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12 Feb, 2011, 04.

19AM IST,PTI

IRDA releases norms for merger of general


insurance cos
NEW DELHI: More than 10 years after opening up of the insurance sector, regulator
Irda today proposed to allow mergers and acquisitions in the general insurance
business that requires consolidation among the 24 industry players, most of which
are loss-making.

To protect the interest of policyholders, they must be given right to exit from the
insurer, which is on the block for acquisition, Irda said in its draft guidelines.

"The transacting parties shall ensure that policyholders of the transferor entity are
migrated in a manner which ensures that their existing policies are continued to be
serviced by the transferee entity on terms and conditions no less favourable than
those existing prior to the merger," Irda said.

An acquirer will need approvals from Irda, the Reserve Bank and the finance
ministry, in case it has foreign direct investment.

Most of the 22 players in the private sector have foreign investment, which is
capped at 26 per cent.

Irda has also said that the intent of the acquirer should be clearly spelt out.

The regulator has retained with itself the power to vet the valuations arrived at by
the companies involved in M&As.

"The Authority reserves the right to appoint an independent actuarial consultant to


carry out actuarial valuation of the insurance business of the proposed transacting
parties, the guidelines said.

According to industry players, most of the private sector general insurance


companies require fresh infusion of capital which may come from foreign partners,
who have been constrained by the FDI cap. The Bill to raise the FDI ceiling is
pending in Parliament.

The general insurance business has remained loss making for want of capital, which
is constrained due cap on foreign capital infusion.

"There are as many players in the general insurance space as in other markets. This
guideline will play a part as the industry matures. The industry has been there for
10 years and this would give opportunity for old players," Sanjay Datta, head of
health at ICICI Lombard General Insurance said.

Irda has invited comments on the draft exposure guidelines by February 22.

At present, the Insurance Act provides for the M&As only for life insurance
companies.

The fast growing general insurance space has many entities looking for M&A
opportunities. There have been reports of Reliance General Insurance looking to buy
majority stake in its rival Royal Sundaram.
As on March 1, 2010
http://finance.mapsofworld.com/merger-acquisition/india.html
Mergers and acquisitions may seem to be beneficial, resulting in the amalgamation of two
conglomerates. They have been found to lead to cost cuts and increased revenues. However,
merger and acquisition failures are not uncommon. These failures may harm the companies,
tarnish their credibility in the market, and ruin the confidence of their shareholders.

Studies reveal that approximately 40% to 80% of mergers and acquisitions prove to be
disappointing. The reason is that their value on the stock market deteriorates. The intentions and
motivations for effecting mergers and acquisitions must be evaluated for the process to be a
success. It is believed that when two companies merge the combined output will increase the
productivity of the merged companies. This is referred to as "economies of scale." However, this
increase in productivity does not always materialize.

There are several reasons merger or an acquisition failures. Some of the prominent causes are
summarized below:

• If a merger or acquisition is planned depending on the (bullish) conditions prevailing in


the stock market, it may be risky.
• There are times when a merger or an acquisition may be effected for the purpose of
"seeking glory," rather than viewing it as a corporate strategy to fulfill the needs of the
company. Regardless of the organizational goal, these top level executives are more
interested in satisfying their "executive ego."
• In addition to the above, failure may also occur if a merger takes place as a defensive
measure to neutralize the adverse effects of globalization and a dynamic corporate
environment.
• Failures may result if the two unifying companies embrace different "corporate cultures."

It would not be correct to say that all mergers and acquisitions fail. There are many examples of
mergers that have boosted the performance of a company and addressed the well-being of its
shareholders. The primary issue to focus on is how realistic the goals of the prospective merger
are.
Abstract:
Just as mergers and acquisitions may be fruitful in some cases, the impact of
mergers and acquisitions on various sects of the company may differ. In the
article below, details of how the shareholders, employees and the management
people are affected has been briefed.

Mergers and acquisitions are aimed at improving profits and productivity of a


company. Simultaneously, the objective is also to reduce expenses of the firm.
However, mergers and acquisitions are not always successful. At times, the main
goal for which the process has taken place loses focus. The success of mergers,
acquisitions or takeovers is determined by a number of factors. Those mergers and
acquisitions, which are resisted not only affects the entire work force in that
organization but also harm the credibility of the company. In the process, in
addition to deviating from the actual aim, psychological impacts are also many.
Studies have suggested that mergers and acquisitions affect the senior executives,
labor force and the shareholders.

Employees:

• Impact Of Mergers And Acquisitions on workers or employees:


Aftermath of mergers and acquisitions impact the employees or the workers
the most. It is a well known fact that whenever there is a merger or an
acquisition, there are bound to be lay offs.

In the event when a new resulting company is efficient business wise, it


would require less number of people to perform the same task. Under such
circumstances, the company would attempt to downsize the labor force. If
the employees who have been laid off possess sufficient skills, they may in
fact benefit from the lay off and move on for greener pastures. But it is
usually seen that the employees those who are laid off would not have played
a significant role under the new organizational set up. This accounts for their
removal from the new organization set up. These workers in turn would look
for re employment and may have to be satisfied with a much lesser pay
package than the previous one. Even though this may not lead to drastic
unemployment levels, nevertheless, the workers will have to compromise for
the same. If not drastically, the mild undulations created in the local economy
cannot be ignored fully.
Management at the top:

• Impact of mergers and acquisitions on top level management:


Impact of mergers and acquisitions on top level management may actually
involve a "clash of the egos". There might be variations in the cultures of the
two organizations. Under the new set up the manager may be asked to
implement such policies or strategies, which may not be quite approved by
him. When such a situation arises, the main focus of the organization gets
diverted and executives become busy either settling matters among
themselves or moving on. If however, the manager is well equipped with a
degree or has sufficient qualification, the migration to another company may
not be troublesome at all.

Shareholders:

• Impact of mergers and acquisitions on shareholders:


We can further categorize the shareholders into two parts:
• The Shareholders of the acquiring firm
• The shareholders of the target firm.

Shareholders of the acquired firm:

The shareholders of the acquired company benefit the most. The reason being, it is
seen in majority of the cases that the acquiring company usually pays a little excess
than it what should. Unless a man lives in a house he has recently bought, he will
not be able to know its drawbacks. So that the shareholders forgo their shares, the
company has to offer an amount more then the actual price, which is prevailing in
the market. Buying a company at a higher price can actually prove to be beneficial
for the local economy.

Shareholders of the acquiring firm:

They are most affected. If we measure the benefits enjoyed by the shareholders of
the acquired company in degrees, the degree to which they were benefited, by the
same degree, these shareholders are harmed. This can be attributed to debt load,
which accompanies an acquisition.

Benefits of Mergers and Acquisitions


Benefits of Mergers and Acquisitions are manifold. Mergers and Acquisitions
can generate cost efficiency through economies of scale, can enhance the revenue
through gain in market share and can even generate tax gains.

The principal benefits from mergers and acquisitions can be listed as increased
value generation, increase in cost efficiency and increase in market share.

Benefits of Mergers and Acquisitions are the main reasons for which the
companies enter into these deals. Mergers and Acquisitions may generate tax
gains, can increase revenue and can reduce the cost of capital. The main benefits of
Mergers and Acquisitions are the following:

Greater Value Generation

Mergers and acquisitions often lead to an increased value generation for the
company. It is expected that the shareholder value of a firm after mergers or
acquisitions would be greater than the sum of the shareholder values of the parent
companies. Mergers and acquisitions generally succeed in generating cost
efficiency through the implementation of economies of scale.

Merger & Acquisition


also leads to tax gains and can even lead to a revenue enhancement through
market share gain. Companies go for Mergers and Acquisition from the idea that,
the joint company will be able to generate more value than the separate firms.
When a company buys out another, it expects that the newly generated shareholder
value will be higher than the value of the sum of the shares of the two separate
companies.

Mergers and Acquisitions


can prove to be really beneficial to the companies when they are weathering
through the tough times. If the company which is suffering from various problems in
the market and is not able to overcome the difficulties, it can go for an acquisition
deal. If a company, which has a strong market presence, buys out the weak firm,
then a more competitive and cost efficient company can be generated. Here, the
target company benefits as it gets out of the difficult situation and after being
acquired by the large firm, the joint company accumulates larger market share. This
is because of these benefits that the small and less powerful firms agree to be
acquired by the large firms.
Gaining Cost Efficiency

When two companies come together by merger or acquisition, the joint company
benefits in terms of cost efficiency. A merger or acquisition is able to create
economies of scale which in turn generates cost efficiency. As the two firms form a
new and bigger company, the production is done on a much larger scale and when
the output production increases, there are strong chances that the cost of
production per unit of output gets reduced.

An increase in cost efficiency is affected through the procedure of mergers and


acquisitions. This is because mergers and acquisitions lead to economies of scale.
This in turn promotes cost efficiency. As the parent firms amalgamate to form a
bigger new firm the scale of operations of the new firm increases. As output
production rises there are chances that the cost per unit of production will come
down

Mergers and Acquisitions are also beneficial

• When a firm wants to enter a new market


• When a firm wants to introduce new products through research and
development
• When a forms wants achieve administrative benefits
• To increased market share
• To lower cost of operation and/or production
• To gain higher competitiveness
• For industry know how and positioning
• For Financial leveraging
• To improve profitability and EPS

An increase in market share is one of the plausible benefits of mergers and


acquisitions. In case a financially strong company acquires a relatively distressed
one, the resultant organization can experience a substantial increase in market
share. The new firm is usually more cost-efficient and competitive as compared to
its financially weak parent organization.

It can be noted that mergers and acquisitions prove to be useful in the


following situations:
Firstly, when a business firm wishes to make its presence felt in a new market.
Secondly, when a business organization wants to avail some administrative
benefits. Thirdly, when a business firm is in the process of introduction of new
products. New products are developed by the R&D wing of a company.

Employee Benefits under Mergers and Acquisitions in US


The 'Employee Retirement Income Security Act' was enacted in 1974. It is also
known as ERISA. Since then programs for employee benefit have been a major
component of the balance and income statements of US business organizations.
Current law promulgations have attached supreme importance to the presence of
post retirement pension schemes and welfare benefit schemes as a part of
corporate obligation. As a result employee benefit programs are affecting the
viability of mergers and acquisitions in the USA.

Expenses accruing due to employee benefit programs may not be fully reflected in
a company's balance sheet. Some employee benefit obligations may arise out of a
change in the corporate structure of a firm. Retirement income schemes and benefit
plans may vary from company to company. Companies going for mergers and
acquisitions strive to iron out the internal differences to maintain a specified level
of employee satisfaction.

Difference Between Merger and Acquisition


Although merger and acquisition are often used as synonymous terms, there is a subtle difference
between the two concepts.

In the case of a merger, two firms together form a new company. After the merger,
the separately owned companies become jointly owned and obtain a new single identity. When
two firms merge, stocks of both are surrendered and new stocks in the name of new company are
issued. Generally, mergers take place between two companies of more or less same size. In these
cases, the process is called Merger of Equals.

However, with acquisition, one firm takes over another and establishes its power as the single
owner.Generally, the firm which takes over is the bigger and stronger one. The relatively less
powerful, smaller firm loses its existence, and the firm taking over, runs the whole business with
its own identity. Unlike the merger, stocks of the acquired firm are not surrendered, but bought
by the public prior to the acquisition, and continue to be traded in the stock market.

Another difference is, when a deal is made between two companies in friendly terms, it is
typically proclaimed as a merger, regardless of whether it is a buy out. In an unfriendly deal,
where the stronger firm swallows the target firm, even when the target company is not willing to
be purchased, then the process is labeled as acquisition.

Often mergers and acquisitions become synonymous, because, in many cases, a bigger firm may
buy out a relatively less powerful one and compel it to announce the process as a merger.
Although, in reality an acquisition takes place, the firms declare it as a merger to avoid any
negative impression.
Insurance Mergers and Acquisitions
Insurance mergers and acquisitions have grown since the early 1990s.
Maximum mergers and acquisitions in the insurance sector have taken place in the
USA followed by UK. Insurance mergers and acquisitions accounted for 14% of the
total in the financial sector in terms of number and 18% in terms of value in the top
13 countries.

Mergers and acquisitions in the insurance sector picked up since the early
1990s. With the opening up of the financial sectors including the insurance sector in
many countries due to economic reforms during this period, the potential of
mergers and acquisitions in the insurance sector increased substantially across the
globe. Both within-border and cross-border mergers and acquisitions gained
impetus in the insurance sector.

USA and UK lead the list of countries that feature among the top in terms of
insurance mergers and acquisitions.

The other countries where mergers and acquisitions in the insurance sectors have
been high are - Netherlands, France, Italy, Germany, Japan, Switzerland, Canada,
Australia, Belgium, Spain and Sweden. The value of M&A (mergers and acquisitions)
deals in USA, however, is far more than the other nations.

In a comparative study between these thirteen countries from 1990 to 2003, it was
found that USA accounted for almost half the total value of mergers and
acquisitions of these countries. UK, the second country on the list accounted for
only 16.1% of the total value compared to 49.9% of USA. Out of the 1413 insurance
mergers and acquisitions in these countries in this period, 606 took place in the
USA.

The comparative figures of these countries are tabulated


below -

Value
Number of
Country ( in million
M&A
dollars)

USA 606 210167

UK 217 67586
Germany 91 19870

Italy 82 19912

Spain 73 3116

France 64 24551

Canada 62 9700

Netherlan
58 25440
ds

Australia 48 4778

Japan 47 17807

Belgium 30 3739

Switzerlan
21 11451
d

Sweden 14 2806

TOTAL 1413 420922

During the period 1990 to 2003, insurance mergers and acquisitions accounted for
14% of the total mergers and acquisitions in the financial sector in terms of
numbers and 18% in terms of value in the top 13 countries. However while the
average value of insurance mergers and acquisitions were 13% in the finance sector
in the period 1990-1995, it rose to 23% between 2001 and 2003. Numerically, the
maximum mergers and acquisitions in the insurance sector took place between
1996 and 2000 with the average annual figure in this period being 130.
Mergers And Acquisitions
The terms mergers and acquisitions may often be confused and look similar. However, the two
have different meanings. Mergers may be of various types and so can acquisitions be. There are
few terms like "spin out", "demerger" and "spin off", which are used to denote the process by
which a company separates into two different companies. The nascent company is usually a listed
company on the stock exchange. The term "Mergers And Acquisitions" is an expression
of a strategy pertaining to the corporate sector. It envisages management of processes related to
selling, buying and combining one or more companies for obtaining a common cause. It also
comprises corporate finances. Common cause consists of aiding, financing or assisting a
company to grow fast so that there is no necessity of establishing a separate entity. Mergers and
acquisitions can be denoted by M and A. Stock swap:
In economics or business sense of the term, merger may be referred to as the establishment of a
larger company as a result of the amalgamation of two companies. Mergers comprise the process
of "stock swap". "Stock swap" is a process, in which the risk undertaken by the shareholders are
equally borne by the shareholders of both the companies.

Many a times, mergers may appear to be similar to takeovers. But in case of takeovers, the name
given to the new resulting company is a compound name consisting of the two company names.
It also acquires a new brand.
(A) Mergers:
Mergers can be classified as:
(i)Conglomerate mergers:
Occurs when the two merging companies belong to two different industrial sectors.

(ii) Vertical mergers:


A vertical merger is said to have taken place if two companies producing the same goods
combine. The two companies should be at different stages of production.

(iv) Horizontal mergers:


Take place when two merging companies manufacture similar goods and belong to the same
industry.

(v) Congeneric merger:


A merger is said to be congeneric when two companies belong to the same industry. They
however, do not have any common customer, buyer, supplier.

Other types of mergers include:

• Reverse mergers
• Dilutive mergers
• Accretive mergers.
Tool for measuring the effect of merger on the market:
A common tool used for studying the aftermath of a merger on the market conditions include the
Herfindahl index.
Regulatory bodies governing mergers:
US Federal Trade Commission, European Commission and United States Department of Justice
are some of the regulatory bodies looking into matters related to mergers.

(B) Acquisitions: A company is said to have "Acquired" a company, when one company buys
another company. Acquisitions can be either:

• Hostile
• Friendly

In case of hostile acquisitions, the company, which is to be bought has no information about the
acquisition. The company, which would be sold is taken by surprise.
In case of friendly acquisition, the two companies cooperate with each other and settle matters
related to acquisitions.
There are times when a much smaller company manages to take control of the management of a
bigger company but at the same time retains its name for the combination of both the companies.
This process is known as "reverse takeover".

Kinds of acquisitions:
There may be two types of acquisitions depending on the option adopted by the buying company.
In one case, the buying company may buy all the shares of the smaller company. The other
option is buying the assets of the smaller companies.

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