M&As - concept and history

The term ‘Mergers & Acquisition’ has become a common notion under the corporate regime. With increasing globalization, mergers & acquisition have become an important concept under the corporate regime.

Though the terms ‘Mergers’ & ‘Acquisitions’ are often used interchangeably there is a significant difference between the two. When two or more already existing entities, often of same size and stature, come together and combine thereby resulting into a third new entity, merger is said to have taken place. In merger, the individual identity of the existing entities is diminished. Whereas, when one existing entity takes over another existing entity, it is known as acquisition. In acquisition, no new entity is formed and the identity of the existing entity is retained.

The two terms have also not been specifically defined in the Companies Act, 1956 or the Income Tax Act, 1961. However, the Companies Act, 2013, though does not define the terms per se, gives an insight into the concept of mergers as a process wherein two entities combine resulting into not just the accumulation of assets and liabilities but also into the organization of such entity into a single business.[1]

A term similar to ‘Merger’ is ‘Amalgamation’ which is defined under section 2(1B)[2] of the Income Tax Act, 1961. The section essentially enumerates three conditions that are necessary for a merger to qualify as an amalgamation.

1.1   Genesis & Historical Origin of Mergers & Acquisitions

The genesis and historical origin of mergers & acquisitions can be attributed to the ‘five waves of Mergers & Acquisitions’. In the international arena, the concept can be traced back to as early as 1890s[3], however in the Indian market the concept gained prominence only in the late 1980s[4] as the practice of mergers and acquisitions was regulated by MRTP (Monopolistic and Restrictive Trade Practices) Act, 1969.[5]

The first and second waves of merger were specifically related to the U.S. market whereas the other three waves covered various other geographical regions including UK, Europe and Asia.[6]

? First Wave Merger (1893-1904)- The first wave merger was mainly characterized by horizontal mergers. Corporate entities operating in the same product market and at the same level of industrial process merged into a single entity. This led to the creation of a monopolistic market. The first wave merger was limited to industries like mining, food products, petroleum products, transportation etc. One of the instances of first wave merger is the merger of J.P. Morgan & U.S. Steel with Carnegie Steel which controlled the steel production in the U.S.[7] The deals in the first wave were ‘friendly deals’ where the bid had the approval of the target’s management and the prime source of financing was cash. The end of first wave was marked by various factors such as the economic slowdown of 1903, stock market crash of 1904, the enactment of antitrust laws, for instance the Sherman Antitrust Act[8] and the dangers of World War I.

India observed the first wave in the year 1988 in the form of acquisition by Swaraj Paul of DCM Ltd and Esscorts Ltd.[9] Prior to this, in the post-independent era, the acquisition of Pukhuri Tea Co. Ltd. by Bishnauth Tea in 1965[10] can be said to one of the important mergers witnessed by India.

?  Second Wave Merger (1916-1929)- Began during World War I, the main characteristic feature of the second wave was the creation of oligopolies and most of the mergers during this wave were more vertical than horizontal in nature. Food, paper, printing and iron industry were the prime focus of merger activity during the second wave. The objective behind the second wave of merger was to gain economies of scale. Government policies implemented in the 1920s also proved as an incentive for the firms to work together. In the second wave, although the deals were friendly but the source of financing changed from cash to equity. However, due to the ‘Great Depression’ in 1929 the second wave came to an end. 

 On the other hand, India witnessed its second wave in 1992-1995. The major acquisition deals in this wave involved the Murugappa Group, Chabbria Group and the RPG Group.[11] In India, the second wave was mostly characterized by a conglomeration of diverse business activities. The process of merger & amalgamation during the second wave was further incentivized and regulated by the introduction of New Industrial Policy in 1991, the establishment of Securities Exchange Board of India (SEBI) in 1992 and the enactment of Substantial Acquisition of Shares and Takeover (SAST) Regulation Act. The condition of requiring prior government approval and the restriction imposed by the Foreign Exchange Regulation Act, 1973 on foreign ownership in Indian companies were also done away with.

?  Third Wave Merger (1965-1969)- After the ‘Great Depression’ and World War II, the third wave of merger surfaced. During the third wave, most of the mergers that took place were conglomerate in nature i.e., the merger of two unrelated companies. An instance of merger in the third wave is the General Electric[12] that operates in a variety of fields including healthcare, transportation, energy, etc. During this wave, the restrictions on anti-competitive mergers and acquisitions were further strengthened. In the late 1970s the wave slowed down and it came to a complete end in 1981 due to the oil crisis. Some of the prominent mergers during the third wave are INCO-ESB Merger, United Technologies and OTIS Elevator merger and the Colt Industries and Garlock Industries merger.[13] Akin to the second wave, equity remained the main source of financing.

The period of third wave merger in India ranged from 1997-2002. Mergers in the third wave also included cement and the telecommunication industry.[14] During the third wave, the number of Indian companies investing abroad has also increased significantly. In the year 2000, domestic mergers took place only in sectors like transport and communication, plastic and pharmaceuticals, food products, computer software etc. whereas, cross-border mergers only took place in the IT sector. The government policies for economic liberalization worked as an incentive for Indian companies to merge with and acquire foreign companies. Some of the prominent examples of third wave merger include Grasim and Larsen & Toubro (L&T), Reliance Industries Ltd. (RIL) and Reliance Petroleum Ltd. (RPL)[15]

?  Fourth wave Merger (1984-1989)- Most of the mergers & acquisition deals that took place in the fourth wave were hostile in nature. In other words, the bid did not have the target’s management approval. Size of the target company, in comparison to the previous waves, increased significantly during this wave. Source of financing also changed from equity to debt and cash funding. Unlike the previous waves, this wave was characterized by ‘Bust-up Takeovers’ and ‘Leveraged Buy-out.’[16] In a bust-up takeover, parts of the target company are divested after the acquisition whereas, in a leveraged buy-out the firm uses its own amount of outside debt to acquire the target company. Industries involved in the fourth wave merger are oil and gas industry, pharmaceutical industry, banking and airline industries etc.[17] Owing to the introduction of anti-takeover laws, financial institution reforms and the Gulf War the fourth wave came to an end.[18]

    The period of fourth wave merger in India is from 2004-2006. Telecom sector alone accounted for one-third of the total value of the M&A deals during the year 2005.[19] Some of the important deals during the fourth wave are Essar Group’s acquisition of BPL Communications, Maxis Group’s acquisition of Aircel, VSNL’s acquisition of Teleglobe International Holdings.[20]

?  Fifth Wave Merger (1993-2000)- The fifth wave of merger emerged mainly due to the booming economy and the globalization. With a view to maximize economic growth and global opportunities, the concept of cross-border merger became quite prevalent as the corporate entities started looking for a target company even outside their domestic boundaries. Some of the significant deals during the fifth wave merger are Citibank and Travelers, Chrysler and Daimler Benz, Exxon and Mobil etc.[21]The M&A deals during this wave were mostly friendly in nature and were predominantly financed by equity. However, due to economic recession the fifth wave came to an end.

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This is first article in a series of articles on the subject by our student researchers Drutika Upadhyay (HNLU), Sanskriti Sharma (RGNUL), Aayush Wadhi (ILS) and Divyansh Prasad (RMLNLU)

[1] ibid

[2] “amalgamation”, in relation to companies, means the merger of one or more companies with another company or the merger of two or more companies to form one company (the company or companies which so merge being referred to as the amalgamating company or companies and the company with which they merge or which is formed as a result of the merger, as the amalgamated company) in such a manner that—

(i) all the property of the amalgamating company or companies immediately before the amalgamation becomes the property of the amalgamated company by virtue of the amalgamation ;

(ii) all the liabilities of the amalgamating company or companies immediately before the amalgamation become the liabilities of the amalgamated company by virtue of the amalgamation ;

(iii) shareholders holding not less than 18[three-fourths] in value of the shares in the amalgamating company or companies (other than shares already held therein immediately before the amalgamation by, or by a nominee for, the amalgamated company or its subsidiary) become shareholders of the amalgamated company by virtue of the amalgamation,

otherwise than as a result of the acquisition of the property of one company by another company pursuant to the purchase of such property by the other company or as a result of the distribution of such property to the other company after the winding up of the first mentioned company.

[3] T.J.A Nouwen, M&A waves and its evolution throughout history, TILBURG UNIVERSITY, (May 15, 2020, 11:09 PM), https://arno.uvt.nl/show.cgi?fid=129395

[4] Mr. Ajay Gehi, History of Merger and Acquisition in India ,MERGERS AND ACQUSITIONS, (May 15, 2020, 11:30 PM), https://www.mergersandacquisitions.in/history-of-merger-and-acquisition-in-india.htm

[5] Surbhi Agarwal, The 10 Biggest Ever Merger & Acquisition Deals in India, iPleaders, (May 17, 2020, 3:45 PM), https://blog.ipleaders.in/10-biggest-ever-merger-acquisition-deals-in-india/           

[6] Supra note 4

[7] Anastasia Belyh, A Historical Analysis of M&A Waves, CLEVERISM, (May 18, 2020, 9: 20 AM), https://www.cleverism.com/historical-analysis-ma-waves-mergers-acquisition/

[8] Supra note 4.

[9] Tejaswini Nachankar, Mergers & Acquisitions: The Indian Scenario, ACADEMIA, (May 18, 2020, 11: 05 AM), https://www.academia.edu/37844212/Mergers_and_Acquisitions_The_Indian_Scenario_5.1_Brief_History_of_Mergers_and_Acquisitions_in_India

[10] Ibid

[11] Supra note 10

[12] Supra note 4

[13]EconomyWatch, History of Mergers and Acquisitions, ECONOMYWATCH, (May 19, 2020, 1:40 PM), https://www.economywatch.com/mergers-acquisitions/history.html

[14] Supra note 10

[15] Supra note 10

[16] Supra Note 4

[17] Supra Note 14.

[18] Ibid.

[19]Supra Note 4.

[20] Supra Note 4.

[21] Supra Note 4.