Combinations: Mergers and Acquisitions | Explained

The article gives an insight into the various kinds of combinations like Mergers and Acquisitions present in the market. It also enlists the basic idea that is hidden behind these combinations and explains their types and how they help the players of the market to achieve their objectives.

Introduction

A wave of restructuring sweeps the corporate world. From the exploration of oil to banking and generation of power to telecommunication, all the companies are forming a group like the one never seen before in history. Not only is this reform seen, but it was also seen that the transformation in the old industries is a requirement, and the biotechnology and e-commerce companies are being exploded. As a result of this, the restricting of corporate with various modes such as acquisitions, takeovers, amalgamation and mergers have formed an integral part of the corporate strategy in the current world.[1]

It is seen that the merging of two or more enterprises is a regular feature of the corporate world in both developed and developing countries such as European countries, the United States of America and Japan, whereby it was seen that every year a number of mergers happen. And in India, one or two mergers between enterprises could be seen every second day, which made the concept seem like wildfire in the market. A new concept of cross-border mergers emerged gradually, and it became normal for multinational companies to take part in mergers and takeovers.[2]

Examining the Indian market, it is seen that Indian companies have taken part in these transactions, which amounted to around $ 33 billion in the year of 2014, whereas a drop was seen in the year of 2015, and transactions with respect to the restructuring market worth $ 20 billion took place. In spite of this dip in the worth of the transactions, it was foretold that there would be a rise during 2016 in the trajectory of the activities of mergers and acquisitions and by virtue of which the Indian market will see deals worth $ 30 billion or more easily.[3]

There are many sectors, such as pharma, financial and banking service, e-commerce, energy, healthcare, and IT, have played a key role in the year of 2015. It was expected that in the upcoming time, there will be an increase in the number of activities and deals related to M&A transactions as not only the local investors but also international investors are finding the corporate market in India as a suitable one for their tremendous and rapid growth.

Mergers and acquisitions provide a mode for the various types of businesses in the market to combine with each other. Another way for the same is a Joint Venture whereby two businesses can come together to work in order to achieve the heights of success as partners in growth, even though the joint venture is nothing but a contractual agreement between the two or more business parties.[4]

Purpose of Mergers and Acquisitions

The principal idea behind mergers and acquisitions or any other type of combination between the various players of the market is that such a combination will help them acquire fast business growth in the corporate world. Competitive position and the improvement in the quality of the products might help the businesses to grow fast.

1. Strategy of Market Expansion: this includes the strategy for eliminating the competition in the market and protecting it from exploitation.
2. Revamping facilities of Production: an amalgamation of facilities of production by virtue of utilizing resources and plants more intensively to gain economies of scale
3. Procurement of Supplies: to provide safety to the sources of intermediary products and raw materials
4. Financial Strength: to have direct access to the cash resources and to improvise the liquidity in the market
5. Strategic Purpose: the company which is acquiring the target always sees the merger as a mode to gain more strategic objectives with the help of various kinds of combinations such as the expansion of products, vertical, horizontal, an extension of market or other objectives that might not be specified but are dependent on the corporate strategies
6. Desired level of integration: these agreements are entered into so that the desired level of integration between all the business houses that are going to combine can be achieved. Such integration could be either financial or operational in nature.

Mergers

The definition of mergers is not provided by either the Companies Act, 1956 or the Income Tax Act, 1961. However, the explanation of the term has been provided by the Companies Act of 2013 even though the Act has also refrained from providing the definition of the term. When two or more entities combine into a big entity, this phenomenon is known as a merger by virtue of which not only the assets and liabilities of both organizations get added up, but the business of both entities also becomes one.[5]

There can be a lot of objectives of mergers, such as access to different markets or sectors, acquisition of technology, economies of scale and so on. Normally when a merger takes place, the entity which has merged with other entity ceases to exist, and both entities would serve as a single entity in the market.

There are various kinds of mergers that depend on the demand of the entities taking part in the transaction.

Horizontal Mergers

It is a kind of merger that usually occurs between those business entities that are involved in the business that stands at the same level in the industry. Such a phenomenon is called ‘horizontal integration’.[6] This kind of merger helps the company to create a monopoly in the market by eliminating a competitor from the market and establishing a stronger presence there.

This type of merger has various other benefits, such as economies of scope and economies of scale. The Competition Commission of India scrutinized these kinds of mergers closely as they tend to create a monopoly which might be harmful to the interests of the consumers and other players in the market.

Vertical Mergers

When two entities, which operate in different industries or at different stages in the process of production, come together to combine with each other, such a combination is known as a vertical merger.

For instance, when a company involved in the business of construction enters into an agreement of merger with another company involved in the production of steel or bricks, such a combination is known as a vertical merger. Companies come together with the motive of lowering transaction costs and synchronizing demand and supply. Further, such a step of combination helps the enterprises in the market to come a step closer to self-sufficiency and greater independence.

Congeneric Merger

When the entities form part of the same general industry or any other industry that is related to the merging entity but they do not share any common relationship in terms of customer-supplier, such a merger is referred to as a congeneric merger.

A company that uses this kind of merger for using the resulting ability to take into use the distribution channels and the same sales to reach out to the customers that are engaged with both businesses.[7]

Conglomerate Merger

When two different entities that form part of two different industries come together to enter into an agreement of merger, such a merger is known as a conglomerate merger.

The basic idea behind this kind of merger is that it helps the involved entities to fully utilize the financial resources available to them, to enlarge their capacity to take the debts, to get a hike in the prices of their outstanding shares due to the increase in leverage and earnings per share and also lowering down the average cost of capital.[8]

Cash Merger

In this type of merger, when a party gets merged with another player in the market, the shareholders of the merging party are provided with cash in place of the shares as usual. This is also known as a cash-out merger. This merger works as an effective exit route for the shareholders who want to sell their shares and leave that enterprise.

Triangular Merger

This is the merger that often takes place due to the tax and regulatory reasons available. As suggested by the name, this is an arrangement whereby the target comes into an agreement of merger with the subsidiary of the acquirer. This merger can be forward and backward in nature depending on the enterprise that is surviving after the merger takes place.

Forward merger takes place when the target gets merged into the subsidiary of the acquirer, and the subsidiary survives after the merger. On the other hand, the Backward merger takes place when the opposite of the forward merger happens, i.e. the subsidiary gets merged into the target entity, and the target survives even after the merger takes place.

Acquisitions

When a person purchases the share capital in such a way to control the interests enunciated with the all or substantial number of shares or assets or liabilities of the target entity, such an agreement is known as acquisition. This is also known as Takeover.

There can be a hostile or friendly takeover, which is entered into between the offering entity and the majority of the shareholder of the acquiring entity. This is done either by purchasing the shares that are available in the open market or by offering to the whole body of shareholders to acquire the shares of the target company.

There can be two ways to acquire a company; first, by acquiring the liabilities and assets of the target company and second, by acquiring the shares of the target company. When the assets and liabilities are acquired, such acquisition is basically a going concern. The Income Tax Act refers to a slump sale to such acquisition or transfer.[9]

It might help the acquirer to get more amount of control in the target company in comparison to the stake of the acquirer in the target. For instance, there is a possibility that there are 40% of the shares of the target company held by the acquirer but it enjoys veto rights, management rights or voting rights that are disproportionate to its shareholding.

Demerger is another way of acquisition. This is the agreement wherein a single big entity breaks down into two or more small entities. Such a form is the reciprocal of the merger. When a company has branched into more than one industry, it might decide to spin off or hive off or cut off a branch to form a new entity. Generally, in such scenarios, the shares of the original entity only become the shareholders of the newly formed entity.

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[1] “Handbook on Mergers, Amalgamations and Takeovers- Law and Practice,” The Institute of Company Secretaries of India, 2004, at p. 1

[2] Ibid.

[3] https://articles.economictimes.indiatimes.com/25-12-25/

[4] Mergers and Acquisitions in India, Nishith Desai Associates; Available Here

[5] Section 230- 234 of the Companies Act, 2013

[6] ‘Corporate Mergers Amalgamations and Takeovers’, J.C Verma, 4th edn., 2002, p.59

[7] ‘Financial Management and Policy-Text and Cases’, V.K Bhalla, 5th revised edn., p.1016

[8] Ibid, note 4, at p. 59

[9] Sec 2 (42) of the Income Tax Act

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