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Home / Mergers & Acquisitions
Mergers & Acquisitions
A business may grow either by organic or inorganic growth. In the case of organic growth, a firm grows gradually over time in the normal course of the business, through acquisition of new assets, replacement of the technologically obsolete equipments and the establishment of new lines of products. In case of an inorganic growth, the business either acquires another running business or merges with the same and grows overnight through combinations. These combinations are in the form of mergers, acquisitions, amalgamations and takeovers of existing business and have now become important features of business restructuring. Inorganic growth strategy is an important contributing towards the growth of a number of leading businesses the world over.
Benefits of Mergers & Acquisitions
The most common motives and advantages of mergers and acquisitions are:-
- Ability to overcome weaknesses:
Business has limited capacity and resources Internal growth requires that an organization should develop its operating facilities- manufacturing, research, marketing, introduce new technologies etc. But, lack or inadequacy of resources and time needed for internal development may constrain a organizations pace of growth. In order to overcome the same and accelerate business growth, it becomes essential to acquire production facilities as well as other resources from outside through mergers and acquisitions.
- Achieving Economies of scale:
Combination or acquisition of business will lead to increase in the volume of production thereby leading to a reduction in the cost of production per unit. With merger, the fixed costs are distributed over a large volume of units causing the unit cost of production to decline. Economies of scale may also arise from other indivisibilities such as production facilities, management functions and management resources and systems.
- Achieving Operating economies:
When two or more businesses combines, it result in cost reduction due to operating economies. As result of the combination the business may avoid or reduce over-lapping functions and consolidate its management functions, introduce new technology, production methodology such as manufacturing, marketing, R&D and thus reduce operating costs.
- Creating better Synergy:
implies a situation where the combined firm is more valuable than the sum of the individual combining firms. It refers to benefits other than those related to economies of scale. Operating economies are one form of synergy benefits. But apart from operating economies, synergy may also arise from enhanced managerial capabilities, creativity, innovativeness, R&D and market coverage capacity due to the complementing resources and skills and a widened horizon of opportunities.
- Diversification and Expansion:
Acquisitions gives organization an opportunity to diversify in other business, which otherwise was not possible for the organization due to being engrossed in current business activities. Diversification implies growth through the combination of firms in unrelated businesses and spreading of risk on number unrelated businesses. It results in reduction of total risks through substantial reduction of cyclicality of operations. Acquisition gives business an edge by making a direct entry into new business segment without undertaking much preparation.
- Achieving financial strategy:
Every business has its financial capacity and growing business needs large funds , merger may solve this problem as it results in achieving financial synergy and benefits the business in many ways:-
- Provides access to funds and thereby eliminates financial constraints
- Mergers reflect financial strength and thereby increase valuation.
- Merger of two companies can bring stability of cash flows which in turn reduces the risk of insolvency and enhances the capacity of the new entity to service a larger amount of debt
- Due to financial stability, the merged firm is able to borrow at a lower rate of interest.
- Overcoming Competition:
Merger and acquisition can be a useful tool for overcoming the increasing competition. A merger can increase the market share of the merged entity and improves the profitability of the firm due to economies of scale. The bargaining power of the firm vis-à-vis labour, suppliers and buyers is also enhanced. The merged firm can exploit technological breakthroughs against obsolescence and price wars.
- Tax Benefits:
Merging a business with accumulated losses with the one having profit, can help in reducing the tax liability of the business, for the purpose of income tax.
Due to its inherent benefits, Mergers and acquisitions have today become an indispensable part of every business long term growth strategy.
Mergers or Amalgamations
A merger is a combination of two or more distinct businesses into one business. Merger is also substituted by the term 'amalgamation' in India. The Income Tax Act,1961 [Section 2(1A)] defines amalgamation as the merger of one or more companies with another or the merger of two or more companies to form a new company, in such a way that all assets and liabilities of the amalgamating companies become assets and liabilities of the amalgamated company and shareholders not less than nine-tenths in value of the shares in the amalgamating company or companies become shareholders of the amalgamated company.
Thus, mergers or amalgamations may take two forms:-
- Merger through Absorption:
Aabsorption is a combination of two or more organization into an 'existing organization'. All organizations except one lose their identity in such a merger. For example, absorption of X Ltd by Y Ltd. Y, an acquiring business (a buyer), survived after merger while X, an acquired company (a seller), ceased to exist. Business X transferred all its assets, liabilities and shares to Business Y.
- Merger through Consolidation:
A consolidation is a combination of two or more organizations into a 'new organization'. In this form of merger, all business entities are legally dissolved and a new entity is created. Here, the acquired business entity transfers its assets, liabilities and shares to the acquiring entity for cash or exchange of ownership stake. For example, merger of A Ltd, B Ltd, C Ltd and D Ltd into an entirely new company called E Ltd.
Types of mergers
- Horizontal merger:
It involves combination of two or more entities engaged in the same area of business. For example, combining of two telecom companies to gain dominant market share.
- Vertical merger:
It involves combination of two or more entities engaged in different stages of production or distribution of the same product. For example, joining of a Newspaper publishing entity and a Books and journal publishing entity. Vertical merger may take the form of forward or backward merger. When a entity combines with the supplier of material, it is called backward merger and when it combines with the customer, it is known as forward merger.
- Conglomerate merger:
It involves the combination of entities engaged in unrelated lines of business activity. For example, merging of different businesses like manufacturing of cement products, insurance investment and advertising agencies.
Acquisitions and Takeovers
An acquisition may be defined as an act of acquiring effective control by one entity over assets or management of another entity without involving any combination of entities. Thus, in an acquisition the control of two or more business entities changes without effecting their independence and separate legal status. Acquisition can be of the following types:
- Voluntary Acquisition:
Where the acquirer acquires the business with the consent of its existing owner, is termed as voluntary acquisition. It involves discussion and deliberation with the current owners to finalize the terms and conditions of the acquisition. It is considered as peaceful process, under which the benefit of each of the party is taken into account.
- Hostile Acquisition:
Where the acquirer acquires the business without the consent of its existing owners is termed as Hostile acquisition. In case the acquirer, either acquire shares from some and not all the owners of the business or from the market. It is not a peaceful process , as the management in such cases opposes the move of takeover.
Regulations for Mergers & Acquisitions
Mergers and acquisitions of Companies are regulated under various laws in India. The objective of the laws is to make these deals transparent and protect the interest of all shareholders. They are regulated through the provisions of:-
Mergers
The Companies Act, 1956
Section 391 and 394 of the Companies Act 1956 lays down the legal procedures for mergers of company with another company/Partnership/LLP:-
- Approval of Board of Directors: - The Board of Directors of the individual companies should approve the draft proposal for amalgamation and authorise the managements of the companies to further pursue the proposal.
- Application in the High Court:- A petition for approving the draft amalgamation proposal duly approved by the board of directors of the individual companies should be made to the High Court, in whose jurisdiction the registered office of the company is situated and in case of companies fall under jurisdiction of different High Courts, than petition for approval shall be filed in each court.
- Shareholders' and creditors' meetings:- The individual companies should hold separate meetings of their shareholders and creditors for approving the amalgamation scheme. At least, 75 percent of shareholders and creditors in separate meeting, voting in person or by proxy, must accord their approval to the scheme. In case the requisite number of shareholders/creditors gives their written consent, than the High Court will dispense the requirement of holding the meeting.
- Sanction by the High Court:- After the approval of the shareholders and creditors, on the petitions of the companies, the High Court will pass an order, sanctioning the amalgamation scheme after it is satisfied that the scheme is fair and reasonable. The date of the court's hearing will be published in two newspapers, and also, the regional director of the Company Law Board will be intimated.
- Filing of the Court order:- After the Court order, its certified true copies will be filed with the Registrar of Companies.
- Transfer of assets and liabilities:- The assets and liabilities of the acquired company will be transferred to the acquiring company in accordance with the approved scheme, with effect from the specified date.
- Payment by cash or securities:- As per the proposal, the acquiring company will exchange shares and debentures and/or cash for the shares and debentures of the acquired company.
Acquisitions
Companies Act 1956
Section 372A of the Companies Act 1956 lays down the legal procedures for acquisition:-
- Approval of Board of Directors: The proposal to acquire the company must be approved by unanimous vote of the Board of Directors.
- Approval of Shareholders: The approval of shareholders by way of special resolution for the proposed acquisition will be required when the aggregate amount of investments to be made together with aggregate amount of amount of loan/investment already made, guarantee and security provided to all other body corporate exceeds the 60% of its paid-up share capital and free reserves or 100% of its free reserves, whichever is more.
SEBI (Substantial Acquisition of Shares and Take-overs) Regulations, 1997
In case of acquisition of stake in the company listed on any recognized stock exchange in India, the acquirer has to comply with the requirement of SEBI (Substantial Acquisition of Shares and Take-overs) Regulations, 1997. The regulation prescribes various upto which acquisition can be made and compliances to be undertaking the acquisition. The regulation prescribes that in case of acquisition of shares beyond the prescribed limits, the acquirer has to give an opportunity to the existing shareholders to sell their shares to them, by way of open offer.
General Laws
The Competition Act, 2002
This Act is an antitrust law which seeks to regulate the various forms of business combinations through Competition Commission of India. Under the Act, no person or enterprise shall enter into a combination, in the form of an acquisition, merger or amalgamation, which causes or is likely to cause an appreciable adverse effect on competition in the relevant market and such a combination shall be void. Enterprises intending to enter into a combination may give notice to the Commission, but this notification is voluntary. But, all combinations do not call for scrutiny unless the resulting combination exceeds the threshold limits in terms of assets or turnover as specified by the Competition Commission of India.
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