MERGERS & ACQUISITIONS
We are living in a time where significant economic change are taking place in all the spheres of the commercial world. Mergers and acquisitions (“M&A”) have become common business strategy, implemented by thousands of companies across the globe. The very concept of the M&A is driven by a philosophy of shareholder value that does not only form a new economic, social and cultural environment in the Companies, but also enable them to achieve their maximum potential to grow faster and provide entrepreneurs rewards for their efforts.
Merger: is defined as the combination of two or more companies into a single company where one survives and the other loses its corporate existence. The survivor acquires the assets as well as liabilities of the merged company or companies.
Amalgamation: Halsbury’s Laws of England describe amalgamation as a blending of two or more existing undertakings onto one undertaking, the shareholders of each blending company becoming substantially the shareholders in the company which is to carry on the blended undertaking.
The term mergers and acquisition refers to the facet of corporate finance, strategy and management dealing with buying and selling or amalgamating different companies that can help in financial aid or help in increasing the market share and growth without creating another business entity.
In India, The movement of mergers and acquisitions has changed over the years. Since 1991, the Indian economic reforms has opened up lot of challenges and completion from within and outside the country. Now even the Indian entrepreneurs are acquiring foreign enterprises.
This paper explores the concept of M&A in detail, the trends followed and all related scenarios.
REASONS FOR MERGERS AND ACQUISITIONS:
In short, if we conclude the main reason behind adopting M&A strategy is to make 2+2=5
However, if we analyze the impact of a successful M&A on different organs and effectiveness of the Company, we tend to avail below mentioned reasons:
- Financial synergy
- Growth acceleration
- Diversification for higher growth products or markets
- Eliminate Competition
- technological change
- Tax considerations
- Undervalued target
- Risk diversion
There is always synergy value created by the joining or merger of two companies. The synergy value can be seen either through the Revenues (higher revenues), Expenses (lowering of expenses) or the cost of capital (lowering of overall cost of capital).
On the basis of movement in the industries:
- Horizontal Mergers
Merger of two firms operating and competing in the same line of business activity with a view to form a larger firm, which may have economies of scale in production by eliminating duplication of competitions, increase in market segments and exercise of better control over the market. It majorly helps firms in industries like pharmaceuticals, automobiles where huge amount is spent on R&D to achieve a critical mass and reduce unit development costs.
- Vertical Mergers
A merger between two or more firms engaged in different stages of production. The main reason for vertical merger is to ensure ready take off of the materials, gain control over scarce raw materials, gain control over product specifications, increase in profitability by eliminating the margins of the previous supplier/ distributor and in some cases to avoid sales tax.
Example: Tea Estate Ltd merging with Brooke Bond Ltd.
- Conglomerate Mergers
Conglomerate merger refers to the merger of two or more firms engaged in unrelated line of business activity.
Example: GNFC acquiring Gujarat Scooters.
Two important characteristics of conglomerate mergers are:
A conglomerate firm controls a range of activities in various industries that require different skills in the specific managerial functions of research, applied engineering, production and marketing.
The diversification is achieved mainly by external acquisitions and mergers and not by internal development.
- Consolidation Mergers
This involves a merger of a subsidiary company with parent company. The reasons behind such mergers are to stabilize cash flows and to make funds available for the subsidiary. In consolidation mergers, economic gains are not readily apparent as merging firms are under the same management. Still, Flow of funds between parent and the subsidiary is obstructed by other consideration of laws such as taxation laws, Companies Act etc. Therefore, consolidation can make it easier for to infuse funds for revival of subsidiaries.
Stages involved in any M&A
As a professional as well as a Corporate, one needs to understand how a M&A process works. There are several stages before planning, initiating, executing and concluding an M&A process.
Such stages can be figured out as under:
|1||Pre-acquisition review||this would include self-assessment of the acquiring company with regards to the need for M&A, ascertain the valuation (undervalued is the key) and chalk out the growth plan through the target|
|2||Search and screen targets||This would include searching for the possible apt takeover candidates. This process is mainly to scan for a good strategic fit for the acquiring company.|
|3||Investigate and valuation of the target||Once the appropriate company is shortlisted through primary screening, detailed analysis of the target company has to be done. This is also referred to as due diligence.|
|4||Negotiations||Once the target company is selected, the next step is to start negotiations to come to consensus for a negotiated merger or a bear hug. This brings both the companies to agree mutually to the deal for the long term working of the M&A.|
|5||Due Diligence||Due diligence is an exhaustive process that begins when the offer has been accepted; due diligence aims to confirm or correct the acquirer’s assessment of the value of the target company by conducting a detailed examination and analysis of every aspect of the target company’s operations – its financial metrics, assets and liabilities, customers, human resources, etc.|
|6||Re-negotiation||Once the Due diligence is completed, the Parties (especially acquirer) usually tend to re-negotiate the terms and value of the deal based on the findings of the due diligence. On finding of a major flaw in the subject matter, the value and terms of the subject matter bears a major impact.|
|7||Signing of Definitive/Binding Agreement||Once the negoation and renegotiations phases are over and the parties have finalized their terms in respect of almost every ingredient of the transaction. Then the parties sign a Definitive Agreement which is binding in nature and paves ways for future operation of the transactions.|
|8||Closing the Deal||This definitive agreement is generally a beginning of the transaction. In it, certain parameters and milestones are prescribed which ultimately fixes a particular event as a Closing event. After achieving of closing by both the parties, the Transaction or Deal is deemed as Complete.|
|9||Post-merger integration||If all the above steps fall in place, there is a formal announcement of the agreement of merger by both the participating companies.|
In 2017, more than 1,000 major mergers and acquisitions were seen, the highest in the current decade.
Buoyed by the recently-implemented Insolvency and Bankruptcy Code (IBC) and an extremely competitive atmosphere in the mobile and e-commerce space, deal making reached new highs in 2018.
Here are some of the largest deals that grabbed headlines this year:-
- FlipKart Takeover
- merger of India’s No.3 and No.4 telecom players i.e. Vodafone and Idea
- Tata Steel successfully submitted the winning bid for bankrupt rival Bhushan Steel.
- Hindustan Unilever to buy GSK’s consumer nutrition brands in one of India’s
- Merger of three public-sector banks
Team VNC Corporate & Legal, has assisted several Corporate Groups to successfully structure their M&A deal and assist in Documentation, due diligence and closing of many transactions pertaining to Real Estate Deal, Company Acquisition, Power Project Acquisition, IT Project/Company Acquisition and many more. We have a team of great professionals who strive to achieve the best outcome of Client M&A requirements.
—Team VNC Corporate & Legal, Advocates and Solicitors