MERGER AND ACQUISITION- THE BASIC CONCEPT INTRODUCTIONThe terms mergers and acquisitions may often be confused and look similar.However, the two have different meanings. Mergers may be of various types andso can acquisitions be. There are few terms like "spin out", "demerger" and "spinoff", which are used to denote the process by which a company separates into twodifferent companies. The nascent company is usually a listed company on the stockexchange. The term "Mergers and Acquisitions" is an expression of a strategypertaining to the corporate sector. MERGERWhen one company purchases another company of an approximately similar size.The two companies come together to become one. Two companies usually agree tomerge when they feel that they can do something together that they cant do ontheir own.The combining of two or more companies, generally by offering the stockholdersof one company securities in the acquiring company in exchange for the surrenderof their stock.Merger is primarily a strategy of inorganic growth.For example, AOL and Time Warner merged a few years back in hopes that theycould both gain something. AOL wanted access to Time Warners cable network.Time Warner wanted access to AOLs users (to promote movies and other TimeWarner products) as well as AOLs extensive internet content.
TYPES OF MERGERMerger may be horizontal or vertical or conglomerate.Under horizontal merger two rival companies tend to share the same product lineand thereby take the mutual benefit of stability of their products. Under verticalmerger two companies or firms, dealing with two separate lines of business gettogether for mutual benefit. For example, in the electronic sector if Compaq andIntel merge then it will be vertical one. Similarly, if automobile makers like Fordand Maruti merge then it will come under horizontal merger. Under conglomeratemerger two companies with diverse business lines in terms of products andmarketing and management tend to get united for a new product and businessmethodology.Conglomerate transactions take many forms, ranging from short-termjoint ventures to complete mergers. Whether a conglomerate merger is pure,geographical, or a product-line extension, it involves firms that operate in separatemarkets. Therefore, a conglomerate transaction ordinarily has no direct effect oncompetition.Other types of mergers include: Reverse mergers Dilutive mergers Accretive mergers.Under merger two or more companies integrate into a single outfit for commonbusiness objectives. It is gainful amalgamation. Under this arrangement both assetsand liabilities get transferred from the transferor to transferee.
CONSOLIDATIONIt involves creation of an altogether new company owing assets, liabilities, loansand business ( on going concern basis) of two or more companies both all ofwhich cease to exist. AMALGAMATIONThis term is used only in India. It is an umbrella term which includes both mergerand consolidation. Thus amalgamation could either be in the form of merger orconsolidation. In India legal requirement for either merger or consolidation are thesame. They are stipulated in Section 390 to 394A and 396 and 396A of theCompanies Act, 1956. SYNERGYSynergy is the magic force that allows for enhanced cost efficiencies of the newbusiness. Synergy takes the form of revenue enhancement and cost savings. Byapplying the rules of synergy effectively, a merger can be made a success. ACQUISITIONAcquisition is an attempt or a process by which a company or an individual or agroup of individuals acquires control over another company called “targetcompany”.A company is said to have "Acquired" a company, when one company buysanother company. Acquisitions can be either: Hostile Friendly
In case of hostile acquisitions, the company, which is to be bought, has noinformation about the acquisition. The company, which would be sold, is taken bysurprise.In case of friendly acquisition, the two companies cooperate with each other andsettle matters related to acquisitions.There are times when a much smaller company manages to take control of themanagement of a bigger company but at the same time retains its name for thecombination of both the companies. This process is known as "reverse takeover".There may be two types of acquisitions depending on the option adopted by thebuying company. In one case, the buying company may buy all the shares of thesmaller company. The other option is buying the assets of the smaller companies. DIFFERENCE BETWEEN MERGER AND AMALGAMATIONMerger is restricted to a case where the assets and liabilities of the companies getvested in another company, the company which is merged losing its identity and itsshareholders becoming shareholders of the other company. On the other hand,amalgamation is an arrangement, whereby the assets and liabilities of two or morecompanies become vested in another company (which may or may not be one ofthe original companies) and which would have as its shareholders substantially, allthe shareholders of the amalgamating companies. DIFFERENCE BETWEEN MERGER AND CONSOLIDATIONA Merger is when two or more corporations come together but only one of thecorporation stays exists afterwards. For example if company A and Company Bmerge to and only company A or B exists afterwards. In consolidation, when two
or more corporations come together to form a completely new corporation. Forexample company A and Company B consolidate to form company C. REASONS FOR M&AWhy do promoters give up the companies that they have set up and nurturedfor years?There are many reasons behind mergers and acquisition. For instance, a particularcompany is very good at administration while some other company is good atmarketing strategies or in operations. If the expertise of both is amalgamated, itproduces synergy. A new company is formed in the process, which has a potentialmuch higher and superior to what the individual companies previously had. Existing non profitable businessCorus vs. Tata steel case-Corus was sold out to Tata steel since the former wasmaking losses.National Organic Chemicals Industries Limited (NOCIL) sold to RelianceIndustries Limited (RIL) after it started incurring heavy losses around the turn ofthe century. Existing non-synergistic or non-core businessLarsen & Toubro (L&T) demerged its cement business from UltraTech CementLimited. Therefore Grasim Limited, a Flagship company of A.V. Birla Group,acquired control over Ultra Tech. It is believed that one of the reason why L&T,sold its cement business to the Birlas is to opt out of the non –core business.Focusing on its core engineering business would have created a far bettershareholder value and hence it opted out of the cement business.
Generate cash flow for other business(es)India cement sold 94.69% of its stake in Shri Vishnu Cement at an enterprise valueof Rs.385 crore. The objective behind this was not only to get rid of the ailing ShriVishnu Cement but to generate cash for retiring high-cost debts of India Cementand also funding its expansion plans. Inability – real or perceived – to withstand competitionLakme Ltd sold its brand and cosmetics business to Hindustan Lever Ltd(HLL).The main reason behind that was that Lakme management was finding itdifficult to pump in huge money to support its brand in the face of advertisementblitzkrieg by MNC’s especially HLL. Inability to achieve further growthBazee.com was sold to e-Bay.com. The intention of the promoters of Bazee.comwas to combine their local expertise with global perspective and the deep pocketsof e-Bay to take Bazee’s business to the next level.Similarly, Daksh e-Service was merged with IBM so that Daksh e-Service will getcontinuous jobs from IBM enabling it to grow faster and become the front runnerin the outsourcing industry in India. Trade –off for survivalThe first most reason why Larsen & Toubro’s (L&T) professional managementagreed to give away the cement business to Birla was their own survival, apartfrom the objective of divesting non-core business. In order to save their controlover L&T which by then was a 10,000 crore empires even sans cement, the L&Tmanagement had no choice but to agree to give away the cement business.
Several other reasons for mergers are as follows: Enhancing company productivity. There is also a general tendency that the merged companies would monopolize the market, thereby ousting others. Political factors. Cutting down expenses and increasing revenues. When a company is not self-sufficient to operate on its own. Hindrances may be in the form of insufficient investment capacity, excessive competition due to which the company is not able to keep pace with other companies. Under such circumstances, the subsidiaries may merge with the parent company for better output.