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Overview of Mergers and Acquisitions

Nowadays, Merger and Acquisition is the pathway businesses choose to reach exponential heights and continue to engender attention. The Indian Merger and Acquisition sector works in a similar fashion and has observed various large M&A deals in the past few years in the banking, insurance, and telecom sectors. Hence, over a period, M&A has become an essential part of the Indian Economy.

Further, time and again.  M&A are misunderstood as one since both the terms denote consolidation of two or more companies. However, they are complete opposites in terms of their implementation.

The term “merger” means a combination of two or more companies that agree to merge and structure a new company. Moreover, the process of merger is carried out with the intent to boost business growth and  increase its goodwill and reach. In contrast, acquisition is an act where an acquirer company acquires a target company by way of a legal agreement.

Reasons to Choose Mergers and Acquisitions

The process of Mergers and Acquisitions is considered by the companies to augment their business at a global level and ensure sustainable development of their business. The following are the reasons why companies choose M&A:

  • For reducing competition;
  • For establishing a larger share in the market;
  • For developing a powerful brand name;
  • For minimising tax liabilities;
  • For diversifying risk;
  • For setting off losses of one entity with the profit of another entity.

Advantages of Merger and Acquisition

The advantages of Merger and Acquisition are as follows:

  • Increased Size: The process of M&A assists companies in increasing their net worth and operations, which may takeyears otherwise. Moreover, these strategic tools help in boosting the company’s share price.
  • Reduced Competition: The combined capitals and reserves of the newly formed company help it in reducing competition and gaining a competitive edge.
  • Increased Power: The synergy formed by the combination of two or more companies is powerful enough to dominate other market players, guarantee better performance, ensure financial gains, etc. Additionally, it simplifies the task of attracting a larger customer base.
  • Tax Benefits: M&A also provides various tax benefits to the involved companies. The losses incurred by one entity are set off against the profits generated by another entity, in that way minimising the tax liability.
  • Creates a New Market: Since M&A makes two companies work together, itprovides better sales prospects. Besides this, M&A also assists in increasing the market reach of the business.

Things to consider before undertaking Merger and Acquisition

The following must be considered before undertaking the process of Merger and Acquisition:

  • Pre-determine Objectives: To simply the process of M&A, it is significant to pre-determine the objectives of the Company. Further, it is also necessary to timely check whether the other company was able to achieve the desired goals or not. 
  • Deal Structuring: It is the most significant part of any M&A deal. Both the acquirer and the target company are required to resolve all the probable differences beforehand, like financial liabilities, price of the deal, sharing of assets, etc.
  • Due Diligence: Based on the nature of the industry, various types of taxes are levied which involve constant regulatory supervision. By conducting tax due diligence, the acquirer company gets an overview of the target company in terms of transfer pricing, ITR filing and other tax liabilities.
  • Assessment of Policies: All the insurance policies concerning intellectual property, employee liability and general liability of the target Company must be inspected by the acquirer company to determine whether they will be favourable for the company or not.

Difference between Merger and Acquisition

 S.no

Point of Difference  

Merger

Acquisition

1.

Definition

When two or more entities come forward to work together as one, it is termed as merger.

When one company acquires the control and management of another company, it is termed as acquisition.

2.

Terms

Mergers are always planned and happen with the mutual consent of the parties.

At times, acquisition can be hostile and involuntary.

3.

Title

A new name is given to the merged company.  

No new name is given to the target company.

4.

Scenario

Two or more companies who work similarly tend to choose the process of merger.

It shall be pertinent to consider that the target company is always smaller in terms of size, operations, growth, market than the acquirer company.

5.

Authority

Both the companies are same in terms of authority.

The acquirer company supervises and monitors the operation of the target company.  

6.

Stocks

New stocks are issued for the merged company.

No new stocks are issues for the acquired company.

7.

Legal Formalities

Legal compliances are more in the process of merger.

Legal compliances are comparatively less in the process of acquisition.

8.

Purpose

The main purpose of the merger is to reduce competition and to boost operational competence.

The main purpose of the acquisition is to acquire instant growth.

9.

Example

The merger of Max HealthCare with Radiant Life.

Acquisition of Jaguar Land Rover by the Tata Motors Private Ltd.

 

Types of Mergers and Acquisition in India

The different types of mergers and acquisition in India are as follows:

  • Horizontal Merger: The term horizontal merger means the combination of two or more companies dealing in the same type of products. The main aim behind this merger is to expand the market reach, acquire a dominant position, and reduce competition. For example: Mergers of Hindustan Unilever and Patanjali; Brooke Bond and Lipton India.
  • Vertical Merger: The purpose of a vertical merger is to combine two companies dealing with similar products. However, the stages of production at which they are functioning are different. For example: Reliance and FLAG Telecom group.
  • Co-Centric Mergers: A co-centric merger takes place between the companies serving the same type of customers. In this case, the products of both companies complement each other even if the products are completely different. For Example: Citi Group acquiring Salomon Smith Barney; Axis Bank acquiring Freecharge; Walmart acquiring Flipkart.
  • Conglomerate Mergers: When two unrelated industries/ companies combine with each other, it is known as conglomerate mergers. The goals and purposes of both companies are entirely different from each other. However, the main objective of this merger is to increase business in terms of size and operations. For example: L&T and Voltas Ltd.
  • Cash Mergers: In cash mergers, shareholders are offered cash instead of the shares of the merger company.
  • Forward Mergers: In forward mergers, a company decides to merge with its customer. For example: ICICI Bank acquired Bank of Mathura.
  • Reverse Mergers: When a business establishment decides to merge with its raw material suppliers. For example: merger of the Godrej soap with the Gujarat Godrej Innovative Chemicals.

Governing Laws for Merger and Acquisition

In India, the concept of Merger and Acquisition is primarily governed by the provisions of the Companies (Compromises, Arrangements and Amalgamations) Rules, 2020, and section 230 read with section 232 of the Companies Act, 2013. However, the following key legislation also regulate the activities of Merger and Acquisition in India:

  • Securities Regulations:
  1. Securities Exchange Board of India, 1992;
  2. The SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011;
  3. The SEBI (Delisting of Equity Shares) Regulations, 2009.
  • Foreign Exchange Management Act, 1999;
  • Competition Act, 2002;
  • Income Tax Act, 1961;
  • Insolvency and Bankruptcy Code, 2016.

Procedure for Merger and Acquisition in India

The steps involved in the procedure of merger and acquisition are as follows:

  • Examine MOA of the Company: The first and the foremost step in an M&A deal is to duly examine the company’s MOA (Memorandum of Association). The same is done to confirm whether the object clause of the company grants the power of merger or not.
  • Notify the Stock Exchange: In the next step, the companies which are going to enter in an M&A deal, must inform the recognised stock exchange about the same. Moreover, they need to send copies of orders, notices, and resolutions to the stock exchange within a prescribed period.
  • Drafting of Merger Proposal: After that, the Boards of the Director (BOD) of both the companies need to confirm the drafting of the merger proposal. Moreover, they are also required to pass a special resolution (SR) to authorise its KMP (Key Managerial Personnel) to carry out the matter.
  • Filing of Application to the High Court: After obtaining the confirmation from the Boards of Directors, both the companies are required to apply to the High Court of the respective state, where the company’s registered office is located.
  • Dispatching of Notice to Stakeholders: If the High Court approves the application, the company is required to send a notice regarding a meeting to all the stakeholders, i.e., shareholders and creditors. The notice must be sent at least twenty-one days before the date of the meeting. Moreover, the notice must also be published in two newspapers, i.e., in English and Vernacular newspapers.
  • Filing of orders with the ROC: Thereafter, the company needs to file a certified copy of the order passed by the High Court with the ROC (Registrar of Companies) within the stipulated period as prescribed by the High Court.
  • Merging of Assets and Liabilities: The concerned companies can then combine their assets and liabilities as per the stipulations mentioned in the merger proposal to complete the process of merger. 
  • Listing of Shares: Lastly, when both the companies have been combined as one and received the status of a separate legal entity, the company formed is qualified to list its shares on the recognised stock exchange.

Package Inclusions:

  • Preparing the agreement related to mergers and acquisitions
  • End-to-end assistance in obtaining court sanction
  • Preparation of documents and signatures of concerned authorities
  • Strategic planning of the entire merger and acquisition
  • Compliance with all the laws and regulations pertinent to mergers and acquisitions

FAQs for Merger and Acquisition

The term mergers and acquisitions (M&A) is described as the consolidation or alliance of companies. Further, segregating the two terms, Merger is basically a combination of two companies coming together to form one. In contrast, Acquisition is the process where one company is taken over by another company.

The term cross border mergers and acquisitions means those deals in which the acquirer company is situated in one country and the target company situated in another company. This type of acquisition is mainly done when the acquirer wants to expand his operations at a global level by having a local business in that country.

Due diligence denotes the process of audit or investigation of a deal or an investment opportunity. This process basically provides buyers an assurance of what they are buying. Hence, it a process of investigation about any person or business before signing a contract.
Further, the concept of Due diligence plays a very imperative role in the transactions concerning merger and acquisition as it aids the buyers in getting a sniff of the genuine business facets they are interested in purchasing. Also, this process helps a buyer in understanding the concept like growth potential of a business, different synergies, and also assists them in getting more customers.

A synergy arises in the process of merger or acquisition when the combined worth of both the two entities is higher than the pre-merger worth of both the firms combined.

The following listed are the reasons why the deals concerning merger and acquisition fail:

  • Misled value for investment– The investment on the assets of other companies may look good on papers, but rationally they may not be the income-generating areas after the closure of the deal. For example – Acquisition of countrywide by the Bank of America’s.
  • Poor integration process – Post-merger, the disintegration of factors such as the key employees, processes, policies, important projects, etc. lead to failure in the process of execution.
  • Mismatch in the culture– If in case the M&A deal fails to develop a strong strategy directed towards the difference in the cultural aspects of two companies, a low efficiency in the employees can be observed by both the companies. For example - Daimler Chrysler case
  • Poor communication– If the motive behind the deal is not clear or is not communicated well to the employees, then a lack of synergy in teams is marked, and moreover, the expectations from the said deal are not met.
  • External factors– External factors such as an economic collapse or any other environmental factor may affect the performance of the deal.
  • Negotiation errors – Whenever a company overpays the acquisition fees, it might lead to future financial losses and failures.

The following listed are the reasons as to why companies merge or acquire other companies:

  • To eradicate competition;
  • For establishing a bigger market share;
  • For creating a powerful brand;
  • For setting off the losses of one company with the profits of another company.

One of the major roles that an investment bank plays in the process of merger and acquisitions is to determine a fair value for the companies engaged in the transactions. Further, these banks also introduce new securities in the market in order to finance the activity of mergers and acquisitions.strong>

The following listed are the benefits annexed with the concept of mergers and acquisition:

  • Increased Size
  • Reduced Competition
  • Increased Powers
  • Tax Benefits
  • Better Research and Visibility
  • Synergies and Economies of Scale

Synergies happens when two companies who deal with the similar nature and type of business combines with each other. As when they combine, then they eliminate duplicate resources such as a branch and regional offices, research projects, manufacturing facilities, etc. Hence, every single penny which is saved goes directly to the bottom line for boosting earnings per share (EPS) and making the transaction of merger and acquisition an “accretive” one.

The following listed are the ways for measuring the success level of a merger and acquisition:

  • Number of Clients
  • Revenue generated
  • Revenue per client
  • Run rate savings
  • Cross-selling of services
  • Cash flows
  • Clients complaints
  • Quality of new clients
  • Stress level of the staff employed
  • Staff turnover

The following listed are the disadvantages annexed with the concept of mergers and acquisition:

  • Substantial Increase in Price
  • Employees losing their jobs
  • Diseconomies of scale
  • Loss in productivity
  • Increased cost
  • Requires re-skilling of the employees

Usually, in the process of acquisition, the share price of the acquiring company falls down and whereas the share price of the company acquired or the target company will rise. The reason behind this is that the acquiring company is required to pay a slightly extra premium than the value of the target company.

The following listed are the factors that are to be considered pre-merger and acquisition process

  • The right partner
  • Trust between the parties concerned
  • Due Diligence
  • Correct valuation
  • Experience from previous mergers and acquisitions
  • Proper communication before the execution of merger and acquisition

The following listed are the factors that are to be considered post-merger and acquisition process:

  • Quality of the plan
  • Execution of the plan
  • Swiftness of integration
  • Communication during implementation
  • Strategic fit
  • Organizational fit
  • Cultural fit
  • Calculation and realization of synergies

The HR (Human Resource) department plays a significant role in the process of M&A between two companies. As we all know, the process of mergers and acquisitions is considered as an indispensable part of a company’s growth strategy and are carried out for the beneficial reasons, but a messed up and weak knowledge of matters relating to HR often stands as an impediment that results in failed mergers. Hence, HR plays a pivotal role in managing all the crises along with the disputes that may arise in an organization, as and when the transaction of merger and acquisition sets off.

The following listed are the ways of creating value through merger and acquisition:

  • Combined expertise
  • Value of shareholders
  • Dow Chemical and DuPont

A merger and acquisition advisory firm gives advice on issues like corporate mergers, acquisitions, and divestitures along with on debt and equity financing. Further, the M&A advisory firms are different and distinct from an investment bank in the fact that an M&A advisory performs other functions as well, along with giving advice. The following listed are the additional roles of an M&A advisory:

  • Advise with the issuance and placement of stock;
  • Act as an agent or underwriter whenever corporations are issuing securities;
  • Maintain markets for the previously issued securities; and
  • Offer advisory services to the investors.

A takeover happens when one company makes a bid in order to assume control of or acquire another company. The same is done often by purchasing a majority stake in the said target firm. Further, in the process of a takeover, the company making the bid is known as the acquirer, while the company it wants to take control of is known as the target.

The effects of the process of mergers and acquisitions on an employee’ morale can be significant if the reorganization of the said business is not handled efficiently. As, throughout any merger or acquisition effort, there are at least 2 groups of employees involved, who are often coming from organizations with definitely different cultures and styles. Further, the issues like stress, fear of losing job, competitiveness are some of the significant impact of the process of merger and acquisitions.

The following listed are the steps involved in the evaluation of the process of merger and acquisition:

  • Determine Growth in the Market
  • Identify candidates for merger and acquisition
  • Assess the strategic financial of the company by using financial statements such as the income statement, balance sheet, cash flow statement, etc.
  • Analysis the all the likely benefits and drawbacks of the said process
  • Conduct Valuation regarding the process and the amount involved
  • Perform Due Diligence
  • Lastly, go for the process of Merger and Acquisition

The mergers and acquisitions in India are governed by:

  • The Companies Act, 2013
  • FEMA, 1999
  • The Competition Act, 2002
  • SEBI (Substantial Acquisition of Shares and Takeovers) Regulations 2011
  • The Indian Stamp Act, 1899
  • The Income Tax Act, 1961

The documents required are:

  • Documents containing approval of the directors, creditors and shareholders of the companies
  • Petition- which is required to be filed in front of the concerned authority
  • Publishing of notice sent to shareholders and creditors in the newspaper
  • Public announcement to be made in case the shares of a listed company are being acquired
  • Affidavits and declarations
  • Share subscription
  • Purchase agreement
  • In case listed company is involved, reporting to the stock exchange

Government fee is applicable on the following:

  • Filing merger before the National Company Law Tribunal
  • In case the shares are held in physical form, the share transfer stamp duty for acquiring shares has to be paid
  • Fee payable to ROC/RD upon filing of forms and applications
  • Notary fee for notarization of affidavits
  • Stamp duty on affidavits, merger order, etc.

S.No.

Topics

Keywords

1.

DIN disqualification

DIN disqualification

2.

FEMA consultancy

Foreign Exchange Management Act

3.

SME-IPO

SME-IPO, Initial Public Offering

4.

AIF Registration

Alternative Investment Fund, AIF Registration

5.

NCLT appeals

NCLT, National Company Law Tribunal

The concept of Mergers and Acquisitions in India are governed and regulated by the provisions of Companies (Compromises, Arrangements and Amalgamations) Rules, 2016 and under section 230 read with section 232 of the Companies Act, 2013.

The following listed are the factors that drive mergers and acquisitions:

  • Value Creation
  • Diversification
  • Acquisitions of assets
  • Increase in financial capacity
  • Tax purposes
  • Incentive for Managers
  • Economies of scale
  • Acceleration of growth
  • Improve company’s performance
  • Due Diligence
  • Gaining entry into new markets
  • Strategic Drivers
  • Increased market share
  • Obtaining new products

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