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Unit 13: Tax Treatment for Business Restructuring

Keeping the above definition provided by the Income tax Act we can say that Thus, mergers or Notes

amalgamations may take two basic forms:-
1. Merger through Absorption: As stated above absorption is a combination of two or more
companies into an ‘existing company’. All companies except one lose their identity in such
a merger.

Example: Absorption of Tata Fertilisers Ltd (TFL) by Tata Chemicals Ltd. (TCL): TCL, an
acquiring company (a buyer), survived after merger while TFL, an acquired company (a seller),
ceased to exist. TFL transferred its assets, liabilities and shares to TCL.
2. Merger through Consolidation: A consolidation is a combination of two or more companies
into a new company. In this form of merger, all companies are legally dissolved and a new
entity is created. Here, the acquired company transfers its assets, liabilities and shares to
the acquiring company for cash or exchange of shares.

Example: Merger of Hindustan Computers Ltd, Hindustan Instruments Ltd, Indian
Software Company Ltd and Indian Reprographics Ltd into an entirely new company called
HCL Ltd.

A fundamental characteristic of merger (either through absorption or consolidation) is that the
acquiring company (existing or new) takes over the ownership of other companies and combines
their operations with its own operations.

Notes Besides, there are three major types of mergers:-

1. Horizontal merger: It is a combination of two or more firms in the same area

of business. For example, combining of two book publishers or two luggage
manufacturing companies to gain dominant market share.
2. Vertical merger: It is a combination of two or more firms involved in different stages

of production or distribution of the same product. For example, joining of a TV
manufacturing (assembling) company and a TV marketing company or joining of
a spinning company and a weaving company. Vertical merger may take the form
of forward or backward merger. When a company combines with the supplier of
material, it is called backward merger and when it combines with the customer, it is
known as forward merger.

3. Conglomerate merger: It is a combination of firms engaged in unrelated lines of
business activity. For example, merging of different businesses like manufacturing
of cement products, fertilizer products, electronic products, insurance investment
and advertising agencies. L&T and Voltas Ltd are examples of such mergers.

13.2.2 Reasons behind Mergers and Amalgamation

Mergers sometimes happen because business firms want diversifi cation. Diversification is the

reduction of risk through investment decisions. If a large, conglomerate firm thinks that it has too

much exposure to risk because it has too much of its business invested in one particular industry,
it may buy a business in another industry. That would provide a measure of diversifi cation for

the acquiring firm. In other words, the acquiring firm no longer has all its eggs in one basket.
Business firms may merge for other reasons regarding diversification. In our diverse economic

and political climate, they may be able to reduce risk by merging with firms in other countries.

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