Mergers and acquisitions (M&A) are defined as consolidation of companies. Differentiating the two terms, Mergers is the combination of two companies to form one, while Acquisitions is one company taken over by the other. M&A is one of the major aspects of corporate finance world. The reasoning behind M&A generally given is that two separate companies together create more value compared to being on an individual stand. With the objective of wealth maximization, companies keep evaluating different opportunities through the route of merger or acquisition.
Definition of Merger and Acquisition
Merger: Merger refers to the mutual consolidation of two or more entities to form a new enterprise with a new name. In a merger, multiple companies of similar size agree to integrate their operations into a single entity, in which there is shared ownership, control, and profit. It is a type of amalgamation. For example M Ltd. and N Ltd. Joined together to form a new company P Ltd.
The reasons for adopting the merger by many companies is that to unite the resources, strength & weakness of the merging companies along with removing trade barriers, lessening competition and to gain synergy. The shareholders of the old companies become shareholders of the new company. The types of Merger are as under:
Acquisition: The purchase of the business of an enterprise by another enterprise is known as Acquisition. This can be done either by the purchase of the assets of the company or by the acquiring ownership over 51% of its paid-up share capital.
In acquisition, the firm which acquires another firm is known as Acquiring company while the company which is being acquired is known as Target company. The acquiring company is more powerful in terms of size, structure, and operations, which overpower or takes over the weaker company i.e. the target company.
Most of the firm uses the acquisition strategy for gaining instant growth, competitiveness in a short notice and expanding their area of operation, market share, profitability, etc. The types of Acquisition are as under:
Advantage and Disadvantage
|1||The most common reason for firms to enter into merger and acquisition is to merge their power and control over the markets.||Loss of experienced workers aside from workers in leadership positions. This kind of loss inevitably involves loss of business understand and on the other hand that will be worrying to exchange or will exclusively get replaced at nice value.|
|2||Another advantage is Synergy that is the magic power that allow for increased value efficiencies of the new entity and it takes the shape of returns enrichment and cost savings.||As a result of M&A, employees of the small merging firm may require exhaustive re-skilling.|
|3||Decrease of risk using innovative techniques of managing financial risk.||Company will face major difficulties thanks to frictions and internal competition that may occur among the staff of the united companies. There is conjointly risk of getting surplus employees in some departments.|
|4||To become competitive, firms have to be compelled to be peak of technological developments and their dealing applications. By M&A of a small business with unique technologies, a large company will retain or grow a competitive edge.||Increase in costs might result if the right management of modification and also the implementation of the merger and acquisition dealing are delayed.|
|5||The biggest advantage is tax benefits. Financial advantages might instigate mergers and corporations will fully build use of tax- shields, increase monetary leverage and utilize alternative tax benefits.||In many events, the return of the share of the company that caused buyouts of other company was less than the return of the sector as a whole.
Examples of Mergers and Acquisitions in India
√ Acquisition of Corus Group by Tata Steel in the year 2006.
√ Acquisition of Myntra by Flipkart in the year 2014.
√ The merger of Fortis Healthcare India and Fortis Healthcare International.
√ Acquisition of Ranbaxy Laboratories by Sun Pharmaceuticals.
√ Acquisition of Negma Laboratories by Wockhardt.
|BASIS FOR COMPARISON||MERGER||ACQUISITION|
|Meaning||The merger means the fusion of two or more than two companies voluntarily to form a new company.||When one entity purchases the business of another entity, it is known as Acquisition.|
|Formation of a new company||Yes||No|
|Nature of Decision||The mutual decision of the companies going through mergers.||Friendly or hostile decision of acquiring and acquired companies.|
|Purpose||To decrease competition and increase operational efficiency.||For Instantaneous growth
|Size of Business||Generally, the size of merging companies is more or less same.||The size of the acquiring company will be more than the size of acquired company.|
Indias Regulatory Framework
Companies Act, 2013
Competition Act, 2002
SEBI (SAS&T) Regulations, 1997
Income Tax Act, 1961
Reserve Bank of India (RBI)
Foreign Investment Promotion Board (FIPB)
Process of Merger and Acquisition
The process involving merger and acquisition is important as it can dictate the benefits derived from the deal. The process involves the following steps:
1. Preliminary Valuation: This step primarily focuses on the business assessment of the target company. Not only the latest financials of the target company are scrutinized, its expected market value in future is also calculated. This close analysis includes the company’s products, capital requirements, brand value, organizational structure, etc.
2. Proposal Phase: Once the target company’s business performance is analyzed and reviewed, the proposal for the business transaction is given. It could be either a merger or an acquisition. Generally, the mode of giving a proposal is an issuance of a non-binding offer document.
3. Planning for Exit: After the proposal is given to the target company and it takes the offer, the target company then engages in planning for the exit. This includes planning the right time to exit and considering all the options such as a full sale or partial sale. This is also a time for tax planning and evaluating the reinvestment options.
4. Marketing: Once the exit plan is finalized, the target company engages in a marketing plan and aims to achieve the highest selling price.
Sun Pharmaceuticals acquires Ranbaxy
This is a classic example of a share swap deal. As per the deal, Ranbaxy shareholders will get four shares of Sun Pharma for every five shares held by them, leading to 16.4% dilution in the equity capital of Sun Pharma (total equity value is USD3.2bn and the deal size is USD4bn (valuing Ranbaxy at 2.2 times last 12 months sales).
Reason for the acquisition: This is a good acquisition for Sun Pharma as it will help the company to fill in its therapeutic gaps in the US, get better access to emerging markets and also strengthen its presence in the domestic market. Sun Pharma will also become the number one generic company in the dermatology space. (currently in the third position in US) through this merger.
Objectives of the M&A:
√ Sun Pharma enters into newer markets by filling in the gaps in the offerings of the company, through the acquired company.
√ Boosting of products offering of Sun Pharma creating more visibility and market share in the industry.
√ Turnaround of a distressed business from the perspective of Ranbaxy.