and the trader would lose the entire amount spent to buy the options, also known as the premium. Premium The premium is determined by taking the price of the call and multiplying it by the number of contracts bought, then multiplying it by 100. In the example, if a trader buys five January IBM $150 Calls for $1 per contract, the trader would spend $500. However, if a trader wanted to bet the stock would fall they would buy the puts. Trading Options Options can also be sold depending on the strategy a trader is using. Continuing with the example above, if a trader thinks IBM shares are poised to rise, they can buy the call, or they can also choose to sell or write the put. In this case, the seller of the put would not pay a premium but would receive the premium. A seller of five IBM January $150 puts would receive $500. Should the stock trade above $150, the option would expire worthless allowing the seller of the put to keep all of the premium. However, should the stock close below the strike price, the seller would have to buy the underlying stock at the strike price of $150. If that happens, it would create a loss of the premium and additional capital, since the trader now owns the stock at $150 per share, despite its trading at lower levels. Management Buyout (MBO) What Is a Management Buyout (MBO)? A management buyout (MBO) is a transaction where a company’s management team purchases the assets and operations of the business they manage. A management buyout is appealing to professional managers because of the greater potential rewards and control from being owners of the business rather than employees. How a Management Buyout (MBO) Works 217 CU IDOL SELF LEARNING MATERIAL (SLM)

Management buyouts (MBOs) are favored exit strategies for large corporations that wish to pursue the sale of divisions that are not part of their core business, or by private businesses where the owners wish to retire. The financing required for an MBO is often quite substantial and is usually a combination of debt and equity that is derived from the buyers, financiers, and sometimes the seller. While management gets to reap the rewards of ownership following an MBO, they have to make the transition from being employees to owners, which comes with significantly more responsibility and a greater potential for loss. One prime example of a management buyout is when Michael Dell, the founder of Dell, the computer company, paid $25 billion in 2013 as part of a management buyout (MBO) of the company he originally founded, taking it private, so he could exert more control over the direction of the company. Management Buyout (MBO) vs. Management Buy-In (MBI) A management buyout (MBO) is different from a management buy-in (MBI), in which an external management team acquires a company and replaces the existing management team. It also differs from a leveraged management buyout (LMBO), where the buyers use the company assets as collateral to obtain debt financing. The advantage of an MBO over an LMBO is that the company’s debt load may be lower, giving it more financial flexibility. An MBO’s advantage over an MBI is that as the existing managers are acquiring the business, they have a much better understanding of it and there is no learning curve involved, which would be the case if it were being run by a new set of managers. Management buyouts (MBOs) are conducted by management teams that want to get the financial reward for the future development of the company more directly than they would do only as employees. Advantages and Disadvantages of a Management Buyout (MBO) Management buyouts (MBOs) are viewed as good investment opportunities by hedge funds and large financiers, who usually encourage the company to go private so that it can streamline operations and improve profitability away from the public eye, and then go public at a much higher valuation down the road. In the case the management buyout (MBO) is supported by a private equity fund, the fund will, given that there is a dedicated management team in place, likely pay an attractive price for the asset. While private equity funds may also participate in MBOs, their preference may 218 CU IDOL SELF LEARNING MATERIAL (SLM)

be for MBIs, where the companies are run by managers they know rather than the incumbent management team. However, there are several drawbacks to the MBO structure as well. While the management team can reap the rewards of ownership, they have to make the transition from being employees to owners, which requires a change in mindset from managerial to entrepreneurial. Not all managers may be successful in making this transition. Also, the seller may not realize the best price for the asset sale in an MBO. If the existing management team is a serious bidder for the assets or operations being divested, the managers have a potential conflict of interest. That is, they could downplay or deliberately sabotage the future prospects of the assets that are for sale to buy them at a relatively low price. 11.5 SUMMARY  Finance is the lifeblood of any business. Case in point is the self-funded (bootstrapped) ventures, which need a timely influx of funds to survive. It’s rare that a startup born out of a founder’s brainwave, and backed by a strong idea, would also have its own personal treasure trunk. This is exactly why angel investors, venture capitalists, and other financing options available to startups are so important.  For a first-time businessman though, the world of funding seems complex and challenging.  Investors who want assured dividends for a sustained period of time should consider preferred shares. The sheer variety and options that preference shares present encompassa a wide range of investors. If you are looking to invest in such shares, make sure you are aware of the pros and cons associated with them and ensure they align with your investment objectives and risk profile. 11.6 KEYWORDS  Fair Market Value: The Price At Which A Willing Buyer Will Pay A Willing Seller When Both Parties Know The Relevant Facts About The Supplied Product Or Service.  Merger: When Two Organizations Absorb Into One Entity And Share Assets And Liabilities, Yet No New Entity Is Created. 219 CU IDOL SELF LEARNING MATERIAL (SLM)

 Long-Term Liabilities: Financial Obligations That Aren’t Due For More Than One Year. Examples Include Mortgages And Long-Term Loans.  Option: Buying The Rights To Purchase An Asset For A Certain Period Of Time. For Example, A Business May Option An Asset For 6 Months For 10% Of The Sale Cost. During This Time They Do Not Own The Asset; However, The Company That Does Own It Is Not Allowed To Sell It During This Period.  Present Value: The Present Value ofa Sum of Money in Comparison Its Future Value. Present Value Is Used To Analyse Investment Opportunities To Determine Whether They Will Provide A Future Payoff. 11.7 LEARNING ACTIVITY 1. Retained earnings are not a good source from the values point of view as it is the right of equity shareholders. Do you agree? Justify your answer. ___________________________________________________________________________ ___________________________________________________________________________ 2. Mr. John has? 1, 00,000 for investment purposes. Should he invest in equity shares, preference shares, public deposits or debentures? Justify your answer. ___________________________________________________________________________ ___________________________________________________________________________ 11.8 UNIT END QUESTIONS A. Descriptive Questions Short Questions 1. What is debenture? 2. Explain different types of preference shares which can be issued by a company. 3. What advantage does issue of debentures provide over the issue of equity shares? 4. Why preferences are given to preferential shares? 5. Describe in brief the features of equity shares. Long Questions 1. Explain in detail the types of debenture a company can issue. 220 CU IDOL SELF LEARNING MATERIAL (SLM)

2. What is the status of debenture holders? 3. Differentiate between a share and a debenture. 4. Preference shares are preferred by company but not by investors. Why? 5. What preferential rights are enjoyed by preference shareholders? Explain. B. Multiple Choice Questions 1. Debenture represents a. Fixed capital of the company b. Permanent capital of the company c. Fluctuating capital of the company d. Loan capital of the company 2. Debentures indicate the a. Short-term Borrowings of a Company b. Directors’ shares in a company c. The Investment of Equity-Shareholders d. Long-term Borrowings of a Company 3. Equity shares cannot be issued for the purpose of: a. Cash Receipts b. Purchase of assets c. Redemption of debentures d. Distribution of dividend 4. Preference shareholders have 221 a. Preferential right as to dividend only b. Preferential right in the management CU IDOL SELF LEARNING MATERIAL (SLM)

c. Preferential right as to repayment of capital at the time of liquidation of the company d. Preferential right as to dividend and repayment of capital at the time of liquidation of the Company 5 A preference share which does not carry the right of sharing in surplus profits is called …………… a. Non-Cumulative Preference Share b. Non-participating Preference Share c. Irredeemable Preference Share d. Non-convertible Preference Share Answers 1-d, 2-d, 3-d, 4-d, 5-b 11.9 REFERENCES References  Angwin, D.(2007 ) Mergers and Acquisitions. Blackwell , Malden .  Bekier , M.M. , Bogardus , A.J. , and Oldham , T.( 2001 ) Why mergers fail . The McKinsey Quarterly, Number 4 .  Bower , J.( 2001 ) Not all M&As are alike . Harvard Business Review, March/April.  Bruner , Robert F. (2005 ) Deals From Hell: M&A Lessons that Rise ab Textbooks  Mamoria, C.B. (2002). Personnel Management. Mumbai: Himalaya Publishing House.  Patrick A. Gaughan, Mergers, Acquisitions, And Corporate Restructurings Fourth Edition  Dr. Nishi Kant Jha,(2011) Mergers, Acquisitions and Corporate Restructuring Websites 222 CU IDOL SELF LEARNING MATERIAL (SLM)

 www.investopedia.com  www.debitoor.com  www.icsi.com 223 CU IDOL SELF LEARNING MATERIAL (SLM)

UNIT-12 RECENT CASES OF MERGER STRUCTURE 12.0 learning objectives 12.1 Introductions 12.2 Case Studies and Recent Trends for Merger and Takeovers. 12.3 Summary 12.4 Keywords 12.5 Learning Activity 12.6 Unit End Questions 12.7 References 12.0 LEARNING OBJECTIVES After studying this unit, you will be able to:  Understanding merger & Acquisition  State different cases of merger & acquisition in India 12.1 INTRODUCTION Mergers & Acquisitions (“M&A”) is a strategy through which two or more business entities enter into a series of financial transaction through which amalgamation or takeover of the relevant entities takes place for various purposes. These became extremely popular in the late 19th century and are carried out even today in huge numbers. In the last twenty years, a record number of M&A transactions have taken place in India as well as across the globe. Commercial legislations like the Companies Act, 2013, the Competition Act, 2002 the Income Tax Act, 1961 and other relevant regulations govern the legal, regulatory and compliance aspects of these transactions. Therefore, all entities have to be mindful of all pertinent legislations when entering into an M&A transaction. M&A transactions may seem simple prima facie; however, they can often have a very complex side. Each transaction is entered into for a different purpose – the terms and conditions of each may vary significantly from the other; thus, even the result of one 224 CU IDOL SELF LEARNING MATERIAL (SLM)

deal/transaction may be quite different from that of another deal. Mergers and acquisitions can be categorized into several types depending on the objective that the entities seek to achieve through the transaction, the way in which the transaction is structured and the nature of the entities entering into the transaction – some types are horizontal mergers, vertical mergers, congeneric mergers, conglomerate mergers, hostile takeovers etc. Thus, the aim of this blog is to discuss and establish the relevance of some major M&A deals that have taken place in the past across various sectors such as banking, telecom, hospitality, construction etc. Every merger has a definite objective underlying it and has lessons to offer for similar deals in future. Since laws and regulations have a significant bearing on M&A transactions, this blog shall make references to them wherever necessary. 12.2 CASE STUDIES AND RECENT TRENDS FOR MERGER AND TAKEOVERS. Vodafone-Idea Merger In August of 2018, the National Company Law Tribunal approved the merger of the U.K based Vodafone Group (comprising of Vodafone Mobile Services Limited (VMSL) & Vodafone India) with Aditya-Birla Group’s Idea Cellular. The purpose of the merger was to create the largest telecom network in India with the highest customer base in India. Post the merger, the Vodafone group owns approximately 45% stake in the merged entity whereas Idea Limited has a share of approximately 26%. The telecom market India is an oligopolistic market and the two companies were facing stiff competition from the two other major operators, Reliance’s Jio and Bharti-Airtel. Moreover, a ruling of the Supreme Court which ordered them to pay crores worth of Adjusted Gross Revenue necessitated that the two companies combine in order to leverage each other’s customer base in order to comfortably pay the dues. L&T’s Acquisition of Mindtree One of the most talked about acquisition in the Indian M&A market last year, was the acquisition of information technology services company Mindtree by construction and engineering major Larson and Toubro (L&T). The deal was one of a kind because it has been called the first ever hostile takeover in the Indian market. It was a hostile takeover as L&T, who was interested in acquiring a controlling stake in Mindtree to enlarge its technology arm, offered to purchase Mindtree’s shares from its promoters who unanimously rejected the 225 CU IDOL SELF LEARNING MATERIAL (SLM)

same. Thereafter, L&T purchased a 20.32% stake in Mindtree from its non-promoter shareholder Mr. V.G.Siddhartha. Thereafter, it purchased 15% stake from, post which it acquired a stake of another 31% after making an open offer, to finally acquire approximately 60% shareholding in the company. The merger was followed by resignations by at least three co-founder promoters. Flipkart’s acquisition of Mantra 2014 saw the merger of two of the biggest e-commerce majors of that time in the Indian market, Flip kart and Mantra. With e-commerce gaining fast popularity and stiff competition from foreign players like Amazon, Flip kart thought it fit to avail the benefit of the Mantra’s 30% market share in fashion e-commerce. Since both the entities were involved in the same industry, this is an example of a horizontal merger. Even post the acquisition, Mantra continues to operate as a separate entity, though under 100% ownership of Flip kart. Sun-Pharmaceuticals & Ranbaxy Merger In April 2014, Sun Pharmaceuticals announced its acquisition of Ranbaxy, one of the largest acquisitions that has ever taken place in the history of the pharmaceutical industry. Sun Pharmaceuticals acquired Ranbaxy from Daiichi-Sankyo, a pharmaceutical company based out of Japan which had acquired Ranbaxy in 2008. However, due to some objections raised by the FDA in terms of quality standards for its drugs, Daiichi Sankyo had to not only face flak from the regulatory authorities but had also suffered damage to reputation and resultant loss in customer base. It was therefore looking to disassociate itself from Ranbaxy when Sun- Pharma saw this as a good opportunity to get hold of the Ranbaxy’s strong presence in the research and development in the area of the pharmaceuticals. Moreover, after the acquisition Sun Pharma is now India’s largest pharmaceutical company and the 5th largest globally. In return for the transaction, Ranbaxy’s shareholders got a 14% stake in the entity post the acquisition. The acquisition has definitely proved to be profitable to Sun Pharma. It saw an increase in its revenue as it got to leverage the customer-base of the Ranbaxy that preferred its generic and affordable range of drugs. Thomas Cook & Sterling Holidays Merger Thomas Cook India Limited merged with Sterling Holiday Resorts (India) limited in 2014 in a deal that consisted of part-cash and part-stock consideration. The transaction helped 226 CU IDOL SELF LEARNING MATERIAL (SLM)

Thomas Cook gain access to Sterling’s inventory of over 1500 rooms in various resorts in the most sought after tourist destinations in India. On the other hand, Sterling Holidays benefitted by being associated with the reputation of Thomas Cook, one of the biggest companies in the tourism sector. The transaction which took place in several tranches involved purchase of 23% stake by Thomas Cook in Sterling Resorts, post which Thomas Cook had made an open offer for acquisition of additional stock in the company. This is an example of a congeneric merger as both were involved in the tourism industry, their customer-bases and process chains were unrelated. Vedanta & Cairn India Merger In April 2017, Vedanta Resources announced acquisition of Cairn India, both involved in the natural resources sector. The minority shareholders of Cairn India were against the proposed transaction, which resulted in negotiations being dragged for a period of almost two years. Ultimately, they consented to it once Vedanta offered them one equity share and four redeemable preference shares in the merged entity for every share of Cairn India. Moreover, the merger helped Cairn India get access to the wide asset base of Vedanta Limited. Vedanta, on the other hand, a wholly owned subsidiary of London based Vedanta Resources sought to discharge its debt obligations with the heavy cash reserves of Cairn India. Since the transaction involved merger of a subsidiary into its holding company, this is an example of an upstream merger. Mergers and Acquisitions at Ricky Chopra International Counsels Ricky Chopra International Counsels (RCIC) is an international law firm with offices across various cities like Gurugram, New York etc. The mergers and acquisitions team at RCIC is indeed one of the most reputed M&A teams globally. The lawyers at RCIC have experienced to give expert M&A advice for transactions taking place both in India and abroad across a gamut of sectors including media, banking, corporate chains etc. The team assists the clients at every stage of the transaction, ranging from negotiations, drafting, regulatory filings etc. Apart from the strategic aspects, the lawyers of the firm are also well-versed with the detailed procedural aspects of M&A transactions, which helps the client in executing the transaction in a smooth and hassle-free manner. The firm has expertise in rendering cutting-edge advice suited for each client and the sheer commitment and passion of the lawyers of the firm has helped it develop a long-term relation with all of its clients. 227 CU IDOL SELF LEARNING MATERIAL (SLM)

12.3 SUMMARY As might be evident from the above discussion, mergers and acquisitions are prevalent across sectors and form a crucial determinant of the health of any economy. As far as the current scenario of M&A in India is concerned, there has been an increase in M&A transactions as a result of acquisition of distressed entities under the IBC resolution process. The growth outlook for the future might also seem uncertain at the moment given the corona virus pandemic however, industrialists are optimistic especially for sectors that have witnessed a start-up boom like ed-tech, fin-tech, FMCG, payments systems, e-commerce etc. Moreover, the Ministry of Finance has also announced merger of ten Public Sector Banks (for example merger of Syndicate bank with Canara Bank, merger of United Bank of Commerce and Oriental Bank of India with Punjab National Bank etc.) in order to reduce bad loans and help revive the economy. In the private sector, debt-stricken airlines such as the Jet Airways and Air India, are have already invited Expression of Interest (EoI) from prospective buyers who might be willing to acquire them. 12.4 KEYWORDS  Acquisition: The purchasing company acquires more than 50% of the shares of the acquired company and both companies survive.  Amalgamation/Consolidation: The joining of one or more companies into a new entity. None of the combining companies remains; a completely new legal entity is formed.  Conglomerate: A merger of companies with seemingly unrelated businesses.  Goodwill: The excess purchase price over and above the target’s net identifiable assets (after fair value adjustments).  Hostile Takeover: The board of directors and management of the target company do not approve of the takeover. They will advise the shareholders not to accept the offer. 12.5 LEARNING ACTIVITY 1. What Are the Roles of A Merger and Acquisition Analyst? ___________________________________________________________________________ ___________________________________________________________________________ 2. What Are the Qualities That A Merger and Acquisition Analyst Need to Be Successful? 228 CU IDOL SELF LEARNING MATERIAL (SLM)

___________________________________________________________________________ ___________________________________________________________________________ 12.6 UNIT END QUESTIONS A. Descriptive Questions Short Questions 1. What’s The Difference between a Merger and an Acquisition? 2. Why Would A Company Want To Acquire Another Company? 3. Which Body Governs Mergers And Acquisitions In India? 4. What Is Conglomerate Merger? 5. What Is Congeneric Merger? Long Questions 1. Is There Anything Else “intangible” Besides Goodwill & Other Intangibles That Could Also Impact The Combined Company? 2. How Are Synergies Used In Merger Models? 3. Can You Give Me Some Examples Of Why A Company Would Want To Take Over Another Company? 4. Let’s Say A Company Overpays For Another Company – What TypicallyHappens Afterwards And Can You Give Any Recent Examples? 5. A Buyer Pays $100 Million For The Seller In An All-stock Deal, But A Day Later The Market Decides It’s Only Worth $50 Million. What Happens? B. Multiple Choice Questions 1. Which two leading telecommunication companies merged with each other in the year 2018? a. BSNL and Idea b. Vodafone and Idea c. Bharti Airtel and BSNL d. Jio and Vodafone 229 CU IDOL SELF LEARNING MATERIAL (SLM)

2. When a company taken over another one and clearly becomes the new owner, the action is called a. Acquisition b. Merger c. Strategic Alliance d. None of these 3. What is the difference between a merger and an acquisition? a. A merger is a type of acquisition in which the acquirer and the target combine to become one legal entity b. No real difference—the terms are synonymous c. An acquisition is a merger involving a hostile takeover d. In a merger, there is never any acquirer or target—two companies simply fuse 4. What is a merger? a. A merger is when two firms combine and form a new legal entity. b. A merger is when one firm separates to become two. c. A merger is when a firm changes its title d. No difference. 5. Which of the following is typically the most important economy or synergy which is sought from Mergers and Acquisitions' M&A activity? a. Economies of scope from applying existing resources to new uses, at little additional cost. b. Economies of scale effects from organizational learning. d) Economies of scale from doing away with duplication of fund. 230 CU IDOL SELF LEARNING MATERIAL (SLM)

c. Revenue and marketing synergies from new, enhanced, or more efficient distribution. d. Economies of scale from doing away with duplication of function between the two firms. Answers 1-b, 2-a, 3-a, 4-a, 5-d 12.7 REFERENCES References  Angwin, D.(2007 ) Mergers and Acquisitions. Blackwell , Malden .  Bekier , M.M. , Bogardus , A.J. , and Oldham , T.( 2001 ) Why mergers fail . The McKinsey Quarterly, Number 4 .  Bower , J.( 2001 ) Not all M&As are alike . Harvard Business Review, March/April.  Bruner , Robert F. (2005 ) Deals From Hell: M&A Lessons that Rise ab Textbooks  Mamoria, C.B. (2002). Personnel Management. Mumbai: Himalaya Publishing House.  Patrick A. Gaughan, Mergers, Acquisitions, And Corporate Restructurings Fourth Edition  Dr. Nishi Kant Jha,(2011) Mergers, Acquisitions and Corporate Restructuring Websites  www.investopedia.com  www.debitoor.com  www.icsi.com 231 CU IDOL SELF LEARNING MATERIAL (SLM)