An acquisition, also known as a
takeover or a buyout, is the buying of
one company (the ‘target’) by another.
Acquisition usually refers to a
purchase of a smaller firm by a larger
one. Sometimes, however, a smaller
firm will acquire management control
of a larger or longer established
company and keep its name for the
combined entity. This is known as a
An acquisition may be
private or public, depending
on whether the acquire or
merging company is or isn't
listed in public markets.
Another type of acquisition
is reverse merger, a deal that
enables a private company
to get publicly listed in a
short time period.
An acquisition may be friendly or hostile.
Whether a purchase is perceived as a
friendly or hostile depends on how it is
communicated to and received by the
target company's board of
directors, employees and shareholders. It
is quite normal though for M&A deal
communications to take place in a so
called 'confidentiality bubble' whereby
information flows are restricted due to
Combining of two or more
companies generally by offering the
stock holders of one company
securities in the acuiring company in
exchange for the surrender of their
Merger is basically when two
companies become one .This decision
is usually mutual between both firm.
The merger between two companies that are
in direct competition and share the same
product lines and markets.
A merger occuring between companies
producing similar goods or offering similar
Vertical mergers refer to the
combination of two entities at different
stages of the industrial or production
process. For example, the merger of a
company engaged in the construction
business with a company engaged in
production of brick or steel would lead
to vertical integration.
Market extension merger: Merger
between two companies that sale the same
products in different markets.
Product extension merger: Merger
between two companies selling different
but related products in same market.
A conglomerate merger is a merger
between two entities in unrelated
industries. The principal reason for
a conglomerate merger is
utilization of financial
resources, enlargement of debt
capacity,and increase in the value
of outstanding shares by increased
leverage and earnings per
share, and by lowering
the average cost of capital.
These are mergers between entities engaged
in the same general industry and somewhat
interrelated, but having no common
In a typical merger, the merged entity
combines the assets of the two companies
and grants the shareholders of each original
company shares in the new company based
on the relative valuations of the two original
companies. However, in the case of a ‘cash
merger’, also known as a ‘cash-out
merger’, the shareholders of one entity
receive cash in place of shares in the merged
entity. This is a common practice in cases
where the shareholders of one of the merging
entities do not want to be a part of the
A triangular merger is often resorted to for
regulatory and tax reasons. As the name
suggests, it is a tripartite arrangement in
which the target merges with a subsidiary of
A merger happens when two firms agree to go
forward as a single new company rather than
remain separately owned and operated. This kind
of action is more precisely referred to as a
"merger of equals". The firms are often of about
the same size. Both companies' stocks are
surrendered and new company stock is issued in
its place.For example, in the 1999 merger of
Glaxo Wellcome and SmithKline Beecham, both
firms ceased to exist when they merged, and a
new company, GlaxoSmithKline, was created.
While An Acquisition is the purchase of one
business or company by another company.
Various methods of financing an
M&A deal exist-
Cash : Payment by cash. Such transactions are
usually termed acquisitions rather than
mergers because the shareholders of the target
company are removed from the picture and the
target comes under the (indirect) control of the
Stock : Payment in the form of the acquiring
company's stock, issued to the shareholders of
the acquired company at a given ratio
proportional to the valuation of the latter.
Economy of scale: This refers to the fact that the
combined company can often reduce its fixed costs
by removing duplicate departments or
operations, lowering the costs of the company
relative to the same revenue stream, thus
increasing profit margins.
Economy of scope: This refers to the efficiencies
primarily associated with demand-side
changes, such as increasing or decreasing the
scope of marketing and distribution, of different
types of products.
Increased revenue or market share: This assumes
that the buyer will be absorbing a major competitor
and thus increase its market power (by capturing
increased market share) to set prices
Cross-selling: For example, a bank buying a stock
broker could then sell its banking products to the
stock broker's customers, while the broker can sign
up the bank's customers for brokerage accounts.
Or, a manufacturer can acquire and sell
Taxation: A profitable company can buy a loss
maker to use the target's loss as their advantage by
reducing their tax liability. In the United States and
many other countries, rules are in place to limit the
ability of profitable companies to "shop" for loss
making companies, limiting the tax motive of an
Geographical or other diversification: This is
designed to smooth the earnings results of a
company, which over the long term smoothens the
stock price of a company, giving conservative
investors more confidence in investing in the
company. However, this does not always deliver
value to shareholders
Resource transfer: resources are unevenly distributed
across firms (Barney, 1991) and the interaction of target
and acquiring firm resources can create value through
either overcoming information asymmetry or by
combining scarce resources.
Vertical integration: Vertical integration occurs when an
upstream and downstream firm merge (or one acquires
the other). There are several reasons for this to occur.
One reason is to internalise an externality problem. A
common example of such an externality is double
marginalization. Double marginalization occurs when
both the upstream and downstream firms have
monopoly power and each firm reduces output from the
competitive level to the monopoly level, creating two
deadweight losses. Following a merger, the vertically
integrated firm can collect one deadweight loss by
setting the downstream firm's output to the competitive
level. This increases profits and consumer surplus. A
merger that creates a vertically integrated firm can be
Reasons why mergers fail…..
>> Culture shock: Can you imagine IBM buying Google? The 'suit'
culture of IBM will not at all jell with the casual approach that Google
has, and a merger of this sort would fail miserably.
>> 2+2>4 attitude: This is a merger between #2 and #3 trying to
take over #1 by merging. Typically, the customers of both #2 and #3
get confused and move to #1, leaving the merged entity in the lurch.
>> No plan: Two companies try to sometimes merge and see if they
can work out something in the long run. But if both of them didn't
have a plan to begin with, then they may end up not having a plan
even when they join.
>> Poor integration: In IT, integration between products matters a
lot, and a company that tries to grow by acquiring many companies
tends to fail simply because it looks like a jigsaw puzzle that has not
been put together properly.
>> People trouble: Many companies tend to tell employees about mergers way
too late in the day, and so confused people tend to leave and the ones who
leave first are the smartest ones.
>> Lack of enthusiasm: Usually you hear of a brilliant start-up that was
acquired by a respected brand and one year later, the founder of the start-up
decides to 'pursue other interests' and from then on, the project runs out of
steam. This is partially related to culture shock listed above, but there is one
difference the failure here happens more due to lack of enthusiasm because
the bright idea has become staid as time passes.
>> Who needs you? Sometimes, two companies decide to merge a little too
late, when both their technologies have been outdated and surpassed by a
superior force. A merger at such a time is not bound to produce the best of
results. In fact, the top gun company may actually benefit while the two
merged companies struggle to find their collective feet.
>> Poor decisions: Who will do what at the top management level once the
merger happens? Will the CFO of the bigger entity become the CFO of the
combined entity even if the CFO of the smaller company is more capable? Put
the wrong CFO on top and he will botch up, while the better CFO resigns in
disgust and moves on to a competitor.
>> Ego clashes: This is ultimately one of the reasons why a merger fails.
People who have been given short shrift, or who perceive it as such (let's face
it, most of us are legends in our own minds) are bound to try to cause
friction, leading to a failed me
Top M&A deals worldwide by value (in mil. USD) from 2000 to 2010
Rank Year Purchaser Purchased Transaction
1 2000 America Online Inc. Time Warner 164,747
2 2000 Glaxo Wellcome Plc. SmithKline Beecham
3 2004 Royal Dutch Petroleum
Shell Transport &
4 2006 AT&T Inc BellSouth Corporation 72,671
5 2001 Comcast Corporation AT&T Broadband & Internet
6 2009 Pfizer Inc. Wyeth 68,000
7 2002 Pfizer Inc. Pharmacia Corporation 59,515
Mergers and acquisition deals, particularly the
horizontal M&As, may affect the competitive
situations in the industry.Since M&As have the
potential to cut down the competition
significantly,they are on the active scanner of
Competition Commission on India (CCI).
Mergers and acquisitions also affect the
shareholders of the combining firms. This
brings the M&As under the SEBI’s purview. Due
to the restructuring of the firms and its tax
impact, the Companies Act and the Income Tax
Act regulations also come into the picture in an
Due to this multi-pronged impact of M&A deals , a
comprehensive legal framework has evolved in
India to regulate such deals.This regulation is
mainly from the viewpoints of the impact of the
deal on the-competitive position in the
industry,shareholder,tax aspects,etc.The M&A
activities in the Indian market are regulated by the
provisions contained in the following:
1. Indian Companies Act,1956
2. Competition Act , 2002
3. Income Tax Act,1961
4. The Securities Exchange Board of India
5. Listing agreement of stock exchanges
6. Takeover code of SEBI