Introduction
The practice of merger and acquisitions has achieved a massive significance in recent corporate world throughout the globe. Merger and acquisition practices are widely taken into consideration for reformation of various trade organizations. In India, the thought of corporate restructuring by way of merger and acquisition was commenced through governmental bodies. This study is an attempt to analyze at large the merger and acquisitions enchanting in Indian businesses in various different sectors like Banking, Telecommunication and Pharmaceutical and to trace the issues and challenges seen by different organizations at the time of merger and acquisition. Through the increasing competition among domestic companies in the national and international markets most of the companies have resorted to combine themselves by way of M&A actions in India. In the contemporary markets the sole objective of most of the companies is to generate global consumers interferes and earn profit through it. Joining hands in business with other established or establishing companies both domestically and internationally can achieve global Consumer Interference. M&A’s as peripheral expansion scheme has attained surge as there is an amplified increase in deregulation, privatization, globalization and liberalization (LPG) implemented in most of the nations across the world. M&A’s has turned out to be an all- embracing medium to spread out creation portfolios, go into latest markets, to obtain knowledge, expand admittance to research and improvement and get admission to the possessions which facilitates company to participate on a global scale.
Merger:
Merger attributes to permutation of two or more than two business entity into single business entity where one company continue to exist and another lost its commercial existence. The existing company acquires all the assets, liabilities, and stocks of the abolished company or companies. Usually existing company is the buyer whereas the quenched company is the seller. Mergers are mainly done to lift up a share of the whole industry, diminished expenses of activities, extend to recent regions, connect usual things, extend incomes and increment benefits—all of which can incur revenue to the firm’s shareholders. “After a merger, shares of the new organization are disseminated to active shareholders of both new businesses”[1]. Merger is not like consolidation, it eradicates the merged companies and the existing company acquire the entire the privileges, right and liabilities of the abolished company. It is the technique by which the companies unite the assets ownership, earlier which was controlled by different bodies, legally.
Acquisition:
An acquisition is usually means attaining of a minor firm by a major business entity. Acquisition is the attainment of all or a section of company’s assets of the intended business. Company acquisition is the development of obtained company to assemble the power or shortcomings of the acquiring company. A merger is like an acquisition but indicates more stringently to merging of the interests of both companies into a stronger distinct company[2]. The final consequence is to develop the industry in more rapid and more beneficial manner than regular organic expansion would permit. An acquisition is the attainment of one company by another in which no new corporation is produced.
Distinction Between Merger and Acquisition
Merger means “to combine”, Acquisition means, “to acquire.” Merger implies to the grouping of two or more corporations, to outline a fresh company, may be by technique of merger or incorporation. Acquisition or merger known as takeover in the business strategy as in this process one company takes the control of another company. Both are the procedure of corporate restructuring, one company having influence on the other company and the decisions are primarily taken during deterioration in the financial system or through failing profit margins.
Advantages of Merger and Acquisition
M&A are two permanent forms of combinations adopted by business to manage, control or administer the working of the company. Shareholders while selling company gains from the M&A as the premium offers to encourage acceptance of the M&A as it offers much more charge than the rate of shares. Usually, firms enter into &A to merge their control and control in the markets.
Synergy- It is formed by the combination of two entities which is influential adequately to improve trade recital, financial growth, and general shareholders worth in long stretch.
Competitive Edge- The combined resources of new company helps in gaining and maintaining a competitive edge in the market.
“Cost Efficiency- The merger results in flourishing the purchasing power of the company which helps in negotiating the bulk orders, this leads to cost efficiency”.
Tax Benefits- Economic compensation might activate mergers and companies to will entirely make use of tax- shields, increase financial control and make use of alternative tax benefits.
Disadvantages of Merger and Acquisition
Merging of two companies that are doing analogous kind of performances may indicate replication and more competence within the corporation that may possibly require retrenchments. Company will face many complications due to frictions and inner struggle, which may take place among the workforce of combined companies. M&A may reduce the option of flexibility[3]. If a rival company makes rebellion and imperative resources those are of advanced feature, change is harsh. Slaughter of practiced employees apart from employees in control post. Such loss is foreseeable as it involves loss of business understanding. Poorly administered integration can also lead to fail of M&A activity as when the two companies come together there should be a proper guideline to follow and work but in absence of that it will le ad to be unsuccessful.
Mergers and Acquisitions in different sectors of India
Recently, India has shown the greatest potential in the case of merger and acquisitions. It is being cooperated efficiently in several different sectors in Indian market. Numerous Indian corporations have been rising in an organic manner to achieve admission to latest business corporations and many foreign corporations are aiming Indian companies for their escalation as well as development[4]. It has been scattering remote and broad on all business platforms.
a) Banking Sector
The huge figure of international as well as national banks is occupied in the merger and acquisition conduct in all over the world. As such merger and acquisition have turn out to be recognizable in the mainstream of countries in all over the world. The basic and principal purpose after M&A in banking division is to obtain remuneration in economies of magnitude. In Indian banking sector M&A has become emerging trend throughout the country. The main motive behind M&A in banking region is to yield repayment of economic scales. M&A are said to be a comparatively fast and efficient approach to develop into new markets and integrate new technologies. It aim behind the strategy by firms is to strengthen and sustain their position in market place. Banks can attain major development in their operations and curtail their charge to a significant scope, with the assistance of M&A in the banking region. Another significant advantage in the wake of such kind of M&A is that in such practice, rivalry is condensed as it abolishes opponents from banking industries.
b) Telecom Sector
Telecommunication industry is one of the most beneficial and quickly developing industries in the world the number of M&A in telecom sector has been increasing drastically. It is regarded as a crucial component of the worldwide utility and services segment. Telecommunication industries deals with various forms of communication mediums like mobile phones, fixed line phones and internet & broadband services. India is currently ranked at the world’s second-largest telecommunications market with more than 1.20 billion subscribers and has publicized strong growth in the past one and a half decades[5]. The Indian mobile industry is growing fiercely and will contribute to India’s Gross Domestic Product. The M&A in telecom sectors are regarded as horizontal mergers because the reason that the entities going for M&A are working in the same industry that is telecommunications industry. The main reason behind such mergers is to attain competitive benefits in the field of telecommunication. M&A in the telecommunications sector have been showing a thriving trend in the recent past and the economist are advocating that they will maintain to do so.
c) Pharmaceutical Sector
There are several M&A taking place in pharmaceutical sector globally. Among them, there is deficiency of appropriate research and improvement facilities within definite pharmaceutical genus. The elevated shape products reminds have also corporate a vital responsibility in the progressing M&A in the commerce. There is several numbers of corporations that have entered into M&A in the Indian pharmaceutical sector. Consolidation of Indian Pharmaceutical Sector in the course of M&A on business-related deliberation and business plans is the essential pre- obligatory. And it is realized globally M&A is the single method for getting hold of competitive benefit nationally and globally and as these the entire series of industries are viewing for planned acquisitions within the nation and in abroad. The total sum of corporations attaining different branches of other corporations has revealed that the Indian pharmaceutical diligence is prepared to be a leading strength in this picture. There are various chances designed for the chief pharmaceutical commodities as well as service supplier in the Indian pharmaceutical division as the cost control have been hassle- free and there have been major modifications in the medical requirement of Indians. The industrialized support of India is too muscularly sufficient to sustain the main international pharmaceutical corporation from the recital point of view.
Regulatory Framework
There are various regulatory frameworks that manage M&A activities in India. The objective of these laws is to build the process of M&A more transparent so that it will be able to protect the interest of shareholders. The economic development since 1991 has concluded in a drastic change of economic authoritarian environment for the commercial sector in India, enhancing in the practice, a market for commercial control categorized by M&A and other varieties of corporate reformation. An effort has been prepared to measure the collision of the authoritarian outline on M&A’s activities[6]. It is also extensively alleged that the guideline schemes and the regulatory framework governing M&A comprises the ease of this conversion in the Indian commercial zone.
a) The Companies Act, 2013
The Companies Act is the primary and foremost legislation, which governs all the companies registered in India. All corporate transaction like merger and acquisitions has to comply with the provisions of the Companies Act, 2013. “Though the term ‘merger’ is not defined under the act, however, provisions dealing with proposals of arrangement or compromise flanked by a company, its shareholders and its creditors for the purposes of reconstruction, amalgamation and combination transactions are thoroughly dealt with. The general law relating to M&A’s is embodied in section 230 to 234 of chapter XV (Companies, Arrangements and Amalgamations)”.
Section 230: Power to compromise or make arrangement with creditors and members
Section 231: Power of tribunal to enforce compromise and arrangement.
Section 232: Merger and amalgamation of companies.
Section 233: Merger and amalgamation of certain companies.
Section 234: Merger or amalgamation of companies with foreign companies.
b) The Competition Act, 2002
“In India, before The Competition Act, 2002 there was the Monopolies and Restrictive Trade Practices Act, 1969 (MRTP), which was the foremost enactment that appeared into existence on June 1, 1970. In India, the MRTP Act was regarded as the first legislation relating to competition in trade practice”[7]. During the economic reforms in the year 1991 it was realized that certain provisions of MRTP Act was not preferable to private investment and further, the provisions of MRTP were attached to be not effective enough while commencing with anti- competitive exercises in the view of growing economic liberalization. It was constituted with the aim to avert deliberation of financial control to universal damage, providing for management of monopolies, restrictive and unfair trade to protect consumer interest, to ensure that procedure of economic system doesn’t consequence in concentration of financial power in the hands of not many people and to make available for the rule of domination.
c) Securities Laws
The securities in Indian markets are governed by the regulations and guidelines issued by the SEBI. The transactions of M&A are also included under governance of SEBI in “Securities and Exchange Board of India (Substantial Acquisition of Shares and Takeovers) (Second Amendment) Regulation, 2018”. In 1990s government initiated the new economic policy which included liberalization, privatization and globalization hence, it resulted in the growth of Indian economy which created an extreme competitive business environment around the world, and it motivated many other companies to restructure their business entity and bring new corporate strategies which included the equipment like M&A, takeovers etc. SEBI is the India’s largest board, which governs the securities in Indian market situated in Bombay, established in 1992. The main objects of SEBI are towards shield investment of the financier in the securities market and en route for grant for the systematic growth of securities market. SEBI enacted “SEBI (substantial Acquisition of shares and takeover) regulations, 1994” in need to regulate the takeovers which laid behind the method to exist track with the acquirer for acquiring widely held shares or domineering in an additional corporation, so that the procedure of capture could carry not in a just as well reasonable method.
d) Foreign Exchange Management Act, 1999
FEMA Guidelines give that any exchange attempted comparable to a cross-outskirt merger as per the FEMA Guidelines will be considered to be endorsed by the RBI (“as mandatory as far as Rule 25A of the Organizations Merger Rules”)[8]. The Foreign Exchange Management Act Guidelines additionally necessitate for overseeing executive or entire time chief and member secretary of the company or companies engaged with such cross-fringe merger to outfit a testament responsibility to guarantee consistence with the FEMA Guidelines alongside the submission prepared to the pertinent National Company Law Tribunal (NCLT) according to mentioned unification. ‘Cross border merger has been characterized in the FEMA Guidelines as any merger, amalgamation or course of action between Indian organization and outside organization as per Organizations (Compromise, Arrangement and Amalgamation) Rules, 2016 advised under the Organizations Demonstration, 2013“. Although the FEMA Guidelines plan to swathe fractious outskirt ‘merger, amalgamation or course of action’ (which would incorporate demergers), Section 234 of the Companies Act and Rule 25A of the Companies Merger Rules, which manage cross fringe combination, just allude to “mergers and amalgamation” with no articulate notice of ‘arrangement’.
e) Income Tax Act, 1961
The Income Tax Act characterizes ‘amalgamation‘ as the combination of at least one organization with second organization, or the combination of at least two organizations to shape one organization. The ITA additionally necessitates that the accompanying situations should be ensured by righteousness of the merger, for such merger to succeed an ‘amalgamation’ under the Income Tax Act:
1. Every belonging of the combining companies turns into the possessions of the combined organization;
2. Every liabilities of the combining companies happen to be the liabilities of the combined organization; also
3. Investors investing at least 75% of the estimation of the portions of the amalgamating organization turn out to be investors of the amalgamated organization.
Issue and Challenges in Merger and Acquisition
While arranging M&A exchange, there are numerous issues that ought to be tended to in advance. The objective organization and the getting organization ought to consider the accompanying issues while examining an exchange. With growing new fiscal modification policy, the Prime Minister of India Dr. Manmohan Singh said, “you are a global company and India is not on your map, and then you have missed the cross-border mergers and acquisitions, are suitable and more rampant feature of the Indian corporate landscape”. As soon as an Indian corporation regards an acquirement or a merger, it desires towards certify that the entire basis and dangers are enclosed so as to come up through such an acquisition or a merge. The absolute series of apprehensions have prolonged because the rapidity and level of worldwide agreement has amplified.
Issues Faced
1. Deal Structure- Three choices subsist for organizing an exchange: (a) stock buy, (b) resource deal, and (c) merger. The acquirers along with object have challenging legitimate security and deliberation inside every other opportunity. It is essential on the way to perceive and tackle matter issues while fixing a meticulous arrangement structure. Certain essential deliberations recognizing with bargain arrangement are: (a) transferability of obligation, (b) outcast authoritative assent necessities, (c) investor endorsement, and (d) charge outcomes.
2. Escrows and Earn-outs- The memo of goal ought to unmistakably demonstrate any possibility to the installment of the value tag in an exchange, with several escrow with several acquire out. The reason for an escrow is to give response to an acquirer into the occasion there are ruptures of the portrayals as well as guarantees prepared through the objective (or else ahead the event of some different occasions[9])[10]. Despite the fact that escrows are paradigm in M&A exchanges, the provisions of an escrow are able to change altogether.
3. Representations and Warranties- The acquirer will be determined to anticipate that complete understanding should incorporate itemized portrayals and guarantees by the objective as for such issues as power, capitalization, licensed innovation, charge, fiscal reports, consistence through regulation work ERISA and matter agreements. It is basic for the objective and objectives guidance to audit these portrayals cautiously on the grounds that breaks can speedily fetch about reimbursement alleges from the acquirer. The revelation plans (which represent special cases on the way to the portrayals) ought to be viewed as the objectives “protection approach” and ought to be as point by point as could reasonably be expected.
4. Object Identification- Object repayment engagements are in every case profoundly haggled in several M&A swap. One of the fundamental concerns to be determined is the object to facilitate kind of reimbursement matters will be apex at the escrow total. In certain examples all matters may be topped at the escrow.
5. Timing Issues- Regarding any exchange, the gatherings should survey long haul lead things as quickly as time permits. For instance, the gatherings should finish an investigation to decide if Hart- Scott-Rodino recording determined and requested to be completed along with, provided that this is true, when such documenting will be finished (at times it is documented later than the letter of goal is implemented yet is frequently documented upon the implementation of authoritative understanding). Despite the fact that 30-day wavier up period can be deferred. A subsequent potential lead thing is deciding whether any outsider notification or assents (as auxiliary portrayed over) will be obligatory also the procedure through which such notification or assents will be prepared.
Challenges Faced
1. Working in a Global Environment- The merger and acquisition are generally and mostly done between the companies having headquarters in different countries. This complicates the transfer of practice as managers generally assume that their knowledge is best and applies universally and they forget to realize that performance drivers vary from culture to culture.
2. Language Barrier- The communication between the employees is seen as the biggest challenge. As the merged companies are from different countries and language used among is different and when such different companies come together the employees seems to restrict them from interacting[11]. Employees of different cultures must be given adequate education about other language prior so that the communication between workforces can be imposed efficiently.
3. Strategic Planning– Regularly HR experts are not adequately engaged with the assessment of target organizations before bargains are agreed upon. On the off chance that they are not members in the improvement of a M&A methodology and the screening of ability and culture at an early stage, they should play look up some other time on, fixing issues that may have been maintained a strategic distance from had they been included at first.
4. Planning Integration- A major challenge is to ensure that the new business entity is not affected by the M&A’s activities. And scrutinize employee’s performance to ensure that customer requirements continue to be met. Integration planning and operation should begin before time as feasible before the deal closes.
LANDMARK CASES
a) TELENOR, AIRTEL AND TATATEL- Airtel acquired Telenor in February 2017, to create a combined database of 315 million subscribers. Later in October 2017, Tata Teleservices decided to merge with Airtel for the same reason. These mergers were a result of competition with Jio as well as the Vodafone and Idea merger. Airtel would take over Telenor’s India outstanding payments of approximately Rs. 1.7 crore for spectrum and other operational contacts along with 44 million customers and employees. In October, 2017, Airtel proposed to buy Tata Tele’s consumer mobile business on a cash-free, debt-free basis, which would help it add revenue and subscriber market share and give access to 4G airwaves in the 850Mhz band, thus making it more competitive against Jio and a combined Voafone-Idea. The merger proposal has received the approval of the Competition Commission of India. Airtel’s acquisition of Tata Tele’s mobile business needs clearance from SEBI, NCTL and DoT whereas Telenor India purchase needs approvals from NCLT and DoT.
b) AXIS BANK AND FREECHARGE- In July 2017, the country’s third largest private sector lender Axis Bank announced the acquisition of digital payment company FreeCharge from Snapdeal for Rs. 385 crore and in all-cash transaction. The deal was roughly 340 million USD cheaper from what Snapdeal had paid to acquire FreeCharge. Snapdeal had bought FreeCharge in April, 2015, for an estimated 400 million USD. “FreeCharge has been in a free fall since 2018 as the company was unable to keep up with the rivals like the cash rich Paytm. The transaction could turn out to a value addition for Axis Bank given most traditional banks have not been able to become prime players in the mobile wallets segment”. Also, the acquisition gives Axis Bank access to about 52 million mobile wallet holders of FreeCharge users as well as about 150 to 200 professionals. For the Financial Year 2017, FreeCharge has GMV of INR 7 thousand crore along with 23 crore transactions.
c) FLIPKART AND EBAY[12]
In April, 2017, the Flipkart group raised 1.4 billion USD from global technology major’s eBay, Tencent and Microsoft and announced the merger with the Indian arm of eBay. Ebay has made cash investment of 500 million USD and sold its business to Flipkart in exchange of an equity stake in Flipkart. It had been earlier speculated that Snapdeal and Flipkart, had been negotiating a merger for five months, which ultimately fell through. The companies will also partner to leverage opportunities in cross-border trade, aimed in facilitating expansion into the global ecommerce market. As per the agreement, Flipkart customers will get expanded product choices with the wide array of global inventory available on eBay while eBay customer will have access to a more unique Indian inventory from Flipkart seller. Flipkart will continue to operate eBay as an independent entity.
d) FLIPKART AND MYNTRA
The biggest and mainly recognized acquisition of the year. The seven-year aged Bangalore profiled familial e-retailer acquired the accessible fashion portal for unrevealed money in May 2014. Industry analysts and insiders consider it was a $300 million or Rs 2,000 crore arrangement. “Flipkart co-founder Sachin Bansal forced that aforesaid transaction was a “completely different acquisition story” as it was not “driven by distress”, suggesting to a profusion of diminutive e-commerce players either having wound up or been bought over in the past two years. Mutually, cooperation’s leader declared, they were aiming “one of the largest e-commerce stories”.
e) TATA STEEL AND CORUS[13]
“Tata Steel is one of the chief Indian’s steel companies and the Corus is Europe’s second largest steel company. In 2007, Tata Steel’s acquired European steel key Corus for the price of $12.02 billion, creating the Indian company, the world’s fifth-largest steel producer. Tata Sponge iron, which was a low-cost steel producer in the fast developing province of the world which was a high-value product manufacturer in the region of the world challenging value products. The acquisition was proposed to give Tata steel access to the European markets and to attain potential synergies in the areas of manufacturing, procurement, R&D, logistics, and back office operations”.
Conclusion
The practices of mergers and acquisitions have better expanded significantly during the current commercial world. This procedure is comprehensively developed in favor of renovating the commerce relatives. In India, the thought of mergers and acquisitions be real and underwent by the administration bodies. Some notable funds related associations took the vital actions to reconstruct the commercial area of India by accepting the mergers and acquisitions arrangements. The Indian fiscal transformation since 1991 has unlocked up and about a number of complications mutually in the residential as well as worldwide circles. The extended rivalry in the universal market place has provoked the Indian association to obtain for mergers and acquisitions as a significant vital conclusion. The blueprint of mergers and acquisitions in India has transformed all through the existence. The quick impacts of the mergers and acquisitions comprise likewise been assorted over the diverse division of the Indian financial system. Till ongoing past, the occurrence of Indian business imaginative gaining outside endeavors was not all that usual. Mergers and acquisitions performances are keen for the means position in a company’s growth. The reimbursement of M&A’s actually developed and maintain for the long-term growth scheme. Conceivably the efficiency of M&A depends on the scheme of the Board, the suppleness of intervention era and interest of parties, but they could accomplish to the object if they are well equipped with the aim to accomplish mergers and acquisitions effectively.
Note:-
[1] https://www.investopedia.com/terms/m/mergersandacquisitions.asp
[2] https://www.edupristine.com/blog/mergers-acquisitions
[3] https://corporatefinanceinstitute.com/resources/knowledge/deals/merger/
[4] https://inc42.com/resources/an-overview-of-mergers-and-acquisitions-in-india/
[5] http://euroasiapub.org/wp-content/uploads/2016/09/4FMSept-2644-1.pdf
[6] http://www.legalserviceindia.com/article/l463-Laws-Regulating-Mergers-&-Acquisition-In-India.html
[7] https://www.emerald.com/insight/content/doi/10.1108/IJLMA-03-2015-0013/full/html?skipTracking=true
[8] https://www.pwc.in/assets/pdfs/news-alert-tax/2018/pwc_news_alert_26_march_2018_fema_cross_border_merger.pdf
[9] http://www.legalserviceindia.com/legal/article-2827-case-laws-related-to-mergers-and-acquisitions-of-banking-companies.html
[10] https://www.grantthornton.com/services/advisory-services/m-and-a-dispute-survey.aspx?gclid=CjwKCAiAxp-ABhALEiwAXm6IyeRcv8BIQ0R18Yvct6Q4KW6NpQvxglOf-JdyCoz8V0eOxoSU02v1fxoCB4gQAvD_BwE
[11] https://dealroom.net/blog/challenges-during-m-a
[12] Supra note 9
[13] https://www.casemine.com/search/in/mergers%20and%20acquisitions
Author Bio
Nice as well as informative article.