Brief Analysis of Mergers and Acquisitions ("M&A")

Introduction

The world is constantly thriving to reach a mile ahead in terms of economic growth. Along with the rest of the world Indian economy is also growing and evolving. India has become a hub of small entrepreneurships that are making it big in the recent times. Various companies have started their businesses from small scale and have made it global. There is an approach to make the business grow and to convert it. In reality, various methods are being tested and tried. One of such ways to make one’s company/business grow is by doing M&A.

Meaning and difference between M&A

To put it in simple words, mergers and acquisitions are business tactics to yield business growth. In both of them, two or more companies come together to form a single company and the terms are often used interchangeably, but they differ from each other in the ways in which the companies have come together.

In Mergers, there are two separate legal entities of almost equal sizes or stature which come together with the object of securing growth in the interest of both the entities by creating a third legal entity. When a third company is created by merging two existing companies, their shares are surrendered, and new shares are allotted in the name of the new company with revised valuation. Generally, when two companies are merged, the value of shares increases and that depicts the financial growth of the company.

Whereas, Acquisition occurs when a small sized legal entity/company is purchased by a comparably larger legal entity/company by purchasing all the assets and liability of the company or by buying all the stocks of the company. It means that the ownership of the company is acquired by any means statutory or non-statutory. Such acquisition of the ownership can be amicable or hostile. Hence, unlike mergers in acquisition, a new legal entity is not created but an existing company loses its identity in the acquiring company.

Reasons behind M&A

When a company reaches to a decision of merging its company with another company or to acquire another company, there is always some rationale behind that decision as a lot of capital and stake is at risk. Such decisions are taken after undergoing all the economic analyses and other factors involved by the management of the companies. The rationales behind reaching to the decision of merger or acquisition can be any of the following separately or in combinations.

· Increasing the scale of business

· Value creation

· Adoption or acquiring modern technologies or expertise.

· Elimination of competition/gaining higher competitiveness

· Lack of managerial talent or human resource

· Diversification

· Tax benefits

· Increasing financial capacity

Types of M&A

Following are the types of M&A -

· Horizontal M&A - In this type of merger/acquisition, both the companies are operating in the same businesses. They are the competitors of each other.

· Vertical M&A - In this type of merger and acquisition, the target company and the acquirer are in a different position on the supply chain. It means that the target company can be a supplier company to the Acquirer Company and the merger can bring low-cost production and overall cost efficiency.

· Conglomerate M&A - when both the target company and the acquirer company are involved in unrelated business activities and a M&A occurs between them, it is called a Conglomerate M&A.

· Congeneric M&A- In this type of M&A, both the companies have the same customer base but they are doing business in different products or services. This kind of merger helps in increasing market share and product line expansion.

· Market extension merger- In this type of M&A, both the companies are selling the same product but in different markets. Here the merger of the two opens the gate of new geographical market and leads to expansion of customer base.

· Product extension merger- Where the M&A occurs between two companies selling different but related product in the same market, such merger is called as Product Extension merger. This kind of merger leads to scaling up of the business and product line expansion.

Process of M&A

When it is decided by the management of a company to get merged with another company or to acquire another company, a comprehensive process is initiated to achieve the set goal. The process can be divided into the following steps.

1.????????First, an acquisition strategy is to be developed which will work on the reasons for the acquisition, that how the company is going to be benefited from such M&A.

2.????????Then, based on the strategy a M&A search criteria has to be established for such M&A. the criteria will focus on the key reasons on which the M&A is based like expanding the customer base, value creation, scaling up of the business or any of the above reasons.

3.????????Then, after developing the search criteria for M&A, a search for a prospective acquisition target has to be started. The target company to be searched must fulfill all the criteria on which the M&A is based. Like, the target company is already having a large customer base and acquiring that company will increase the customer base of the acquiring company, which is the reason for the M&A.

4. ???????Then, after finding one or more suitable targets, the acquiring company has to start the M&A Planning. Here the acquirer has to plan and go forward accordingly to meet and convince the potential target for the Merger.

5.????????Then, when the target company has agreed to go forward with the merger the acquirer has to perform the value analysis based on the details sought from the target company like their past financial statement, current financial statement, list of customer base, business background, geographical location or any other such document which will add value to the target company.

6.????????After doing the value analysis, the next step is starting the negotiations between the parties to the M&A. Here, both the target and the acquirer company will negotiate on the valuation of the company, as the acquirer would like to buy the target at a lesser price and the target would want a greater price.

7.????????When the negotiation part is over, the next step is to start the due diligence process. The due diligence process plays a crucial role in a deal of M&A and if it is not done properly, it may lead to the failure of the deal and losses to the parties. Due diligence means that the acquirer has to check all the aspects of the target company like all the relevant documents, assets, valuation criteria, customer base list, balance sheets, financial statements, etc.

8.????????Afterwards, the parties have to determine the type of purchase and sale agreement, whether it should be a share purchase agreement or asset purchase agreement

9.????????Then, the financing strategy for M&A is made. Here, the acquirer has to decide from where the deal of purchase will be financed, whether by leveraged buy-out (bank loan), equity financing, or by any other financing arrangement.

10.??????Then, the closing and integration of the M&A is done. Where the management teams of both the companies work together to make the process of integration and merger smooth and with no difficulty.

Legal aspects of mergers and acquisition in India

Like other countries, M&As are regulated by law in India as well. The enactments that are involved in such deals are:

1.????????The Companies Act, 2013

2.????????The Indian Income Tax Act, 1961

3.????????The Competition Act, 2002

4.????????The Foreign Exchange Management Act (FEMA), 1999

5.????????The Insolvency and Bankruptcy Code, 2016

6.????????The Indian Stamp Act, 1899

7.????????The SEBI Regulations 2011

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