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Published by Enhelion, 2019-11-25 07:43:10





1.1 Introduction

Sir Milton Friedman, an economist who won the Nobel Prize for his research in Economics,
came up with the theory that the basic purpose behind every business operation is to
maximize the profits of its shareholders.

Mergers and Acquisitions are nothing but means of consolidating enterprises to grow as a
single business entity which is stronger, and more efficient in maximizing the profits of its
shareholders. The fundamental principle here is that 2 + 2 = 5, i.e., two companies share a
greater value when they come together compared to when they operate individually. These
options look more tempting when one of the companies operates sub - optimally below its
potential. In such cases, the company with the stronger foundation and superior financial
resources merges with or acquires the other company (operating below its potential) to create
a company which has a better competitive advantage and an increased share value. At the
same time, the target company usually doesn’t resist very much as it realises the difficulty in
surviving alone.

Mergers and Acquisitions are complicated processes which, inter alia, require-

➢ Preparation
➢ Analysis
➢ Investigation
➢ Deliberation

There are a lot of internal and external parties who might be affected by a merger or an
acquisition, like:

➢ Promoters
➢ Government agencies
➢ Bankers
➢ Workers
➢ Professional managers of the companies involved.

Before a deal is finalized, interests of all such parties require consideration, and their
concerns should be addressed, so that any possible hurdles can be avoided.

1.2 History of Mergers and Acquisitions in India

For a long time, companies and businesses in India were hesitant to come together to carry on
business. This is because they were governed by, oppressive and undesirably restrictive, rules
and procedures laid down by the Monopolistic and Restrictive Trade Practices Act, 1969.
This legislation was far-reaching and acted as a deterrent for M&A activities and a significant
cause for very less number of businesses joining hands together.

But this changed in the year 1988, when India witnessed one of its oldest significant company
mergers or business acquisition. It was the hostile takeover by Swaraj Paul to subjugate DCM
Ltd. and Escorts Ltd. In addition to that, numerous Non – Resident Indians tried to gain
control over different companies by means of their stock exchange portfolios.

The value of mergers and acquisitions involving Indian companies more than doubled in the
first nine months of 2018 to a shade below the $100 billion mark.1

Today, with the globalization of businesses and the growing competition, the scenario has
changed a lot. In fact, India is believed to be among the top countries that have entered into
mergers and acquisitions mode.2

1.3 Mergers

When the board of directors of two companies decide to come together and amalgamate their
companies and vote in its favour, the two companies are said to have decided to merge
together. After the process of merger, the acquired company ceases to have a distinct entity
and becomes part of the company acquiring it. More often than not, a merger is used to
expand into new territories and acquire more market share till the time the product lines of
both the companies unite.

1 ‘M & A poised to cross $100 billion- mark in 2018’, livemint,
in-2018.html accessed on 25 November 2018.
2Ajay Gehi, History Of Mergers And Acquisition

Significance of a merger-

➢ It can present a remarkable opportunity to a business entity which aspires to grow and
become more successful.

➢ When a company decides to sell itself, it is best available option for the company to
find another company which has deep pockets and has the willingness to acquire it.

➢ The acquired company will be successful in surviving by becoming a subsidiary of
the acquiring company.

➢ Helps companies look for an exclusive product or a strong distribution channel or a
unique quality which is not available anywhere else due to which the acquiring
company might be forced to pay a premium price.

The key to a successful merger lies in finding the right company to acquire which has the
following characteristics-

➢ Sizable business good market share
➢ Good client list
➢ Good distribution network
➢ Good order book, technology, efficient employees etc.

Also, for a merger to succeed, it must be a win – win situation for both the companies. For
this purpose, one or more of the companies might be required to-

➢ Clean up its balance sheets
➢ Remove poorly performing products
➢ End insider deals
➢ Shorten unrestricted fringe benefits
➢ Clear all tax defaults etc.

1.4 Types of Mergers

Mergers can be divided into different kinds, which are-

1. Horizontal merger- When the acquiring company and the acquired company operate

in the same line of business or are competitors. For example, Lipton India & Brooke

bond and Bank of Mathura with ICICI Bank.

2. Vertical merger- When both the companies are involved in the same line of

production but at different stages. For instance, Reliance and FLAG Telecom group.

3. Reverse merger- when a parent company merges into a subsidiary, or a profit-making

firm merges into a loss-making one. For example, when Godrej Soaps Ltd. merged

with Gujarat Godrej Innovative Chemicals Ltd.

4. Conglomerate merger- When both the companies operate in completely

different lines of business. This kind of merger takes place to diversify and spread the

risks, in case the current business does not yield adequate profits. Example, L&T and

Voltas Ltd.

1.5 Acquisitions

An acquisition can be considered as a corporate action through which an entity buys most of
the ownership stakes of another entity to have a control on it. An acquisition happens when a
buying company obtains more than 50% ownership in a target company. As a major aspect of
the trade, the acquiring organization frequently buys the target company's stock and other
resources, which permits the acquiring organization to settle on choices in regards to the
recently gained resources without the approval of the target company'sstakeholders.
Acquisitions can be paid for in cash, in the acquiring company's stock or a blend of both.

Companies perform acquisitions for various reasons-

➢ They may be seeking to achieve economies of scale, greater market share,
increased synergy, cost reductions, or new niche offerings.

➢ To grow their operations to another country, purchasing an existing company might
be the right approach to enter a remote market rather than starting afresh.

➢ The purchased business will as of now have its own workforce (both labour and
management), a brand name and other intangible resources, guaranteeing that the
acquiring company will start off with a decent client base.

➢ Acquisitions are often made as part of a company's growth strategy when it is more
beneficial to take over an existing firm's operations than it is to expanding on its own.
It makes difficult for large companies to keep growing without losing efficiency3.

➢ At a point when an industry draws in numerous competitors or when the supply from
existing firms increase excessively, organizations may look to acquisitions as an
approach to reduce excess capacity, neutralize the opposition, or concentrate on the
most productive suppliers.

➢ On the off chance that another innovation emerges, that could build profitability; an
organization may decide that it is more cost-efficient to buy a contender that has
already acquired the technology.

➢ Research and development might be excessively troublesome or take too much time,
so the company offers to purchase the current resources of an organization that has
officially experienced that process.

1.6 Types of Acquisitions

Acquisitions can be either

➢ Friendly or
➢ Hostile.

Friendly acquisitions take place when the target company communicates its consent to be
acquired. Hostile acquisitions don't have a similar understanding from the target firm, and the
acquiring company should effectively buy substantial stakes of the target organization to gain
a majority.

➢ Friendly acquisitions regularly work towards a shared advantage for both the
acquiring and the target companies. The companies create strategies to guarantee that
the acquiring company buys the suitable resources, including the financial statements
and different valuations, and that the purchase accounts for any obligations that may
accompany the benefits. Once both the companies consent to the terms and meet any
legal stipulations, the purchase moves forward.

3 Deepesh Kumar, Project Work of Investment and Securities Law Acquisition of Shares,,

➢ Unfriendly acquisitions, more commonly referred to as hostile takeovers, occur when
the target company does not consent to the acquisition. The acquiring company must
gather a majority stake to force the acquisition. To acquire the same, the acquiring
company can produce a tender offer to encourage current shareholders to sell their
holdings in exchange for an above-market value price.

1.7 Different Methods of Combining Business

There are several methods for combining businesses other than Mergers and Acquisition.
Hereafter, the term ‘acquisitions’ will refer to any type of business combination.

1. Consolidation-

A consolidation is a mix of at least two organizations whereby a completely new corporation
is shaped and every consolidating organization ceases to exist. Shares of the new organization
are traded for those of the merging ones. Two similar sized organizations for the most part
consolidate as opposed to merging. Despite the fact that the refinement amongst merger and
consolidation is important, the terms are regularly utilized interchangeably, with either used
to allude by and large to the joining of the assets and liabilities of two companies.

A consolidation is a combination of two or more companies in which an entirely new
company is formed and all merging companies cease to exist. New company’s shares are
exchanged for the merging company’s shares. It is preferential for two similar sized
companies to consolidate rather than merge. The terms are often used interchangeably, with
either used to refer generally to a joining of the assets and liabilities of two companies4.

2. Leveraged Buyout-

A leveraged buyout (LBO) is a sort of acquisition that happens when a group of investors, led
by the administration of a company (management buyout or MBO), obtains funds to buy the
organization. The assets and future earnings of the organization are utilized to secure the
finances required to buy the company. At times employees are permitted to take part through

4 Ian Giddy, Mergers and Acquisitions: An Introduction,, (last visited Nov. 11, 2018) (hereinafter called Ian

an employee stock ownership plan, which may provide tax advantages and improve
employee productivity by giving employees an equity stake in the company.

3. Holding Company-

A holding company is a company that claims adequate voting stock to have a controlling
interest for at least one organization called subsidiaries. A subsidiary company is an
incorporated entity which has an identity of its own, which shall be separate from its holding
company5. Under the Companies Act, 2013 a subsidiary company is defined as,

“Subsidiary company” or “Subsidiary”, in relation to any other company (that is to say the
holding company), means a company in which the holding company –
(i) Controls the composition of the Board of Directors; or
(ii) Exercises or controls more than one-half of the total share capital either at its own or
together with one or more of its subsidiary companies:
Provided that such class or classes of holding companies as may be prescribed shall not have
layers of subsidiaries beyond such numbers as may be prescribed.6

A holding company that takes part in the administration of the subsidiaries is known as a
parent company.

4. Tender Offer-

In a tender offer, one organization offers to buy the outstanding stock of the other at a
particular cost. The acquiring company conveys the offer directly to the other company's
shareholders, bypassing the administration and board of directors of the latter.

Example: On 9th October 2014, the high-profile investor Carl. C. Icahn had written an open
letter to Tim Cook, the Apple, Inc. CEO urging him for a tender offer stating that the

5 Aditya Shah, Taking Care of Children: Companies Act Imposes Obligations Pertaining to Subsidiaries,
subsidiaries.html (last visited on Nov. 11, 2018).
6Companies Act, 2013, Section 2(87).

company, despite having done a wonderful job in the market, remained undervalued in the
stock market.7

While the acquiring company may continue to exist, most tender offers result in mergers
especially when there are certain dissenting shareholders.

5. Divestitures-

While divestitures don't represent a business combination, they are a method for encouraging
the acquisition of a part of an organization. Divestitures can also be utilized by companies as
a way to enhance profit and shareholder value, or as a means for raising capital. A divestiture
includes the offer of a portion of an organization. Two prominent methods for divestiture are-

➢ Spin-off- where a company distributes all of its shares in a subsidiary to the
company's shareholders as a tax-free exchange. A leading example of spin-off is
AT&T. AT&T was reorganized into three separate publicly traded corporations. What
remained was AT&T which consisted of long distance and wireless phone businesses,
a credit card business, and two other companies that were spun off to shareholders
who were given stock in the two companies. One of these companies- Lucent
Technologies which was an equipment producer and research company was spun-off
to avoid conflicts with customers of other AT&T products. The other company NCR-
a computer company was spun-off to remove the effects of a poor-performing
business from AT&T's results.

➢ Equity carve-out- it is similar to a spin-off. It occurs when a company sells some of its
shares in a subsidiary to the public8. This raises additional capital for the company.9

1.8 Motives for Mergers and Acquisitions

➢ Synergy-

The fundamental thought process behind a merger or acquisition is to enhance the
organization's effectiveness for its investors through collaboration, which is an idea that
expresses that the esteem and execution of two combined entities will be more prominent

7 ‘Tender Offer: An introduction to its meaning with examples’, WealthHow,
offer-meaning-examples accessed on 25 November 2018.
8 Ian Giddy, supra note 8.
9 Id.

than the aggregate of the different individual parts. This is the reason why potential
cooperative synergy from mergers and acquisitions is assessed before the decision is made.

➢ Growth-

Mergers or acquisitions can exponentially contribute to the growth of an organization, as it
has more resources available at its disposal. At the point when two organizations combine
their skills and resources, their assets and market shares are also combined, which provides a
greater opportunity for growth in the market. The market share which was shared by two
organizations will now solely belong to one company. The increased market control will
produce more opportunities for sales, revenue and profitability.

➢ Acquiring Unique Capabilities-

Sometimes, mergers and acquisitions take place to secure unique capabilities or assets, which
could change the outlook of company. This would include licenses and patents, which the
acquiring organization will access once the merger is complete. A patent, permit or certain
technology could have a considerable effect on the organization, which could help it
significantly increase sales and profits, since it may create a substantially impressive / unique
business model for the new company. At this point, when two unique organizations merge, it
could unlock hidden values, which may become useful resources in improving the efficiency
of the new company.

➢ Exploiting the Market-

Market frameworks in most economies are not perfect, which implies that there is scope for
organizations to misuse these imperfections to their own benefit. Assuming control over
another organization or a merger could encourage a monopoly- like situation, which would
give the company an edge over its rivals. Then again, a merger should be possible with a
rationale to control the supply of certain raw materials which will give the company a
favourable position over other organizations.

➢ As an Answer to Government Policies-

Mergers and acquisitions also take place to adapt to unfavourable government policies, which
may require a specific size of a firm to exist. Few governments offer tax reductions and
different motivators to companies of a particular size and scale, which support mergers as

more profit can be made as tax liability is lower. Keeping in mind the end goal to manage
governmental pressure to survival inside an industry, organizations mergers and acquisitions
have a greater impact on government policies.

➢ Transfer of Technology-

Another explanation behind mergers and acquisitions is the exchange of innovative
technology, particularly for exceptionally specific organizations with unique advancements.
Companies purchase different organizations trying to get a specific technology which is
patented and/or extraordinary. In this way, these technologies are utilized to improve
products/ services, and thus providing a more prominent piece of the pie.

➢ To Handle Large Clients-

Mergers and acquisitions, particularly in the administration business, take place with a
specific end goal to take after major customers. There are a lot of cases of such Mergers and
Acquisitions occurring for law offices, when the clients are so enormous, it forces firms to
merge keeping in mind the end goal to serve them better. The consolidated firms have more
resources and ability to deal with significant clients. It additionally gives organizations an
approach to bootstrap earnings, thus better execution at the stock trade for listed companies.

➢ Diversification-

Mergers and acquisitions enable organizations to enhance into different zones of business,
spreading wings and opening door for more deals, benefits and acknowledgment in the
market. For instance, if a garments store converges with a textile company, it would help the
two organizations, since they would have the capacity to keep a more prominent edge of
benefit. Diversification can likewise occur in extremely different industries.

1.9 Different Phases of any Merger & Acquisition

Phase 1: Pre-acquisition review- The first and foremost step towards M&A is self-
assessment of the acquiring company i.e. to look whether there is a need for M&A and
ascertaining the valuation and chalking out the growth plan through the target.

Phase 2: Search target companies- The second step involves searching the possible takeover

Phase 3: Valuation and investigation of the target- After the appropriate company is
shortlisted, a detailed analysis of the target company needs to be done with due diligence.
Phase 4: Acquire the target through negotiations- The next step is initiating negotiations to
come to a consensus for a negotiated merger or a bear hug.
Phase 5: Post- merger integration- If all the above steps fall in place, the last step involves a
formal announcement of the agreement of merger by both the participating companies.10 The
actual integration process follows this.
Mergers and Acquisitions are regarded as some of the most important or essential elements of
any business. In this dynamic environment, a business must not only learn to adapt quickly
but must also be extremely innovative to survive. Therefore, for any business to grow, a
merger or acquisition becomes a significant business strategy. Although, it is an extremely
complex process, if done right, it usually leads to positive results benefiting all the parties

10EduPristine, Mergers, (Aug.28, 2017, 8.03 PM),

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