Mergers and acquisition

DEFINATION

A general term used to refer to the consolidation of companies. A merger is a combination of two companies to form a new company, while an acquisition is the purchase of one company by another in which no new company is formed.

INTRODUCTION

Mergers and acquisitions (M&A) and corporate restructuring are a big part of the corporate finance world. Every day, Wall Street investment bankers arrange M&A transactions, which bring separate companies together to form larger ones. When they're not creating big companies from smaller ones, corporate finance deals do the reverse and break up companies through spinoffs, carve-outs or tracking stocks. 

India in the recent years has showed tremendous growth in the M&A deal. It has

been actively playing in all industrial sectors. It is widely spreading far across the

stretches of all industrial verticals and on all business platforms. The increasing

volume is witnessed in various sectors like that of finance, pharmaceuticals,

telecom, FMCG, industrial development, automotives and metals. 

The volume of M&A transactions in India has apparently increased to about 67.2

billion USD in 2010 from 21.3 billion USD in 2009. At present the industry is

witnessing a whopping 270% increase in M&A deal in the first quarter of the financial

year. This increasing percentage is mainly attributed to the increasing cross-border

M&A transactions. Over that increasing interest of foreign companies in Indian

companies has given a tremendous push to such transactions. 

Large Indian companies are going through a phase of growth as all are exploring

growth potential in foreign markets and on the other end even international

companies is targeting Indian companies for growth and expansion. Some of the

major factors resulting in this sudden growth of merger and acquisition deal in India

are favorable government policies, excess of capital flow, economic stability,

corporate investments, and dynamic attitude of Indian companies. 

The recent merger and acquisition 2011 made by Indian companies worldwide are

those of Tata Steel acquiring Corus Group plc, UK based company with a deal of US

$12,000 million and Hindalco acquiring Novelis from Canada for US $6,000 million. 

With these major mergers and many more on the annual chart, M&A services India

is taking a revolutionary form. Creating a niche on all platforms of corporate

businesses, merger and acquisition in India is constantly rising with edge over

competition.

What Are Mergers and Acquisitions?Mergers and acquisitions are both changes in control of companies that involve combining the operations of multiple entities into a single

company.

In a merger, two companies agree to combine their operations into a single entity.

In an acquisition, one company purchases another company, and has the right to sell off operations, merge them into similar groups in the purchasing company, or close facilities or cancel products altogether.

Why Merge?Companies would choose to merge together for different reasons:

1. The combined entity would be larger, and have corresponding

larger resources for marketing, product expansion, and obtaining

financing. This could help them better compete in the

marketplace.

2. The combined entity could merge similar operations to reduce

costs. Corporate and administrative functions, such as human

resources and marketing, are often targets for combinations.

They might also combine the production areas if the companies

produce similar products and reduce costs by having fewer

plants or facilities in operation.

3. The combined entity might have less competition in the

marketplace. If the products of the two companies competed for

customers, they could combine their offerings and use resources

for improving the product, rather than marketing against each

other.

4. The combined entity might have synergy in operations. Synergy

is when combined operations show lower costs or higher profits

than would be expected by just adding their financial information

together on paper. This could be due to economies of scale,

where costs are lower due to higher volume of production, or

due to vertical integration, where greater control over the

production process is achieved due to owning more steps in the

production process.

Why Acquire?Acquisitions are undertaken for strategic reasons. For example:

1. A company might acquire another company to obtain a specific

product. It can be less expensive to purchase a company

offering a product you'd like to sell than building the product

yourself. Software companies often purchase smaller companies

that offer extensions to their product line if they become popular

with customers, so they can add the functionality to their primary

offering.

2. A company might acquire other companies to increase its size. A

larger company may have more visibility in the marketplace, and

also better access to credit and other resources.

3. A company might acquire another to obtain control over a critical

resource. For example, a jewelry company might acquire a gold

mine, to ensure they have access to gold without market price

fluctuations.

PROCESS OF MERGERS AND ACQUISITIONS

It's a well known fact that a good number of mergers fail because of various factors

including cultural differences and flawed intentions. Most companies when sign an

agreement often get a create a bigger picture of their expectations as they believe in

pure concept of higher capital gains when two are combining together. This belief is

not always true as conditions in the market and economy often rules the operation

and functioning of any company. 

The history of merger and acquisitions have revealed that almost two thirds of the

mergers taking place experience failure and feel disappointed on their own terms

and pre defined parameters. At times even the motivation driving the mergers can

prove to be intangible. 

There are many factors contributing to the failure and elements that are problems of

mergers and acquisition. There are many aspects that should be understood and

analyzed before signing an agreement because even one small mistake in taking a

decision can completely dump both the companies with an irreversible impact. 

Some of the prominent issues with regards to failure of M&A are as follows: 

A flawed intention in terms of unethical motivation or high expectations can

eventually lead to failure of the merger. If any company desires high capital gain

along with glory and fame irrespective of the corporate strategy defined to fulfill the

requirements of the company, the merger fails. 

Any kind of agreement based completely on the optimistic stock market condition

can also lead to failure as stock market is an uncertain entity. In such cases more

risks are involved with the prevailing merger. 

Cultural difference is also a big problem in case of a merger. When two companies

from different corporate cultures come together it becomes a really challenging task

to integrate the cultures of both the companies. It is certainly difficult to maintain the

difference and move ahead for success without any kind of integration.

TYPES OF Mergers and acquisitions

There are many types of mergers and acquisitions that redefine the business world

with new strategic alliances and improved corporate philosophies. From the

business structure perspective, some of the most common and significant types of

mergers and acquisitions are listed below: 

Horizontal Merger 

This kind of merger exists between two companies who compete in the same

industry segment. The two companies combine their operations and gains strength

in terms of improved performance, increased capital, and enhanced profits. This kind

substantially reduces the number of competitors in the segment and gives a higher

edge over competition. 

Vertical Merger 

Vertical merger is a kind in which two or more companies in the same industry but in

different fields combine together in business. In this form, the companies in merger

decide to combine all the operations and productions under one shelter. It is like

encompassing all the requirements and products of a single industry segment. 

Co-Generic Merger

Co-generic merger is a kind in which two or more companies in association are

some way or the other related to the production processes, business markets, or

basic required technologies. It includes the extension of the product line or acquiring

components that are all the way required in the daily operations. This kind offers

great opportunities to businesses as it opens a hue gateway to diversify around a

common set of resources and strategic requirements. 

Conglomerate Merger

Conglomerate merger is a kind of venture in which two or more companies

belonging to different industrial sectors combine their operations. All the merged

companies are no way related to their kind of business and product line rather their

operations overlap that of each other. This is just a unification of businesses from

different verticals under one flagship enterprise or firm.

JOINT VENTURE

Joint venture, commonly known as JV, is a contractual arrangement between two or

more parties who agree to come together to undertake a business project. All the

parties contribute capital and share profits and losses in a decided ratio. Joint

ventures are a type of partnership that is always executed through a written contract

known as a joint venture agreement (JVA). These contracts are registered and are

legally binding on the parties. Moreover, they are temporary in nature because they

are executed for a definite period of time to accomplish a specific purpose. The

contract automatically dissolves after the expiry of the decided time period. 

Joint ventures are typically used in high-risk business propositions that require

considerable amount of investment and technical expertise. That is why all research

and development activities are mainly undertaken through joint ventures. Overall,

joint ventures help to safely penetrate untapped markets and create new distribution

links. It increases the capacity and creates a larger pool of resources. 

Such partnerships were increasingly formed during the initial stages of the IT boom

in India. People were new to the virtual environment and were skeptical about its

success. Therefore, many JVs were formed to enter online business or e-commerce.

However, the success of any JV depends upon the coordination and understanding

between the parties. They should prefer hiring a law firm to draft a detailed JVA to

handle conflicting clauses.

AMALGATION

Amalgamation is an arrangement where two or more companies consolidate their

business to form a new firm, or become a subsidiary of any one of the company. For

practical purposes, the terms amalgamation and merger are used interchangeably.

However, there is a slight difference. Merger involves the fusion of two or more

companies into a single company where the identity of some of the companies gets

dissolved. On the other hand, amalgamation involves dissolving the entities of

amalgamating companies and forming a new company having a separate legal

entity. 

Normally, there are two types of amalgamations. The first one is similar to a merger

where all the assets and liabilities and shareholders of the amalgamating companies

are combined together. The accounting treatment is done using the pooling of

interests method. It involves laying down a standard accounting policy for all the

companies and then adding their relevant accounting figures like capital reserve,

machinery, etc. to arrive at revised figures. 

The second type of amalgamation involves acquisition of one company by another

company. In this, the shareholders of the acquired company may not have the same

equity rights as earlier, or the business of the acquired company may be

discontinued. This is like a purchase of a business. The accounting treatment is

done using a purchase method. It involves recording assets and liabilities at their

existing values or revaluating them on the basis of their fair values at the time of

amalgamation.

DIFFERENCE BETWEEN MERGERS AND ACQUISITIONS

Merger and acquisition is often known to be a single terminology defined as a

process of combining two or more companies together. The fact remains that the so-

called single terminologies are different terms used under different situations.

Though there is a thin line difference between the two but the impact of the kind of

completely different in both the cases. 

Merger is considered to be a process when two or more companies come together

to expand their business operations. In such a case the deal gets finalized on

friendly terms and both the companies share equal profits in the newly created

entity. 

When one company takes over the other and rules all its business operations, it is

known as acquisitions. In this process of restructuring, one company overpowers the

other company and the decision is mainly taken during downturns in economy or

during declining profit margins. Among the two, the one that is financially stronger

and bigger in all ways establishes it power. The combined operations then run under

the name of the powerful entity who also takes over the existing stocks of the other

company. 

Another difference is, in an acquisition usually two companies of different sizes

come together to combat the challenges of downturn and in a merger two

companies of same size combine to increase their strength and financial gains along

with breaking the trade barriers. A deal in case of an acquisition is often done in an

unfriendly manner, it is more or less a forceful or a helpless association where the

powerful company either swallows the operation or a company in loss is forced to

sell its entity. In case of a merger there is a friendly association where both the

partners hold the same percentage of ownership and equal profit share.

STRATEGIES OF MERGERS AND ACQUISITIONS

Strategies play an integral role when it comes to merger and acquisition. A sound

strategic decision and procedure is very important to ensure success and fulfilling of

expected desires. Every company has different cultures and follows different

strategies to define their merger. Some take experience from the past associations,

some take lessons from the associations of their known businesses, and some hear

their own voice and move ahead without wise evaluation and examination. 

Following are some of the most essential strategies of merger and acquisition

that can work wonders in the process:

The first and foremost thing is to determine business plan drivers. It is very important

to convert business strategies to set of drivers or a source of motivation to help the

merger succeed in all possible ways.

There should be a strong understanding of the intended business market, market

share, and the technological requirements and geographic location of the business.

The company should also understand and evaluate all the risks involved and the

relative impact on the business.

Then there is an important need to assess the market by deciding the growth factors

through future market opportunities, recent trends, and customer's feedback.

The integration process should be taken in line with consent of the management

from both the companies venturing into the merger.

Restructuring plans and future parameters should be decided with exchange of

information and knowledge from both ends. This involves considering the work

culture, employee selection, and the working environment as well.

At the end, ensure that all those involved in the merger including management of the

merger companies, stakeholders, board members, and investors agree on the

defined strategies. Once approved, the merger can be taken forward to finalizing a

deal.

MERGERS AND ACQUISITIONS VALUATION

The number as well as the average size of merger and acquisition deals is

increasing in India. During post liberalization, increase in domestic competition and

competition against cheaper imports have made organizations merge themselves to

reap the benefits of a large-sized company. The merger and acquisition valuation is

the building block of a proposed deal. It is a technical concept that needs to be

estimated carefully. 

M&A valuation involves determining the maximum price that a buyer is willing to pay

to buy the target company. From the seller's point of view, it means estimating the

minimum price he wants to take against his business. If there are many buyers, then

each one bids a purchase price based on his valuation. Finally, the seller will give

the business to the highest bidder. 

The use of different valuation techniques and principles has made valuation a

subjective process. A conflict in the choice of technique is the main reason for the

failure of many mergers. For instance, the asset value can be determined both at the

market price and the cost price. Therefore, it is important that the merging parties

should first discuss and agree upon the methods of valuation. 

Calculating the swap ratio is at the core of the valuation process. It is the ratio at

which the shares of the acquiring company will be exchanged with the shares of the

acquired company. For instance, a swap ratio of 1:2 means that the acquiring

company will provide its one share for every two shares of the other company.

BENEFITS OF MERGERS AND ACQUISITIONS

Merger and acquisition has become the most prominent process in the corporate

world. The key factor contributing to the explosion of this innovative form of

restructuring is the massive number of advantages it offers to the business world. 

Following are some of the known advantages of merger and acquisition:

The very first advantage of M&A is synergy that offers a surplus power that enables

enhanced performance and cost efficiency. When two or more companies get

together and are supported by each other, the resulting business is sure to gain

tremendous profit in terms of financial gains and work performance.

Cost efficiency is another beneficial aspect of merger and acquisition. This is

because any kind of merger actually improves the purchasing power as there is

more negotiation with bulk orders. Apart from that staff reduction also helps a great

deal in cutting cost and increasing profit margins of the company. Apart from this

increase in volume of production results in reduced cost of production per unit that

eventually leads to raised economies of scale.

With a merger it is easy to maintain the competitive edge because there are many

issues and strategies that can e well understood and acquired by combining the

resources and talents of two or more companies.

A combination of two companies or two businesses certainly enhances and

strengthens the business network by improving market reach. This offers new sales

opportunities and new areas to explore the possibility of their business.

With all these benefits, a merger and acquisition deal increases the market power of

the company which in turn limits the severity of the tough market competition. This

enables the merged firm to take advantage of hi-tech technological advancement

against obsolescence and price wars.

CORPORATE MERGERS AND ACQUISITIONS

Corporate merger and acquisition is defined as the process of buying, selling, and

integrating different corporations with the desire of expansion and accelerated

growth opportunities. This kind of association in any form plays an integral role when

it comes to business and economy as it results in significant restructuring of a

business. 

The key objective of corporate mergers and acquisitions is to increase market

competition. This can be done in various ways using different methods of merger like

horizontal merger, conglomeration merger, market extension merger, and product

extension merger. All the types work towards a common goal but behold different

characteristics suited to get the best outcome in terms of growth, expansion, and

financial performance. 

In many significant ways, this kind of restructuring a business proves to be beneficial

to the corporate world. It greatly helps to share all resources, skills, talents, and

knowledge that eventually increases the wisdom bar within the company. This can

further help to combat the competitive challenges existing in the market. 

Further to that, elimination of duplicate departments, possibility of cross selling,

reduction of tax liability, and exchange of resources are other big time benefits of

corporate merger and acquisition. This not only helps to cut the extra cost involved

in the operation and gain financial gains but also help to expand across boundaries

and enhance credibility. This in the long run help increase revenue and market

share, fulfillment of the only desire that drives the growth of M&A.

BANK MERGERS AND ACQUISITIONS

Mergers and acquisitions in the banking sector is a common phenomenon across

the world. The primary objective behind this move is to attain growth at the strategic

level in terms of size and customer base. This, in turn, increases the credit-creation

capacity of the merged bank tremendously. Small banks fearing aggressive

acquisition by a large bank sometimes enter into a merger to increase their market

share and protect themselves from the possible acquisition. 

Banks also prefer mergers and acquisitions to reap the benefits of economies of

scale through reduction of costs and maximization of both economic and non-

economic benefits. This is a vertical type of merger because all banks are in the

same line of business of collecting and mobilizing funds. In some instances, other

financial institutions prefer merging with a bank in case they provide a similar type of

banking service. 

Another important factor is the elimination of competition between the banks. This

way considerable amount of funds earlier used for sustaining competition can be

channelized to grow the banking business. Sometimes, a bank with a large bad debt

portfolio and poor revenue will merge itself with another bank to seek support for

survival. However, such types of mergers are accompanied with retrenchment and a

drastic change in the organizational structure. 

Consolidating the business also makes the bank robust enough to sustain in the

every-changing business environment. They find it easier to adapt themselves

quickly and grow in the domestic and international financial markets.

SUCCESS OF MERGERS AND ACQUSITIONS

Mergers & Acquisitions have become a common strategy to consolidate business.

The basic aim is to reduce cost, reap the benefits of economies of scale and at the

same time expand market share. For many people, mergers simply mean sharing

resources and costs to increase bottomlines. However, it is not as simple as it

sounds. According to statistical reports, more than 64% of the times the mergers fail

to accomplish the promised results. They suffer from a decline in the shareholders'

wealth and conflicts in management. Therefore, a success of any merger initiative

primarily depends upon the objective behind the need for a merger. 

Following globalization, many small organizations hastily got into mergers to stand

against highly-competitive, large scale multinational corporations. They took mergers

as a protective strategy to save their business from being perished in the newly

created dynamic environment. Unfortunately, in many cases, it did not work due to

lack of proper planning and implementation of the planned merger. Moreover, the

high costs of business consolidation (professional fees of bankers, lawyers,

advisors, paperwork, etc.) could not be covered by the combined revenue of the

merged organization leading to its failure. 

Another reason for an unsuccessful merger is the lack of efficient management to

unite different organizational cultures. The most challenging task is to bring together

people and make them work as a team. Establishing a new organizational structure

that fits all the employees is also difficult. Hence, many fearing retrenchment resign

leading to a complete break-down at the operational level.

PROBLEMS OF MERGERS AND ACQUISITIONS

It's a well known fact that a good number of mergers fail because of various factors

including cultural differences and flawed intentions. Most companies when sign an

agreement often get a create a bigger picture of their expectations as they believe in

pure concept of higher capital gains when two are combining together. This belief is

not always true as conditions in the market and economy often rules the operation

and functioning of any company. 

The history of merger and acquisitions have revealed that almost two thirds of the

mergers taking place experience failure and feel disappointed on their own terms

and pre defined parameters. At times even the motivation driving the mergers can

prove to be intangible. 

There are many factors contributing to the failure and elements that are problems of

mergers and acquisition. There are many aspects that should be understood and

analyzed before signing an agreement because even one small mistake in taking a

decision can completely dump both the companies with an irreversible impact. 

Some of the prominent issues with regards to failure of M&A are as follows:

A flawed intention in terms of unethical motivation or high expectations can

eventually lead to failure of the merger. If any company desires high capital gain

along with glory and fame irrespective of the corporate strategy defined to fulfill the

requirements of the company, the merger fails. 

Any kind of agreement based completely on the optimistic stock market condition

can also lead to failure as stock market is an uncertain entity. In such cases more

risks are involved with the prevailing merger. 

Cultural difference is also a big problem in case of a merger. When two companies

from different corporate cultures come together it becomes a really challenging task

to integrate the cultures of both the companies. It is certainly difficult to maintain the

difference and move ahead for success without any kind of integration.

Mergers and acquisitions (M & A) is the area of corporate finances,

management and strategy dealing which deals with purchasing and/or

joining with other companies.

Though the two are often mentioned together, a merger is very different

from an acquisition.

A merger, in a nutshell, involves two corporate entities joining forces and

becoming a new business entity, with a new name. It usually involves two

companies of same size and stature joining hands.

An acquisition, on the other hand, involves one bigger business taking

over a smaller company which may be absorbed into the parent company

or run as a subsidiary. The company being taken over is referred to as the

‘target company’ in the corporate world.

Here is a list of some of the most happening mergers and

acquisitions in India in the year 2014, listed in random order.

Here is a list of some of the most happening mergers and acquisitions in India in the year

2014, listed in random order.

1. Flipkart- Myntra

The huge and most talked about takeover or acquisition of the year. The seven year old

Bangalore based domestic e-retailer acquired the online fashion portal for an undisclosed

amount in May 2014. Industry analysts and insiders believe it was a $300 million or Rs

2,000 crore deal.

Flipkart co-founder Sachin Bansal insisted that this was a “completely different acquisition

story” as it was not “driven by distress”, alluding to a plethora of small e-commerce players

either having wound up or been bought over in the past two years. Together, both company

heads claimed, they were scripting “one of the largest e-commerce stories”.

2. Asian Paints- Ess Ess Bathroom Products

Asian paints signed a deal with Ess Ess Bathroom products Pvt Ltd to acquire its front end

sales business for an undisclosed sum in May, 2014.

“The company on May 14, 2014 has entered into a binding agreement with Ess Ess Bathroom

Products Pvt. Ltd and its promoters to acquire its entire front-end sales business including

brands, network and sales infrastructure,” Asian Paints said in a filing to the BSE on

Wednesday.

Ess Ess produces high end products in bath and wash segment in India and taking them over

led to a 3.3% rise in share price for Asian paints.

3. RIL- Network 18 Media and Investments

Reliance Industries Limited (RIL) took over 78% shares in Network 18 in May 2104for Rs

4,000 crores. Network 18 was founded by Raghav Behl and includes moneycontrol.com,

In.com, IBNLive.com, Firstpost.com, Cricketnext.in, Homeshop18.com, Bookmyshow.com

while TV18 group includes CNBC-TV18, CNN-IBN, Colors, IBN7 and CNBC Awaaz.

4. Merck- Sigma Deal

One of the leading Indian manufacturers, Merck KGaA took over US based Sigma-Aldrich

Company for $17 billion in cash, hoping the deal will help boost its lab supplies business.

Sigma is the leading supplier of organic chemicals and bio chemicals to research laboratories

and supplies groups like Pfizer and Novartis with lab substances.

5. Ranbaxy- Sun Pharmaceuticals

Sun Pharmaceutical Industries Limited, a multinational pharmaceutical company

headquartered in Mumbai, Maharashtra which manufactures and sells pharmaceutical

formulations and active pharmaceutical ingredients (APIs) primarily in India and the United

States bought the Ranbaxy Laboratories. The deal is expected to be completed in December,

2014.

Ranbaxy shareholders will get 4 shares of Sun Pharma for every 5 Ranbaxy shares held by

them. The deal, worth $4 billion, will lead to a 16.4 dilution in the equity capital of Sun

Pharma.

6. TCS- CMC

Tata Consultancy Services (TCS), the $13 billion flagship software unit of the Tata Group,

has announced a merger with the listed CMC with itself as part of the group’s renewed efforts

to consolidate its IT businesses under a single entity.

At present, CMC employs over 6,000 people and has annual revenues worth Rs 2,000 crores.

The deal was inked a few days back. TCS already held a 51% stake in CMC.

7. Tata Power- PT Arutmin Indonesia

India’s largest private power producer, Tata Power, purchased 30% stake in Indonesian coal

manufacturing firm for Rs 47.4 billion. Earlier this year, they sold off 5% of its stake in PT

Arutmin Indonesia (Arutmin) and PT Kaltim Prima Coal (KPC) for Rs. 250 billion due to

falling coal prices globally. It plans to sell the remaining 25% stake for $ 1 billion soon too.

8. Tirumala Milk – Lactalis

The largest dairy player in the world, Groupe Lactalis SA, acquired the 18 year old

Hyderabad based Tirumala Milk products for a whopping Rs 1750 crore ($275 million) in

January, 2014.

Founded in 1896 by D Brahmanandam, B Brahma Naidu, B Nageswara Rao, Dr N Venkata

Rao and R Satyanarayana, Tirumala is the second largest private dairy company in South

India.

Lactalis acquired 100% of their shares.

9. Aditya Birla Minacs- CSP CX

Aditya Birla Nuvo Ltd (ABNL) owned ABNL IT & ITeS Ltd. was sold to a Canadian based

technology outsourcing firm marking Aditya Birla’s exit for the IT industry.

The deal was chalked out with a group of investors led by Capital Square Partners (CSP) and

CX Partners (CXP) for $260 million (approximately Rs. 1,600 crore).

10. Sterling India Resorts- Thomas Cook India

Billionaire Prem Watsa owned Thomas Cook India bought the Sterling Resorts India for Rs

870 crores in , marking Thomas Cook’s entry into the hospitality sector. Thomas Cook had

earlier acquired Ikya Human Solutions in 2013.

11. Yahoo- Bookpad

The search engine giant, Yahoo, acquired the one year old Bangalore based startup

Bookpad for a little under $15 million, though the exact amount has not been disclosed by

either of the two parties concerned. While the deal value is relatively small, this was the first

acquisition made by Yahoo, and was much talked about and hence finds a mention in our list.

Bookpad was founded by three IIT Guwahati pass outs and allows users to view, edit and

annotate documents within a website or an app.

LAWS OF MERGERS AND ACQUISITIONS

A business identity goes for mergers and acquisitions for strengthening a disjointed market and for elevating their functional competence in order to boost their competitive streak. Many countries have propagated Mergers and Acquisitions Laws to control the operations of the trade units within.

Most of the mergers and acquisitions have been successful in elevating the functional competence of companies but on the flip side this activity can lead to formation of monopolistic power. The anti-competitive results are accomplished either by synchronized effects or by one-sided effects.

An open and unbiased competition is ideal for capitalizing on the consumers' interests both in contexts of capacity and worth. 

Laws governing Mergers and Acquisitions in India Mergers and Acquisitions in India are governed by the Indian Companies Act,

1956, under Sections 391 to 394. Although mergers and acquisitions may be instigated through mutual agreements between the two firms, the procedure remains chiefly court driven. The approval of the High Court is highly desirable for the commencement of any such process and the proposal for any merger or acquisition should be sanctioned by a 3/4th of the shareholders or creditors present at the General Board Meetings of the concerned firm.

Indian antagonism law permits the utmost time period of 210 days for the companies for going ahead with the process of merger or acquisition. The allotted time period is clearly different from the minimum obligatory stay period for claimants. According to the law, the obligatory time frame for claimants can either be 210 days commencing from the filing of the notice or acknowledgment of the Commission's order.

The entry limits for companies merging under the Indian law are considerably high. The entry limits are allocated in context of asset worth or in context of the company's annual incomes. The entry limits in India are higher than the European Union and are twofold as compared to the United Kingdom.

The Indian M&A laws also permit the combination of any Indian firm with its international counterparts, providing the cross-border firm has its set up in India.

There have been recent modifications in the Competition Act, 2002. It has replaced the voluntary announcement system with a mandatory one. Out of 106 nations which have formulated competition laws, only 9 are acclaimed with a voluntary announcement system. Voluntary announcement systems are often correlated with business ambiguities and if the companies are identified for practicing monopoly after merging, the law strictly order them opt for de-merging of the business identity. 

Provisions under Mergers and Acquisitions Laws in India

Provision for tax allowances for mergers or de-mergers between two business identities is allocated under the Indian Income tax Act. To qualify the allocation, these mergers or de-mergers are required to full the requirements related to section 2(19AA) and section 2(1B) of the Indian Income Tax Act as per the pertinent state of affairs.

Under the “Indian I-T tax Act”, the firm, either Indian or foreign, qualifies for certain tax exemptions from the capital profits during the transfers of shares.

In case of “foreign company mergers”, a situation where two foreign firms are merged and the new formed identity is owned by an Indian firm, a different set of guidelines are allotted. Hence the share allocation in the targeted foreign business identity would be acknowledged as a transfer and would be chargeable under the Indian tax law.

As per the clauses mentioned under section 5(1) of the Indian Income Tax Act, the international earnings by an Indian firm would fall under the category of 'scope of income' for the Indian firm.

IMPACT OF MERGERS AND ACQUISITIONS

Just as mergers and acquisitions may be fruitful in some cases, the impact of mergers and acquisitions on various sects of the company may differ. In the article below, details of how the shareholders, employees and the management people are affected has been briefed.Mergers and acquisitions are aimed at improving profits and productivity of a company. Simultaneously, the objective is also to reduce expenses of the firm. However, mergers and acquisitions are not always successful. At times, the main goal for which the process has taken place loses focus. The success of mergers, acquisitions or takeovers is determined by a number of factors. Those mergers and acquisitions, which are resisted not only affects the entire work force in that organization but also harm the credibility of the company. In the process, in addition to deviating from the actual aim, psychological impacts are also many. Studies have suggested that mergers and acquisitions affect the senior executives, labor force and the shareholders.Employees:Impact Of Mergers And Acquisitions on workers or employees:Aftermath of mergers and acquisitions impact the employees or the workers the most. It is a well known fact that whenever there is a merger or an acquisition, there are bound to be lay offs.In the event when a new resulting company is efficient business wise, it would require less number of people to perform the same task. Under such circumstances, the company would attempt to downsize the labor force. If the employees who have been laid off possess sufficient skills, they may in fact benefit from the lay off and move on for greener pastures. But it is usually seen that the employees those who are laid off would not have played a significant role under the new organizational set up. This accounts for their removal from the new organization set up. These workers in turn would look for re employment and may have to be satisfied with a much lesser pay package than the previous one. Even though this may not lead to drastic unemployment levels, nevertheless, the workers will have to compromise for the same. If not drastically, the mild undulations created in the local economy cannot be ignored fully.

Management at the top:Impact of mergers and acquisitions on top level management:Impact of mergers and acquisitions on top level management may actually involve a “clash of the egos”. There might be variations in the cultures of the two organizations. Under the new set up the manager may be asked to implement such policies or strategies, which may not be quite approved by him. When such a

situation arises, the main focus of the organization gets diverted and executives become busy either settling matters among themselves or moving on. If however, the manager is well equipped with a degree or has sufficient qualification, the migration to another company may not be troublesome at all.

Shareholders:Impact of mergers and acquisitions on shareholders:We can further categorize the shareholders into two parts:The Shareholders of the acquiring firmThe shareholders of the target firm.

Shareholders of the acquired firm:

The shareholders of the acquired company benefit the most. The reason being, it is seen in majority of the cases that the acquiring company usually pays a little excess than it what should. Unless a man lives in a house he has recently bought, he will not be able to know its drawbacks. So that the shareholders forgo their shares, the company has to offer an amount more then the actual price, which is prevailing in the market. Buying a company at a higher price can actually prove to be beneficial for the local economy.

Shareholders of the acquiring firm:

They are most affected. If we measure the benefits enjoyed by the shareholders of the acquired company in degrees, the degree to which they were benefited, by the same degree, these shareholders are harmed. This can be attributed to debt load, which accompanies an acquisition.

IMPORTANT POINTS RELATING TO MERGERS AND ACQUISITIONS

Important terms relating to mergers and acquisitions are vital to the understanding of the entire process of mergers and acquisitions.

Every word encountered in the process of mergers and acquisitions need to be carefully understood for a sound understanding of the subject.

There are many important terms relating to mergers and acquisitions. These terms may appear to be completely unrelated to mergers and acquisitions but nevertheless, these terms may indicate a very important process in mergers and acquisitions. Some of the important terms relating to mergers and acquisitions are as follows:

MergersWhen two or more companies combine. The shareholders of the target firm are adequately compensated for, if the merger is effected. AcquisitionWhen one company acquires another company. The company, that is acquired is known as target firm. The company, which acquires is called acquiring company. An acquisition may be either friendly acquisition, when both the companies agree to the tender offer or may be unfriendly acquisition when the companies do not agree with the tender offer.

TakeoverTakeover may be referred to as a corporate activity when a company places a bid for acquiring another company. The company, which intends to take over the target firm makes an offer of the “outstanding shares” in case the target firm is traded publicly.Hostile takeoverIs defined as an “unfriendly takeover”. Such actions are usually revolted against by the managers and executives of the target firm.

People pillUnder some circumstances of hostile takeover, the people pill is used to prevent the takeover. The entire management team gives a threat to put in their papers if the takeover takes place. Using this strategy will work out provided the management team is very efficient and can take the company to new heights. On the

other hand, if the management team is not efficient, it would not matter to the acquiring company if the existing management team resigns. So, the success of this strategy is quite questionable.

SandbagSandbag is referred to as the process by which the target firm tends to defer the takeover or the acquisition with the hope that another company, with better offers may takeover instead. In other words, it is the process by which the target company “kills time” while waiting for a more eligible company to initiate the takeover.

Shark RepellentThere are instances when a target company, which is being aimed at for a takeover resists the same. The target firm may do so by adopting different means. Some of the ways include manipulating shares as well as stocks and their values. All these attempts of the target firm resisting its acquisition or takeover are known as shark repellent.

Golden parachuteIs yet another method of preventing a takeover. This is usually done by extending benefits to the top level executives lest they lose their portfolio/jobs if the takeover is effected. The benefits extended are quite lucrative.

RaiderMay be referred to an acquiring company, which is always on the look out for firms with undervalued assets. If the company finds that a company (target) does exists whose assets are undervalued, it buys majority of the shares from that target company so that it can exercise control over the assets of the target firm.

Saturday Night SpecialSaturday Night Special is referred to as an action of the corporate companies, whereby one company makes an attempt to takeover another company all of a sudden by executing a public tender offer. The name is derived from the fact that such attempts were made towards the weekends. However, such practices have been stopped as per Williams Act. It has now been obligatory that if a company acquires more than 5% of stocks from another company, this has to be reported to the SEC or the Securities Exchange Commission.

Macaroni defenseThis is referred to the policy wherein a large number of bonds are issued. At the same time the target company also assures people that the return on investment for these bonds will be higher with the takeover has taken place. This is another strategy embraced by the target firm for not succumbing to the pressures of the acquiring company.

 

INTERNATIONAL MERGERS AND ACQUISITIONS

The opening up of the European countries to international mergers and acquisitions and the economic reforms in developing countries provided major boost to international mergers and acquisitions since the 1990s.

Foreign investment gets major impetus from international mergers and acquisitions. While there are various advantages of international mergers and acquisitions, certain impediments in the form of regulatory restrictions also exist.

The adoption of economic reforms in many countries in the last two decades of the 20th century opened up opportunities ofinternational mergers and acquisitions. With different countries opening up their economies to foreign investors, international mergers and acquisitions has received. The European economy also opened up to foreign mergers and acquisitions in the 1990s, which resulted in M&A (merger and acquisition) activities of large volumes taking place across Europe.

While USA has always been the pioneer in merger and acquisition activities, UK too has registered high levels of mergers and acquisitions. With the European countries gaining momentum in mergers and acquisitions, international mergers and acquisitions also received a major boost.

There are various benefits that accrue to firms that undertake international mergers and acquisitions. Cross border mergers and acquisitions are effective in boosting Foreign Direct Investment (FDI). For international investors, it is easier to invest through a merger or an acquisition. International mergers and acquisitions provide access to infrastructure and customer base in a country which is quite difficult to build from the scratch. Moreover an existing brand name in a country provides strong business edge. Access to local markets of different countries is possible through international mergers and acquisitions.With the developing countries adopting liberal economic policies, the incentives of firms in the developed nations to indulge in mergers and acquisitions in these countries are huge. International mergers and acquisitions provide a way to tap the markets of these countries. On the other hand, for these developing countries international mergers and acquisitions provide them access to improved technologies and more productive operative mechanisms.

However there are certain impediments to international mergers and acquisitions. Regulations of different countries play an important role. In some countries certain sectors are prohibited from international mergers and acquisitions, while for some other sectors certain conditions need to be fulfilled. In China, for instance, laws regarding international mergers and acquisitions are quite stringent.

COSTS OF MERGERS AND ACQUISITIONS

Abstract: Costs of Mergers and Acquisitionsare calculated in order to check to the viability and profitability of any Merger or Acquisition deal.

The different methods adopted for this cost calculation are the Replacement Cost Method, Discounted Cash Flow Method and Comparative Ratio calculation method.

Costs of Mergers and Acquisitionsare very much important as it determines the viability of any Merger or Acquisition. Any company finalizes a merger deal only after calculating the cost of merger. In case of acquisition, when a company buys out another firm, it calculates the costs in order to determine how beneficial will be the takeover.

In order to calculate thecost of Mergers and Acquisitions, proper valuation of the target company. It is very natural that the target company tries to project its value to a high level but the firm who wants to take over the target company wants the deal to settled at a low price. So, the ultimate cost of the Acquisition depends on the price of the target company.

In the overall cost calculation of Acquisition, the Replacement Costs are something very crucial. In many cases, the Replacement Costs determine whether the Acquisition will ultimately take place or not.Replacement Costs actually refers to the cost of replacing the target firm. Generally, Target company’s value is calculated by adding the value of all the equipments, machinery and the costs of salary payments to the employees. So, the company which wishes to acquire the target firm, offers price accounting to this value. But, if the target firm does not agree on the price offered, then the other firm can create a competitor firm with same costing. So, this idea of cost calculation is referred as the calculation of Replacement Cost. But, it should be mentioned here that, in case of the firms, where the main assets are not equipments and machinery, but people and their skills, this type of cost calculation is not possible.

Other than this Replacement Cost calculation method, the other methods that are followed in calculating Costs of Mergers and Acquisitions, are the methods of Discounted Cash Flow Method and Comparative Ratio calculation Method. In Discounted Cash Flow Method, weighted average costs of capital are calculated, while in Comparative Ratio calculation method, Price- Earnings Ratio and Enterprise Value to Sales Ratio are calculated.

 

TRENDS OF MERGERS AND ACQUISITIONS

Merger and Acquisition Trends give a clear idea about the movements of the market. Not only the product market or labor market, but also the money market gets influenced by these Merger and Acquisition Trends.

Merger and Acquisition Trends are important to study in order to judge the market movements of any particular economy.

Not only the markets of particular countries, but also the World Market gets influenced by the significant Mergers and Acquisitions.

So, one can easily understand how determining the Merger and Acquisition Trends are in the overall development growth of any economy.

In the years 2006 and 2007, the world experienced numerous mergers and acquisitions.

All over the world, in the developed and developing nations, record number of merger and acquisition deals took place.

Most of these merger and acquisitions actually led to decrease in number of public undertakings and increase in number of private enterprises. This happened as many public organizations all over the world, were either merged into or acquired by big private institutions.

The reason of this particular Merger and Acquisition Trend, was the emergence and rapid growth of Private Equity Funds. Moreover, the regulatory environment of the publicly owned companies and the urge to attain growth of short term earnings were also behind the specific trend of Mergers and Acquisitions.

Mergers and Acquisitions resulting into privatization of the public undertakings took place not only in Europe, but also in North America, China and even in country like Brazil. In Europe this type of Mergers and Acquisitions took place significantly, as the market for public-to-private investment was quite strong in Europe. In China this type of Mergers and Acquisitions were first approved in 2006.

According to experts this trend of going private through mergers and acquisitions will continue in the future. As the Private Equity Funds are facing the target of deploying the raised capital, acquisition og large public organizations are definitely in the pipeline.