All about Mergers and Acquisitions

‘Mergers and Acquisitions’ refer to the consolidation of companies or its assets through certain financial transactions, for instance consolidations, tenders, purchase of assets, management acquisitions etc. The process of mergers and acquisitions in India is court driven and thus is long drawn. The process can be initiated through common agreements between the two parties, but that is insufficient to provide a legal cover to it. To bring it into effect, the sanction of the High Court is required.

The provisions relating to mergers and acquisitions and other related issues are consolidated in The Companies Act, 1956. The Central Government in this process acts through an Official Liquidator (OL) or the Regional Director of the Ministry of Company Affairs,. Recently, with an increase in global trade, there has been a steady increase in cross-border mergers.

MERGER

The term ‘merger’ is not defined in the Companies Act, 2013 or Income Tax Act, 1961 (“ITA”). Merger is a union of two or more organizations into one. The effect of merger is not only the accumulation of assets and liabilities of the entities, but also organization of such entity into one business. The possible objectives of a mergers are numerous- economies of scale, acquisition of technologies, access to varied sectors / markets etc.

Usually, in a merger, the merging entities cease to exist and merges into a single surviving entity. Commercially, mergers may be of several types. It depends on the requirements of the merging entities.

i.  Horizontal  Mergers

‘Horizontal merger’, takes place between entities that are engaged in competing businesses and are at the same stage of the industrial process. It takes a company a step closer towards monopoly by eliminating a competitor and establishing a stronger presence in the market. Another benefits of this form of merger are the advantages of economies of scale and economies of scope. These forms of merger are heavily perused by the Competition Commission of India (“CCI”).

ii.  Vertical  Mergers

Vertical merger is the combination of two entities at different stages of the industrial or production process. An example can be the merger of a company engaged in construction business with a company engaged in production of brick or steel. In this kind of merger, companies stand to gain on account of synchronization of demand and supply and lower transaction costs. Also, vertical integration helps a company move towards greater independence and self-sufficiency.

iii. Congeneric  Mergers

In such kind of mergers, the two companies or entities are in the same or related industries or markets however they do not offer the same products. In a congeneric merger, the companies often share the same distribution channels, which provide synergies for the merger. The acquiring company and the target company may have overlapping technology or production systems, which makes integration easy for the two entities. This type of merger is often initiated by entities who intend to increase their market shares or expand their product lines. 

iv. Conglomerate Mergers

In a conglomerate merger, the merger is between two entities who belong to unrelated industries. The reason for such a merger usually is utilization of financial resources, enlargement of debt capacity, and increase in the value of outstanding shares by an increase in the leverage and per share earnings, and by lowering the average cost of capital. The merger with an entity involved in an  unrelated business helps the entity to thrust into diverse businesses without incurring large start-up costs which is normally associated with a new business.

v.  Cash  Merger

In a ‘cash merger’ or ‘cash-out merger’, the shareholders of one entity receive cash instead of shares in the merged entity. This is functionally an exit for the cashed-out shareholders.

vi. Triangular Merger

A triangular merger is mostly resorted to, for regulatory and tax reasons. It is a tripartite arrangement where the target merges with a subsidiary of the acquirer. Based on which entity is the survivor after such merger, a triangular merger may be forward, or reverse.

ACQUISITION

An ‘acquisition’ or ‘takeover’ is the purchase of controlling interest in the share capital or of all or substantially all of the assets and/or liabilities, of the target entity by one person. A takeover can be friendly or hostile and can be structured either by way of agreement between the offeror and the majority shareholders or purchase of shares from the market or by an offer for the acquisition of the target’s shares to the entire body of shareholders.

Acquisitions can also be done by way of acquisition of shares of the target, or by the acquisition of assets and liabilities of the target. In the latter case, the entire business of the target can be acquired on a going concern basis or certain assets and liabilities can be picked and purchased by the acquirer. The transfer in the case when a business is acquired on a going concern basis is a ‘slump sale’ as under the Income Tax Act.

JOINT VENTURE

A joint venture is nothing but the coming together of two or more businesses for a specific purpose. It may or may not be for a limited duration. The purpose of the joint venture can be an entry into a new business or an entry into a new market. Parties can set up a new company or use an existing entity, through which the proposed business will be conducted further. The parties enter into an agreement and set out the rights and obligations of each joint venture party, the broad framework for the management of the company, and accordingly, such terms are incorporated in the byelaws of the company for strengthening its enforceability.

CONCLUSION

With a plethora of financing options available to the corporate houses, the aspiration has become a reality for many of them, who can now boast of having the best in the industry under their wings. Indian companies have surpassed their foreign counterparts several times in corporate restructuring both within and beyond the national frontiers. Mergers and acquisitions are powerful indicators of a strong and growing economy. The legal framework for corporate restructuring should be facilitative and not restrictive. The biggest hurdle however in the way of completing a merger still remains the long drawn out court procedure which is required for the sanction of a scheme of arrangement.

-BY SHRIJA VERMA