Table of content

Introduction to Mergers and Acquisition.
Mergers
Acquisitions
Difference between Merger and Acquisition.
Procedure for Mergers and Acquisitions.
Examples of Merger and Acquisition
Conclusion

INTRODUCTION TO MERGERS AND ACQUISITIONS:

A business may grow over time as the utility of its products and services is recognized. It may also grow through an inorganic process, symbolized by an instantaneous expansion in work force, customers, infrastructure resources and thereby an overall increase in the revenues and profits of the entity.

Mergers and acquisitions are manifestations of an inorganic growth process. While mergers can be defined to mean unification of two players into a single entity, acquisitions are situations where one player buys out the other to combine the bought entity with itself. It may be in form of a purchase, where one business buys another or a management buyout, where the management buys the business from its owners.

Further, de-mergers, i.e., division of a single entity into two or more entities also require being recognized and treated on par with mergers and acquisitions regime as recommended below, and accordingly references below to mergers and acquisitions also is intended to cover de-mergers.

Mergers and acquisitions (M&A) is a practice area of the law, focused on domestic and global transactions aimed at consolidating businesses of two or more companies through legal operations such as mergers, purchase of assets, tender offers, and hostile takeovers among others.

The legal framework governing mergers, acquisitions, in India is primarily governed by the Companies Act, 2013, along with the rules made there under.

MERGERS:

A merger requires two companies to consolidate into a new entity with a new ownership and management structure. In other words, a merger is the legal consolidation of two business entities into one.

Mergers are most commonly done to gain market share, reduce costs of operations, expand to new territories, unite common products, grow revenues, and increase profits- all of which should benefit the firms’ shareholders. There are several types of mergers and also several reasons why companies complete mergers.

There are five major types of mergers namely conglomerate, congeneric, market extension, horizontal, and vertical:

Conglomerate: This is a merger between two or more companies engaged in unrelated business activities. The firms may operate in different industries or in different geographical regions. A pure conglomerate involves two firms that have nothing in common. A mixed conglomerate, on the other hand, takes place between organizations that, while operating in unrelated business activities, are actually trying to gain product or market extensions through the merger.
Congeneric: A congeneric merger is also known as a Product Extension Merger. In this type, it is a combining of two or more companies that operate in the same market or sector with overlapping factors, such as technology, marketing, production process, and research and development (R&D). When two companies become one under a product extension, they are able to gain access to a larger group of consumers and, thus, a larger market share.
Market extension: This type of merger occurs between companies that sell the same products but compete in different markets. Companies that engage in a market extension merger seek to gain access to a bigger market and, thus, a bigger client base. To extend their markets, Eagle Bancshares and RBC Centura merged in 2002.
Horizontal: A merger is considered horizontal if the two companies already offer the same products or services. Horizontal mergers help companies reduce competition and dominate the market. For example, gas giant Exxon combined with das giant Mobil back in 1998 to form ExxonMobil. At the time, that horizontal deal valued the new company at $81 billion.
Vertical: A merger is considered vertical if the two companies operate within each other’s supply chain. Think of a home construction company purchasing a window pane manufacturer or a winery buying a glass bottle manufacturer. Vertical mergers help companies reduce costs because they effectively cut out the middleman.

Merits and demerits of mergers:

Merits

They can turbocharge growth.
They help companies achieve economies of scale.
They give companies access to capital.

Demerits

They are costly and time consuming.
They are stressful.
They don’t always pan out.

ACQUISITIONS:

In an acquisition, a new company does not emerge. Instead, the smaller company is often consumed and ceases to exist with its assets becoming part of the larger company.

Acquisitions, sometimes called takeovers, generally carry a more negative connotation than mergers. As a result, acquiring companies may refer to an acquisition as a merger even though it’s clearly a takeover. An acquisition takes place when one company takes over all of the operational decisions of another company. Companies may acquire another company to purchase their supplier and improve economies of scale-which lowers the costs per unit as production increases.

Companies consolidate for a variety of reasons and in a number of ways. The most common types of acquisitions include:

Horizontal Acquisition: A horizontal acquisition occurs when a company buys another company that offers similar products or services. So, for instance, if one streaming network were to purchase another streaming network that would be considered a horizontal acquisition.
Vertical Acquisition: A vertical acquisition occurs when a company buys another company that produces a product in its existing supply chain. So, for instance, if a streaming network purchases a film or television production company, that would be considered a vertical acquisition.
Congeneric Acquisition: A congeneric acquisition occurs when one company buys another company that offers different products or services, but caters to the same customer base. So if a streaming network were to buy a smart television manufacturer, which would be considered a congeneric acquisition.
Conglomerate Acquisition: A conglomerate acquisition occurs when one company buys another company from a completely separate industry. So if a streaming network buys a crayon company, which would be considered a conglomerate acquisition.

Merits and demerits of acquisition:

Merits:

They can increase market share.
They can lower costs.
They reduce or eliminate competition.

Demerits:

They take time
They cost money
They can be mispriced

DIFFERENCE BETWEEN MERGERS AND ACQUISITIONS:

The term acquisition is also sometimes used synonymously with merger, but both words technically have different meanings. In an acquisition, the two companies continue to function as separate legal entities.

A merger, conversely, occurs when two existing companies combine to form a new legal entity. For example, Exxon and Mobil coming together to form ExxonMobil back in 1999 or Price Waterhouse merging with Coopers and Lybrand to form PricewaterhouseCoopers (PwC) in 1998.

PROCEDURE FOR MERGERS AND ACQUISITIONS:

The procedure for mergers and acquisitions are as followed;

Pre-transaction planning: Before the transaction, both companies should conduct a thorough analysis of their own strengths and weaknesses, as well as those of their potential partner. They should also identify areas of overlap and determine the strategic fit of the transaction.
Valuation: Both companies should determine the fair value of their assets and liabilities to establish a fair exchange ratio or price. This process typically involves hiring a third-party appraiser to provide an objective valuation.
Due diligence: The acquiring company should conduct a comprehensive review of the target company’s financial statements, contracts, legal documents, and operational procedures to identify any potential risks or liabilities.
Negotiation: Once the due diligence process is complete, both companies should enter into negotiations to establish the terms of the transaction, including the exchange ratio or price, the structure of the transaction, and any contingencies or conditions.
Documentation: Once the terms have been agreed upon, both companies should prepare and execute legal documentation, such as a merger agreement, acquisition agreement, or purchase agreement.
Regulatory approvals: Depending on the nature of the transaction involved, both companies may need to obtain regulatory approvals from board of directors, shareholders and various other stakeholders including regulatory agencies and government agencies.
Integration: After the transaction is complete, the companies should begin the process of integrating their operations, systems, and cultures to realize the benefits of the transaction.
Post-transaction evaluation: Finally, both companies should evaluate the success of the transaction and identify any areas for improvement or further integration. This evaluation process should continue over time to ensure the ongoing success of the combined entity.

The procedures involved in mergers, acquisitions can be complex and time-consuming, and it’s important to have experienced professionals to guide the process.

Examples of Mergers and Acquisitions:

Zee Entertainment – Sony India Merger: Zee Entertainment Enterprises Limited (ZEEL) and Sony Pictures Networks India (SPNI), two of India’s biggest media conglomerates, have taken the first steps towards a multibillion-dollar merger. The Zee board of directors approved the merger between the two companies. Sony Pictures Entertainment would invest $1.575 billion in the newly consolidated firm as part of the acquisition.
Vodafone idea Merger: The Vodafone Idea merger to be valued at $23 billion. Although the deal resulted in a telecom giant it is safe to say that the 2 companies were pushed to do so due to the entry of Reliance Jio and the price war that followed. Both companies struggled amidst the growing competition in the telecom industry.

CONCLUSION:

In conclusion we can say that the mergers and acquisitions are a common strategy used by companies to achieve growth and expand their market share. However, they can also be complex and challenging endeavours that require careful planning, execution, and integration.

Most of these mergers and acquisition are predatory and take place when the acquirer is doing well but unfortunately, there may be multiple reasons that may turn the mergers and acquisition into a disaster. That is why companies take extra precautions before entering into mergers and acquisition and ensuring they are taking on an asset and not just a liability.

Written by – Nireesha Rao

The following sources were referenced during the research for this article

Mergers and Acquisitions in the 21st Century: Empowering Growth Through Strategic Alliances

Table of content

INTRODUCTION TO MERGERS AND ACQUISITIONS: