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Merger: A Boon or Bane for companies?

The Companies Act,2013 has significantly replaced the 1956 act. It has brought some major and efficient changes or evolution in the corporate world. Among these changes, the evolution in the procedures of merger and acquisition of companies is a significant change. By doing this the amendment act tries to make the process of merger and acquisition smoother and easier.

The term 'merger' has not been defined anywhere in the act however, it implies amalgamation of two or more companies to form a new company which automatically receives all the resources/ assets of the companies merged.

For example:
Vodafone and Idea merged together to form 'Vi'.

Why companies merge?

  • To kill competition. For example- Adidas acquired Reebok to compete with Nike.
  • To reduce business operation cost;
  • To expand market;
  • For geographical expansion;
  • To get technology, patent, copyright, and other assets

Why mergers fail?

  • Wrong strategy;
  • Wrong partner;
  • Poor execution;
  • Cultural unfit;
  • Trust issues;
  • Wrong due diligence

Types of mergers:

  • Horizontal Merger- Here the companies merging together are part of same industry.
  • Vertical Merger- Backward integration

Forward integration
Illustration: A is having a business of manufacturing steel pipes. For manufacturing steel pipes he requires regular supply of steel, if he would merge with the steel merger then it would be called as backward integration.

After manufacturing steel pipes if A merges with the seller of pipes, then it would be called as forward integration.

Conglomerate Merger:
When parties merging together are part of totally different industries.

For example:
When a car manufacturing company merges with a telecom company.

Congeneric Merger:
When companies are although part of different industries but their target audience is same.

For example:
When a car manufacturing company merges with a car insurance company.

Market extension Merger:
When those companies come together which sell same products in different markets. This is usually done the increase the size of market.

Product extension Merger:
When those companies come together whose products are closely connected with each other and they operate in same market. For example- merger of Pizza Hut with Pepsi.

Reverse Merger:
When a private limited company merge with a public company so that the private company could get easily converted into a public company without any complex procedure.

For Example:
Warren Buffet merged a public limited textile company with an insurance company without even changing its name. Currently it is known with the name of Berkshire Hathaway.

Cross Border Merger:
Two firms belong to two different countries. It is a deal between a foreign company and a domestic company. This trend has increased with the rise of globalization. 1990s were known as the Golden decade of cross border merger.

For example:
Tata steel acquired UK based company for rupees 8 billion.

Advantages of Cross border merger:
  1. Resource sharing
  2. to encourage entry growth
  3. globalization
  4. Market extension
Disadvantages of Cross border merger:
  1. Cultural differences
  2. Different competition policy
  3. goal conflicts
  4. Different operating methods

Air India case
After independence, India was served by two aviation companies: Air India and Indian Airlines. Air India used to serve international market whereas the domestic aviation was Indian Airline's department. After the opening of Indian aviation sector for private players the competition became really tough.

In 2007, the Govt of India decided to merge Air India with Indian Airlines to reduce the business operation cost. Since then Air India is globally recognized brand name of the company merged together.

The merger had created a mega company with combined revenue of 15000 crore rupees.

Kingfisher Airlines and Air Deccan Case

In 2007, kingfisher airlines acquired a 26% equity stake in air deccan and became the single largest stakeholder in the company. Kingfisher later increased its stake to 46% and they renamed it as "Simply Deccan"

Air India And Tata Sons

Air India had a debt of 426 billion rupees, it was going through losses. The govt decided to offer Air India to Talace Pvt Ltd. which is a subsidiary of TATA group. Talace pvt ltd bought it at 18000 crore rupees.

Talace Pvt Ltd acquired 100% stake in the company on 27 January 2022.

Merger usually works as a famous English proverb "beacon of hope" meaning something that holds the promise of hope for the companies which are at the edge of losing their value. Its tremendous example has been discussed above wherein Govt of India in 2007 merged Air India and Indian Airlines to save the public aviation sector.

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