Introduction
Mergers and Acquisitions, in general terms, mean the consolidation of companies or assets through financial transactions. In acquisitions, a company is purchased, and in a merger, the companies are combined to create a new legal entity under a single corporate name.
When one company absorbs another company and establishes itself as the owner, that purchase is called an acquisition. An acquisition of a company can either be a friendly or a hostile takeover.
Example: The joint venture of Reliance and The Walt Disney Company, the merger of their companies, led to the culmination of Jiohotstar, in which Reliance is the major stakeholder with 63.16% and Disney holds 36.8%.
Mergers and Acquisitions are significant in the modern business environment. It is a strategic alliance that helps to adapt to the changing market, opportunities, and customer demands. It helps businesses to grow or downsize. It can be used to access new markets, expand their product line, etc.
M&A synergies, also known as merger synergies or acquisition synergies, refer to the benefits or advantages that can be achieved from merging two companies. In simple words, when the merged value of two firms is higher than the pre-merger value of both firms simply added together.
Meaning and Concept of Mergers and Acquisitions
| Basis | Merger | Acquisition |
| Meaning | A merger is the combination of two companies that come together to form a new entity or company. | Acquisition means acquiring a new company or purchasing a company, without forming a new entity. |
| Intention | For companies to combine into a single entity and increase revenue, growth, sales, etc. | For companies to enter new markets, diversify, gain control, and expand market shares. |
| Purpose | It happens to decrease competition and increase operational efficiency. | It happens to increase the growth of the company, and more competition. |
| Legal Formalities | More legal formalities | Fewer legal formalities |
| Terms | A merger is considered friendly and is planned and executed. | Acquisition is a hostile takeover of the company; it isn’t as friendly. |
| Size of Company | Remains the same or less | Remains the same or is larger than the previous one. |
| Example | The merger between Reliance and The Walt Disney Company led to the formation of JioHotstar. | Zomato’s acquisition of Blinkit. |
Different Types of M&A Transactions
Horizontal Merger – Between companies in the same industry.
The purpose of a horizontal merger is to increase market shares, reduce competition, and boost economic sales, which leads to cost savings.
Example: Vodafone India and Idea Cellular Vodafone Idea Limited merged to form a new entity to compete better with companies like Reliance.
Vertical Merger – Between companies in the same supply chain.
The purpose of this is to increase operational efficiency, reduce costs, and gain more control over the distributors and production.
Example: The merger of HDFC Limited and HDFC Bank, where a housing finance company merged with a commercial bank.
Conglomerate Merger – Between unrelated businesses.
The purpose of this merger is to diversify, expand into new business, and grow.
Example: The merger of Reliance Industries Limited and the British toy company Hamleys, in which Reliance Industries Limited acquired Hamleys.
Concentric Merger – Between firms with similar customer bases but different products.
The purpose of this merger reduce costs by sharing resources and increase market shares.
Example: The merger of PepsiCo with Gatorade and Tropicana.
Reverse Merger – A private company merges with a public company to become publicly listed.
The purpose of this merger is that the company can gain a stock market listing and to save money and time.
Example: ICICI’s 2002 reverse merger with its subsidiary, ICICI Bank.
Market Extension Merger – similar kind of products sold in different markets.
The purpose of this merger is to enhance brand recognition and expand the market.
Example: Tata Motors and Jaguar Land Rover [2008].
Product Extension Merger – companies provide different products and services in the same geographical market and tie up with each other.
The purpose of this merger is to reduce the cost and improve synergies.
Example: The merger of PepsiCo and Quaker Oats [2001].
Step-by-Step M&A Process
The Mergers and Acquisitions have several steps and can take months to several years to complete. Let’s look into these steps:
Identification of Target Company
The first step in Mergers and Acquisitions is the identification of the company that aligns with the purchaser’s strategy, such as expanding market, entering new markets. This entails looking into various firms to find out which one precisely matches the plan.
Example: Walmart’s purchase of Flipkart was a tactical action to penetrate the Indian e-commerce market.
Due Diligence
The company that is to be acquired is subject to a comprehensive scrutiny of its aspects in terms of legality, finance, and operations. This is very important since it gives us the opportunity to find out possible risks, liabilities, and issues that will affect the deal’s value and legality.
It is very important as it points out risks like hidden debts, lawsuits that are still going on, and non-compliance with regulations that could lead to financial losses or legal issues if the company is taken over.
Valuation and Negotiation
Valuation determines the fair price at which the target company should be sold.
- Discounted Cash Flow: evaluates the present value of cash flows that are expected to be received in the future.
- Comparable Company Analysis: compares the target company with similar companies in the market.
The lawyers and investment bankers play a crucial role in the negotiations. They facilitate the process by ensuring that the terms are compliant with all regulations and picking the right way to structure the deal so that it protects the rights and interests of both parties.
Structuring the Deal
The deal can be structured in several ways
- Share Purchase: purchasing shares of the target company.
- Asset Purchase: The target company’s specific assets are acquired.
- Merger Arrangement: Two companies are combined into one, and a single entity is formed.
The Share Purchase Agreement is crucial because it outlines the terms and conditions of the deal, together with any representations and warranties accompanying it. Thus, it provides protection to both the buyer and the seller.
Regulatory Approvals and Compliance
There is a process, and M&A is to be approved by several authorities in India.
- SEBI: authorities with respect to listed companies and securities regulation.
- The Competition Commission of India: To ascertain the deal’s non-creation of any anti-competitive consequences.
- National Company Law Tribunal: For the sanctioning of the arrangement scheme and mergers.
- RBI: for foreign exchange and other transactions.
Compliance with these authorities ensures that the deal is legally valid.
Post-Merger Integration
The merger is finalized, and the integration process becomes the most important factor in extracting the benefits and maintaining the smooth operation of the entire organization.
Cultural Alignment: Unifying the cultures of the companies for the purpose of cooperation.
Operational Integration: Merging the systems, processes, and teams.
HR policies: coordinating staff policies and advantages.
Example: The Disney-Pixar merger was successful to a great extent because of cultural compatibility.
Indian Laws and Regulations on Mergers and Acquisitions
Companies Act, 2013 (Sections 230-240) — this is where the amalgamation and arrangement processes are fully covered.
Competition Act, 2002 — the prevention of monopolies and the protection of competition are attained through the control of combinations.
SEBI (Securities and Exchange Board of India) Takeover Code, 2011 — this law governs the acquisition of publicly traded companies and also imposes the requirement of disclosure and conducting public offers.
Foreign Exchange Management Act (FEMA), 1999 — this law imposes a strict regulation regime on M&A and foreign investment transactions, especially cross-border ones.
Income Tax Act, 1961 — this Act specifies the tax implications, exemptions, and treatments with respect to M&A transactions.
One recent Indian case, the merger between HDFC Ltd and HDFC Bank, is a perfect example of how complicated the whole process of approvals by SEBI, Competition Commission of India, Reserve Bank of India, and NCLT is. The approval of the NCLT has to be obtained as it is a very important stage in the merger application process where the legality and public benefit of the merger are determined.
The legal framework created by the above-mentioned laws and regulatory authorities through their cooperation is so strong that M&A transactions in India not only get the legal approval required but also get a position in the marketplace that is to be competitive.
Importance of Understanding M&A for Students
The variety of mergers and acquisitions consists of mergers, acquisitions, amalgamations, and takeovers, which each portray a different strategic aim. The whole procedure goes through a series of painstaking and careful steps that include: identification of the right target, carrying out detailed due diligence, determining the worth and negotiating the deal, coming up with the right structure, getting the relevant approvals from the regulatory authority, and lastly, joining the companies together after the merger. Those transactions are all controlled by a very strong legal system that guarantees the protection of all parties involved and their interests.
M&A is a major factor that leads the corporate sector to increase and also to become more competitive on the global stage, through the opening up of new markets for businesses, the acquisition of new technologies, and the combination of operations, as well as the realization of operational synergies. It is a practice for both students and professionals that reviewing real M&A documents, such as Share Purchase Agreements and term sheets, is extremely helpful, since it gives a very practical view of the complexities of negotiation and legal drafting involved.
To sum up, the merger and acquisition process is not only a financial strategy but also a kind of legal art that determines the future of the corporation by mixing vision, law, and ambition into the business plan of the future.
About the Author
Aastha R.Y., an 18-year-old girl, is studying BBA LLB (Hons.) at the University of Mumbai and is very interested in corporate and business law. She is a strong legal research and writing enthusiast and has even published one article as part of her undergraduate studies, which is a sign of her strong dedication to the field of law. Her career goal is to be in corporate and business law and to use her skills in research and analysis for the benefit of legal practice.
FAQs
- What is the difference between a merger and an acquisition?
A merger combines two companies to form a new entity, while an acquisition involves one company purchasing another without creating a new company.
- What are the main reasons for M&A transactions?
M&As are executed mainly for accessing new markets, decreasing the number of competitors, and sharing the benefits of a higher efficiency operation, continuous or else by a gradual decrease of the cost or increased revenue.
- What are the different types of M&A transactions?
The most common ones are horizontal, vertical, conglomerate, concentric, reverse, market extension, and product extension mergers; each has its own specific strategic purpose.
- What is the normal course of an M&A transaction?
The main steps are: identifying the target, performing due diligence, valuing the company, negotiating the contract, structuring the deal, getting the necessary regulatory approvals, and integrating the two companies post-merger.
- What is the significance of due diligence in M&A?
Due diligence clarifies the financial, legal, and operational condition of the target company to estimate the risks, liabilities, or regulatory issues before the deal is concluded.