Mergers and Acquisitions (M&A) are considered one of the effective ways
through which a business can plan to grow rapidly. Different firms and companies
with their vivid yearly turnover have shot up their growth, due to the M&A
strategy that these firms deploy in their business operations apart from other
factors. M&A refers to the deal between two companies integrating in some form.
Although both of the said terms i.e., 'mergers and 'acquisition' are used
interchangeably and in the same breath, they have different meanings.
An acquisition can be defined as when a larger company acquires a smaller
company, thereby absorbing the business of the smaller company. On the other
side, a merger can be described as when two firms of approximately the same
size, shake hands together to form a single new entity as a whole, rather than
carrying on their operations and owning separately.
In a country like India, the government and the financial institutions
responsible for arranging the M&A transactions within the framework comprising
statutes like Company Law 2013, Competition Act 2002, and the Securities and
Exchange Board of India Act, 1992. In India, mergers and acquisitions of firms
are regulated by SEBI (Securities and Exchange Board of India).
With increased competition among the Indian industries in the domestic and
international markets, the majority of corporations have now opted for M&A
transactions to grow in today's market. Over time, M&A has proven to be a
thorough method for growing portfolios, entering new markets, gaining knowledge,
increasing access to R&D, and gaining access to the resources that enable a
corporate company or a firm to operate on a global scale.
Simplifying - Mergers
Simply put, a merger is when two entities combine to form one entity. The
primary driver or fundamental goal behind doing so is to raise the long-term
profitability of the merging entities, boost their market share, reduce
operating expenses, expand into new markets, and link everyday objects. In a
merger, however, the boards of directors of the two companies consent to the
merger and request shareholder approval.
Mergers can be structured in several different ways, based on the
interrelation between the two companies involved in the deal:
- Horizontal merger
When two businesses merge horizontally, it means that their products are
similar, and they operate in the same sector. Any merger or union between two
businesses that compete in the same market is referred to as a horizontal
merger. This kind of merger may have a significant impact on the market or
little to none.
The effects of a horizontal merger-the joining together of two incredibly small
businesses-are less obvious. The effect of a horizontal merger of a small
neighborhood restaurant with another neighborhood restaurant on the market for
food and drink would be minimal. However, the aftereffects of a sizable
horizontal merger can be felt across the entire market sector and occasionally
the entire economy. One of the classical examples of a horizontal merger is the
merger of Vodafone India and Idea Cellular Limited, Two telecommunication
companies in the year 2018.
- Vertical merger
Vertical mergers take place when two businesses that are engaged in different
stages of the same good's production combine. By restricting competitors' access
to crucial distribution channels or component products, a vertical merger may
hurt the competitive environment. For instance, a merger between a manufacturer
and a distributor of the manufacturer's goods would have a significant effect on
other manufacturers and distributors operating in the same industry.
One of the perfect examples of this kind of merger is the merger between Zee
Entertainment Enterprises Limited, a broadcaster, and Dish TV India Limited, a
Distribution platform operator, where both entities are at different stages of
the production/supply chain.
- Congeneric merger
Congeneric mergers take place when two merging companies operate in the same
general industry but do not share a supplier or buyer relationship. It involves
the union of two independent businesses with unrelated markets or products. In
other words, they are not connected professionally. Usually, risk
diversification serves as the justification for such mergers.
The merger between Thomas Cook India Limited and Sterling Holiday Resorts
(India) Limited is an example of a congeneric merger as both companies were
involved in the same tourism industry but their customer bases and process
chains were unrelated.
- Market-extension merger
When a merger occurs between companies that sell the same products or render the
same kind of services but operate in different markets then such mergers are
called market extension mergers. As the title itself suggests that this type of
merger helps the companies to gain access to a larger market and thus ensure a
bigger customer base.
The merger between Mittal Steel and Arcelor Steel, a Luxembourg- based steel
company happen in the year 2006, is an example of a market-extension merger.
- Product-extension merger
Last but not least a product-extension merger is a merger between companies that
sell related products or services and that operate in the same market. The
crucial point to note is that the products and services rendered by both
companies are not the same, but they are related.
The merger of PepsiCo with Pizza Hut in the year 1977, is considered a classic
example of a product extension merger as both of the companies worked in the
same sector i.e., the food and beverages industry, and sold related but not the
Simplifying - Acquisition
Acquisition typically refers to the purchase of a smaller business by a larger
one. In a wide sense, the term "acquisition" refers to the outright purchase of
one corporation by another. It involves one corporation acquiring a majority
stake in the stock of another active business.
There are two basic forms of acquisitions:
- Stock Purchase
In a stock purchase, the acquirer exchanges share of the target company for cash
and/or stock from the target firm's stockholders. In this case, the shareholders
of the target, not the target, receive compensation.
- Asset purchase
Rather than acquiring the target company by paying cash in exchange for shares,
the acquirer purchases the target's assets and pays the target directly.
What is a Hostile Takeover:
The most frequent acquisitions are friendly ones, which take place when the
target company consents to be purchased, its board of directors and shareholders
authorize the acquisition, and these unions frequently work to both parties'
Hostile takeovers, also referred to as unfriendly acquisitions, happen when the
target company rejects the acquisition. In contrast to friendly acquisitions,
hostile acquisitions require active participation on the part of the acquiring
firm to acquire a controlling position in the target company and compel the
Advantages of M&A
Some of the advantages of M&A are:
- M&A Unlocks synergies.
Creating synergies that make the merged firm more valuable than the two
companies separately is a common justification for mergers and acquisitions.
Synergies may result from lower costs or higher sales.
- Higher growth
M&A allows a business to grow faster and more profitably than it could through
organic expansion. By merging with or purchasing a firm that has the newest
capabilities, a company can utilize an aggressive M&A strategy to avoid the
expense and risk of developing those capabilities internally.
- M&A Leads to stronger market power.
The emerging entities from horizontal and vertical mergers acquire a greater
degree of market power, giving them the ability to control prices and the supply
- Tax advantage
If the target company is in a strategic industry or a nation with a favorable
tax system, M&A may occasionally result in tax benefits. Additionally, by
acquiring a business with net tax losses, the acquiring business can use the tax
losses to reduce its tax obligation.
It has been demonstrated that M&A is one of the most effective ways to get past
current obstacles and advance business development. The domestic companies
appear to have improved their efficiency and competitiveness in the global
market by restructuring the business, primarily through M&A, operating at a
larger scale, and other synergy effects.
The entry of foreign businesses through M&A, on the other hand, appears to have
increased competitive pressure in the domestic market, forcing the businesses to
increase their competitiveness.