In today's business world, mergers and acquisitions have become very common. Both words seem to be identical, but there is a significant difference between them. When two businesses merge to form a single company with new management and ownership, it is known as a merger.
It specifies each party's responsibilities and rights in carrying out the entity. An acquisition is when one entity is taken over by another, and the small entity becomes a part of the new entity. In an acquisition, one person takes over the control of another, and they then make all of the company's decisions together. A merger and acquisition structure is a contract between two parties that spells out their respective rights and responsibilities.
When two businesses merge to form a single company for economic, social, or personal purposes, this is known as a merger and acquisition. It is only possible when two organisations or groups agree to work together. A merger and acquisition contract arrangement is the set of terms and conditions to which they agree. In a merger or acquisition, one of the steps that must be taken is deal structure. The entity's goal is defined in the contract framework, and every party involved is pleased with the goal. Risks are therefore initiated, and each party must bear the risk. The following steps are involved in the contract structure process:
- Negotiation is the process of reaching an agreement.
- Observing risk and determining how it can be managed.
- The circumstances under which the negotiation will be cancelled.
- The level of risk that can be tolerated.
Reasons for Choosing Merger and Acquisition
Companies consider Mergers and Acquisitions in India to expand their business on a global scale and ensure long-term growth. Companies prefer M&A for the following reasons:
- For minimising competition
- for acquiring a higher market share
- for building a strong brand name
- for reducing tax liabilities
- for risk diversification
- For offsetting losses of one company with profits of another.
Things to consider before undertaking Merger and Acquisition
In the process of Merger and Acquisition the following should be considered:
- Pre-determine Objectives
In order to determine the company's objectives, it is important simply to define the M&A process. In addition, the other company must also be able to achieve the desired goals in timely manner.
- Deal Structuring
It is the largest part of any M&A agreement. Both the purchaser and the target firm must resolve in advance all likely differences, such as financial liabilities, transaction price, sharing of assets etc.
- Due Diligence
Different tax types involving on-going regulatory supervision are imposed based on the nature of the industry. The acquirer receives an overview of the company in terms of transfer pricing, ITR filing through the provision of tax due diligence.
- Assessment of Policies
The acquirer shall instruct the purchaser company to determine whether or not the insurance policies relating to the intellectual property, the employee liability and the general liability for the target company.
Types of Mergers and Acquisition in India
- Horizontal Merger
The term horizontal merger refers to the combination of two or more companies that deal with the same product type. Its main objective is the expansion of market reach, the acquisition of a dominant position and the reduction of competition. The Hindustan Unilever and Patanjali merge, for example, Brooke Bond, Lipton India. For example:
- Vertical Merger
The vertical fusion is aimed at combining two companies dealing with products of the same nature. The production stages in which they operate are however different. Example: FLAG Telecom Group and Reliance.
- Co-Centric Mergers
A co-centered merger between companies that serve the same kind of clients takes place. In this case, even if the products are completely different, the products of both companies complement one another Example is the acquisition of Salomon Smith Barney by Citi Group; freecharge by Axis Bank; Walmart by Flipkart.
In combination with each other, two related companies/industries are known as mergers of conglomerates. Both companies have their objectives and purposes completely different. The main purpose of this merger, however, is to expand its size and operations. L&T & Voltas Ltd., for instance.
- Cash Mergers
In cash mergers, shareholders are offered money instead of merger company shares.
- Forward Mergers
A company opts to merge with its customer in future combinations. For instance: Bank of Mathura has acquired ICICI Bank.
- Reverse Mergers
When a company decides to merge with its raw material suppliers. For example, the merger of Godrej soap and Gujarat Godrej Innovative Chemicals.
Advantages Mergers and Acquisition in India:
- Increases market share
When two companies merge, the new company gains a larger market share and gains a market advantage.
- Reduces the cost of operations
Companies can benefit from economies of scale by purchasing raw materials in bulk, resulting in cost savings. Asset investments are now spread out over a larger output, resulting in technical economies.
- Avoids replication
Some companies that make similar products may decide to merge in order to avoid duplication and eliminate competition. Customers benefit from lower prices as well.
- Expands business into new geographic areas
To get a business started in a specific geographical area, a company seeking to expand its business may merge with another similar company operating in the same area.
- Prevents closure of an unprofitable business
Mergers can save a company from bankruptcy while also saving many jobs.
Disadvantages Mergers and Acquisition in India:
- Raises prices of products or services
A merger reduces competition and increases market share. As a result, the new company can establish a monopoly and raise the prices of its products or services.
- Creates gaps in communication
The cultures of the companies that have agreed to merge may differ. It may cause a communication breakdown and have an impact on employee performance.
- Creates unemployment
In an aggressive merger, one company may choose to eliminate the other company's underperforming assets. Employees could lose their jobs as a result.
- Prevents economies of scale
Synergies can be difficult to achieve in situations where the firms have little in common. A larger company can therefore struggle to inspire workers and maintain the same level of control. As a result, the new business will be unable to reach economies of scale.
Procedure for Merger and Acquisition in India
- Examine MOA of the Company : The first and most important move in every M&A transaction is to thoroughly review the company's MOA (Memorandum of Association). The same procedure is followed to determine whether the company's object clause grants acquisition authority or not.
- Notify the Stock Exchange : The companies that are planning to enter into an M&A transaction must then notify a recognised stock exchange about it. They will need to submit copies. They must also submit copies of instructions, notes, and resolutions to the stock exchange within a certain time frame.
- Drafting of Merger Proposal : Following that, both companies' Boards of Directors (BODs) must confirm the merger proposal's drafting. They must also pass a special resolution (SR) authorising their KMP (Key Management Personnel) to handle the situation.
- Filing of Application to the High Court : Both companies must apply to the High Court of the respective state where the company's registered office is located after receiving approval from the Boards of Directors.
- Dispatching of Notice to Stakeholder : If the application is approved by the High Court, the company must notify all stakeholders, including shareholders and creditors, of a meeting. At least twenty-one days before the conference, the notice must be submitted. Furthermore, the notice must be published in two newspapers, one in English and one in the vernacular.
- Filing of orders with the ROC : The companies involved can then combine their assets and liabilities in accordance with the merger proposal's terms.
- Merging of Assets and Liabilities : In order to complete the merger procedure, the companies concerned can combine their assets and liabilities as specified in the merger proposal.
- Listing of Shares : Finally, the newly established corporation is entitled to list its shares on a recognized stock exchange after the two entities have been merged as one and given the status of a separate legal entity.
Frequently Asked Questions on Mergers and Acquisition in India :
What do you mean by Merger?
When two businesses merge to form a single company with new management and ownership, it is known as a merger.
What do you mean by Acquisitions?
An acquisition is when one entity is taken over by another, and the small entity becomes a part of the new entity.
What does "cross-border mergers and acquisitions" mean?
The word "cross-border mergers and acquisitions" refers to transactions in which the acquirer is based in one country and the target is based in another.
What is the main factor for the need for cross-border mergers and acquisitions?
The main objective of a cross-border merger and acquisition is for the acquirer to expand its global operations by establishing a local presence in that country.
What is Mergers and Acquisitions Due Diligence?
Due Diligence refers to the process of auditing or investigating a transaction or investment opportunity.
What is the significance of Due Diligence in Mergers and Acquisitions?
The main objective of the Due Diligence process is to provide buyers with assurance about what they are purchasing.
What Are the Advantages of Mergers and Acquisitions?
The advantages of mergers and acquisitions include increase in size, reduced competition, increasing the power, tax advantages, improved research and visibility, and synergies and economies of scale.
How do mergers and acquisitions help businesses create synergy?
Synergies occur when two companies with identical natures and types of businesses combine hands.
How Can Mergers and Acquisitions Be Measured?
The following factors are considered: the number of clients, the revenue generated, the revenue per client, the run rate savings, cross-selling of services, cash flows, client complaints, the quality of new clients, the stress level of the staff employed, and staff turnover.
What are the key factors driving India's mergers and acquisitions?
Value Creation, Diversification, Asset Acquisition, Increase in Financial Capacity, Tax Purposes, Incentive for Managers, Economies of scale, Acceleration of growth, Improve Company Performance, Due Diligence, Gaining Entry into New Markets, Strategic Drivers, Increased Market Share, and Obtaining New Products are examples of “Major Factors.”
What is their role in the merger and acquisition process?
It contributes to the establishment of fair value for the transactions' companies. In order to finance the activity of mergers, these banks also introduce new securities in the market.
What are some of the most significant drawbacks of mergers and acquisitions?
The following are the main drawbacks of mergers and acquisitions: Significant Price Increase, Employee Unemployment, Diseconomies of Scale, Productivity Loss, Increased Cost, and Employee Re-skilling.
Do mergers and acquisitions have an effect on stock prices?
Yes, the purchasing company's stock price drops, while the stock price of the company purchased or the target company rises.
What causes the stock market to fluctuate in price?
The explanation for this is that the purchasing company would pay a significantly higher premium than the target company's value.