Mergers and Acquisitions : An insight into its use and purpose in the Corporate scenario
Merger is defined as combination of two or more companies into a single company where one survives and the others lose their corporate existence. The survivor acquires all the assets as well as liabilities of the merged company or companies. Generally, the surviving company is the buyer, which retains its identity, and the extinguished company is the seller.
Merger is also defined as amalgamation. Merger is the fusion of two or more existing companies. All assets, liabilities and the stock of one company stand transferred to Transferee Company in consideration of payment in the form of:
Equity shares in the transferee company,
Debentures in the transferee company,
A mix of the above modes.
Acquisition in general sense is acquiring the ownership in the property. In the context of business combinations, an acquisition is the purchase by one company of a controlling interest in the share capital of another existing company.
A ‘takeover’ is acquisition and both the terms are used interchangeably.
Takeover differs from merger in approach to business combinations i.e. the process of takeover, transaction involved in takeover, determination of share exchange or cash price and the fulfillment of goals of combination all are different in takeovers than in mergers
Types of Mergers
Based on the offerors’ objectives profile, combinations could be vertical, horizontal, circular and conglomeratic as precisely described below with reference to the purpose in view of the offeror company.
(A) Vertical combination:
A company would like to takeover another company or seek its merger with that company to expand espousing backward integration to assimilate the resources of supply and forward integration towards market outlets. The acquiring company through merger of another unit attempts on reduction of inventories of raw material and finished goods, implements its production plans as per the objectives and economizes on working capital investments.
In other words, in vertical combinations, the merging undertaking would be either a supplier or a buyer using its product as intermediary material for final production.
The following main benefits accrue from the vertical combination to the acquirer company:
(1) It gains a strong position because of imperfect market of the intermediary products, scarcity of resources and purchased products;
(2) Has control over products specifications.
(B) Horizontal combination:
It is a merger of two competing firms which are at the same stage of industrial process. The acquiring firm belongs to the same industry as the target company. The mail purpose of such mergers is to obtain economies of scale in production by eliminating duplication of facilities and the operations and broadening the product line, reduction in investment in working capital, elimination in competition concentration in product, reduction in advertising costs, increase in market segments and exercise better control on market.
(C) Circular combination:
Companies producing distinct products seek amalgamation to share common distribution and research facilities to obtain economies by elimination of cost on duplication and promoting market enlargement. The acquiring company obtains benefits in the form of economies of resource sharing and diversification.
(D) Conglomerate combination:
It is amalgamation of two companies engaged in unrelated industries like DCM and Modi Industries. The basic purpose of such amalgamations remains utilization of financial resources and enlarges debt capacity through re-organizing their financial structure so as to service the shareholders by increased leveraging and EPS, lowering average cost of capital and thereby raising present worth of the outstanding shares. Merger enhances the overall stability of the acquirer company and creates balance in the company’s total portfolio of diverse products and production processes.
Purpose of Mergers and Acquisitions
The basic purpose of merger or business combination is to achieve faster growth of the corporate business. Faster growth may be had through product improvement and competitive position.
1) Procurement of supplies: To safeguard the source of supplies of raw materials or intermediary product
2) Revamping production facilities: To achieve economies of scale by amalgamating production facilities through more intensive utilization of plant and resources;
3) Market expansion and strategy: To eliminate competition and protect existing market;
4) Financial strength: To improve liquidity and have direct access to cash resource;
5) Strategic purpose: The Acquirer Company view the merger to achieve strategic objectives through alternative type of combinations which may be horizontal, vertical, product expansion, market extensional or other specified unrelated objectives depending upon the corporate strategies
6) Desired level of integration: Mergers and acquisition are pursued to obtain the desired level of integration between the two combining business houses. Such integration could be operational or financial.
Advantages of Mergers and Takeovers
Mergers and acquisitions are caused with the support of shareholders, managers and promoters of the combining companies.
From the standpoint of shareholders
Investment made by shareholders in the companies subject to merger should enhance in value. The sale of shares from one company’s shareholders to another and holding investment in shares should give rise to greater values i.e. the opportunity gains in alternative investments. Shareholders may gain from merger in different ways viz. from the gains and achievements of the company i.e. through
(a) realization of monopoly profits;
(b) economies of scales;
(c) diversification of product line;
(d) acquisition of human assets and other resources not available otherwise;
(e) better investment opportunity in combinations.
From the standpoint of managers
Managers are concerned with improving operations of the company, managing the affairs of the company effectively for all round gains and growth of the company which will provide them better deals in raising their status, perks and fringe benefits. Mergers where all these things are the guaranteed outcome get support from the managers. At the same time, where managers have fear of displacement at the hands of new management in amalgamated company and also resultant depreciation from the merger then support from them becomes difficult.
Mergers do offer to company promoters the advantage of increasing the size of their company and the financial structure and strength. They can convert a closely held and private limited company into a public company without contributing much wealth and without losing control.
Benefits to general public
Impact of mergers on general public could be viewed as aspect of benefits and costs to:
(a) Consumer of the product or services;
(b) Workers of the companies under combination;
(c) General public affected in general having not been user or consumer or the worker in the companies under merger plan.
Mergers are pursued under the Companies Act, 1956 vide sections 391/394 thereof or may be envisaged under the provisions of Income-tax Act, 1961 or arranged through BIFR under the Sick Industrial Companies Act, 1985
Minority Shareholders Rights
Section 395 of the Companies Act, 1956 provides for the acquisition of shares of the shareholders. According to section 395 of the Companies Act, if the offerer has acquired at least 90% in value of those shares may give notice to the non-accepting shareholders of the intention of buying their shares. The 90% acceptance level shall not include the share held by the offerer or it’s associates. The procedure is laid down in this section.
To ensure that the acquirer shall pay the shareholders the agreed amount in redemption of his promise to acquire their shares, it is a mandatory requirement to open escrow account and deposit therein the required amount, which will serve as security for performance of obligation.
Payment Of Consideration
Consideration may be payable in cash or by exchange of securities. Where it is payable in cash the acquirer is required to pay the amount of consideration within 21 days from the date of closure of the offer. For this purpose he is required to open special account with the bankers to an issue (registered with SEBI) and deposit therein 90% of the amount lying in the Escrow Account, if any. He should make the entire amount due and payable to shareholders as consideration. He can transfer the funds from Escrow account for such payment. Where the consideration is payable in exchange of securities, the acquirer shall ensure that securities are actually issued and dispatched to shareholders in terms of regulation 29 of SEBI Takeover Regulations
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