Mergers and acquisitions (M&A) are strategic tools companies use to grow, improve market position, reduce costs, or combine resources. While both involve combining businesses, they differ fundamentally in structure and result.
- Merger: Joining to Form a New Entity
A merger happens when two or more companies voluntarily decide to join together and form one new company. This often takes place when the companies are similar in size, resources, and market strength, so that neither one dominates the other.
Because a merger is voluntary and typically equals combining, the primary aim is to gain synergy, meaning the combined company works more efficiently and achieves greater value than the two companies operating separately. Mergers help reduce duplicate work, lower costs, increase market reach, and strengthen the business against competitors.
Legal Framework in India: Mergers are mainly regulated by the Companies Act, 2013, and are subject to review by the Competition Act, 2002, and SEBI regulations. A merger must be reviewed and approved by the National Company Law Tribunal (NCLT) to ensure fairness and transparency.
Merger Example and Case Law
- Example: The Vodafone India–Idea Cellular merger (2018), which formed Vodafone Idea Ltd. This was a combination of two massive telecom companies aiming to leverage combined infrastructure and tackle intense industry competition.
- Case Law: In Hindustan Lever Employees’ Union v. Hindustan Lever Ltd. (1995), the Supreme Court upheld a merger, emphasizing that courts must primarily examine the fairness, reasonableness, and public interest of a merger scheme rather than substituting their business judgment for that of corporate experts.
- Acquisition: One Company Takes Control
An acquisition occurs when one company purchases a controlling stake in another company. The acquiring company continues its existence, while the target company may either continue as a subsidiary or be absorbed entirely.
Acquisitions may be friendly (management agrees) or hostile (proceeds without consent). They are driven by motives such as rapid market entry, diversification, technological access, or gaining a competitive advantage.
Acquisition Example and Case Law
- Example: Tata Steel’s acquisition of Corus (2007). Tata Steel purchased Corus Group Plc’s entire shareholding, making Corus a wholly owned subsidiary and significantly expanding Tata Steel’s international footprint.
- Case Law: In Daiichi Sankyo Co. Ltd. v. Malvinder Mohan Singh (2018), the Supreme Court examined a dispute following Daiichi’s acquisition of Ranbaxy. The Court found the sellers had hidden important information, holding them liable for losses due to misrepresentation. This shows that in an acquisition, the buyer has legal recourse if the seller violates warranties made during the sale.
Comparative Summary
|
Feature |
Merger |
Acquisition |
|
Result |
A new legal entity is formed; the original companies cease to exist independently. |
The acquiring company remains; the target company may be absorbed or become a subsidiary. |
|
Nature |
Combination of equals; voluntary. |
Purchase of control; can be friendly or hostile. |
|
Motivation |
Achieve synergy and market strength through combined resources. |
Rapid market entry, diversification, or elimination of a competitor. |
|
Dominance |
Neither company typically dominates; control is shared. |
The acquiring company dominates and assumes control. |
Conclusion
Mergers and acquisitions are both crucial ways for companies to re-organize and grow, but their methods are distinct. In a merger, two companies join together as equals to form a new company, pooling resources and benefits. In an acquisition, one company takes over another by buying control, and the stronger company remains in charge. Despite their differences, both M&A strategies help businesses expand, stay competitive, and adjust to changing market dynamics.
