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Mergers And Acquisition - Simplified

Mergers and Acquisitions (M&A) are considered one of the effective ways through which a business can plan to grow rapidly. Different firms and companies with their vivid yearly turnover have shot up their growth, due to the M&A strategy that these firms deploy in their business operations apart from other factors. M&A refers to the deal between two companies integrating in some form. Although both of the said terms i.e., 'mergers and 'acquisition' are used interchangeably and in the same breath, they have different meanings.

An acquisition can be defined as when a larger company acquires a smaller company, thereby absorbing the business of the smaller company. On the other side, a merger can be described as when two firms of approximately the same size, shake hands together to form a single new entity as a whole, rather than carrying on their operations and owning separately.

In a country like India, the government and the financial institutions responsible for arranging the M&A transactions within the framework comprising statutes like Company Law 2013, Competition Act 2002, and the Securities and Exchange Board of India Act, 1992. In India, mergers and acquisitions of firms are regulated by SEBI (Securities and Exchange Board of India).

With increased competition among the Indian industries in the domestic and international markets, the majority of corporations have now opted for M&A transactions to grow in today's market. Over time, M&A has proven to be a thorough method for growing portfolios, entering new markets, gaining knowledge, increasing access to R&D, and gaining access to the resources that enable a corporate company or a firm to operate on a global scale.

Simplifying - Mergers

Simply put, a merger is when two entities combine to form one entity. The primary driver or fundamental goal behind doing so is to raise the long-term profitability of the merging entities, boost their market share, reduce operating expenses, expand into new markets, and link everyday objects. In a merger, however, the boards of directors of the two companies consent to the merger and request shareholder approval.

Mergers can be structured in several different ways, based on the interrelation between the two companies involved in the deal:
  1. Horizontal merger
    When two businesses merge horizontally, it means that their products are similar, and they operate in the same sector. Any merger or union between two businesses that compete in the same market is referred to as a horizontal merger. This kind of merger may have a significant impact on the market or little to none.

    The effects of a horizontal merger-the joining together of two incredibly small businesses-are less obvious. The effect of a horizontal merger of a small neighborhood restaurant with another neighborhood restaurant on the market for food and drink would be minimal. However, the aftereffects of a sizable horizontal merger can be felt across the entire market sector and occasionally the entire economy. One of the classical examples of a horizontal merger is the merger of Vodafone India and Idea Cellular Limited, Two telecommunication companies in the year 2018.
  2. Vertical merger
    Vertical mergers take place when two businesses that are engaged in different stages of the same good's production combine. By restricting competitors' access to crucial distribution channels or component products, a vertical merger may hurt the competitive environment. For instance, a merger between a manufacturer and a distributor of the manufacturer's goods would have a significant effect on other manufacturers and distributors operating in the same industry.

    One of the perfect examples of this kind of merger is the merger between Zee Entertainment Enterprises Limited, a broadcaster, and Dish TV India Limited, a Distribution platform operator, where both entities are at different stages of the production/supply chain.
  3. Congeneric merger
    Congeneric mergers take place when two merging companies operate in the same general industry but do not share a supplier or buyer relationship. It involves the union of two independent businesses with unrelated markets or products. In other words, they are not connected professionally. Usually, risk diversification serves as the justification for such mergers.

    The merger between Thomas Cook India Limited and Sterling Holiday Resorts (India) Limited is an example of a congeneric merger as both companies were involved in the same tourism industry but their customer bases and process chains were unrelated.
  4. Market-extension merger
    When a merger occurs between companies that sell the same products or render the same kind of services but operate in different markets then such mergers are called market extension mergers. As the title itself suggests that this type of merger helps the companies to gain access to a larger market and thus ensure a bigger customer base.

    The merger between Mittal Steel and Arcelor Steel, a Luxembourg- based steel company happen in the year 2006, is an example of a market-extension merger.
  5. Product-extension merger
    Last but not least a product-extension merger is a merger between companies that sell related products or services and that operate in the same market. The crucial point to note is that the products and services rendered by both companies are not the same, but they are related.

    The merger of PepsiCo with Pizza Hut in the year 1977, is considered a classic example of a product extension merger as both of the companies worked in the same sector i.e., the food and beverages industry, and sold related but not the same products.

Simplifying - Acquisition

Acquisition typically refers to the purchase of a smaller business by a larger one. In a wide sense, the term "acquisition" refers to the outright purchase of one corporation by another. It involves one corporation acquiring a majority stake in the stock of another active business.

There are two basic forms of acquisitions:
  1. Stock Purchase
    In a stock purchase, the acquirer exchanges share of the target company for cash and/or stock from the target firm's stockholders. In this case, the shareholders of the target, not the target, receive compensation.
  2. Asset purchase
    Rather than acquiring the target company by paying cash in exchange for shares, the acquirer purchases the target's assets and pays the target directly.

What is a Hostile Takeover:

The most frequent acquisitions are friendly ones, which take place when the target company consents to be purchased, its board of directors and shareholders authorize the acquisition, and these unions frequently work to both parties' advantage.

Hostile takeovers, also referred to as unfriendly acquisitions, happen when the target company rejects the acquisition. In contrast to friendly acquisitions, hostile acquisitions require active participation on the part of the acquiring firm to acquire a controlling position in the target company and compel the acquisition.

Advantages of M&A

Some of the advantages of M&A are:
  1. M&A Unlocks synergies.
    Creating synergies that make the merged firm more valuable than the two companies separately is a common justification for mergers and acquisitions. Synergies may result from lower costs or higher sales.
  2. Higher growth
    M&A allows a business to grow faster and more profitably than it could through organic expansion. By merging with or purchasing a firm that has the newest capabilities, a company can utilize an aggressive M&A strategy to avoid the expense and risk of developing those capabilities internally.
  3. M&A Leads to stronger market power.
    The emerging entities from horizontal and vertical mergers acquire a greater degree of market power, giving them the ability to control prices and the supply chain.
  4. Tax advantage
    If the target company is in a strategic industry or a nation with a favorable tax system, M&A may occasionally result in tax benefits. Additionally, by acquiring a business with net tax losses, the acquiring business can use the tax losses to reduce its tax obligation.
It has been demonstrated that M&A is one of the most effective ways to get past current obstacles and advance business development. The domestic companies appear to have improved their efficiency and competitiveness in the global market by restructuring the business, primarily through M&A, operating at a larger scale, and other synergy effects.

The entry of foreign businesses through M&A, on the other hand, appears to have increased competitive pressure in the domestic market, forcing the businesses to increase their competitiveness.

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