Mergers and Acquisitions- Understanding of Basic Concepts

[Shubham Agarwal]

The most talked about subject of the day is Mergers & Acquisitions (M&A). In developed economies, corporate Mergers and Acquisition are a regular feature. In Japan, the US and Europe, hundreds of mergers and acquisition take place every year. In India, too, mergers and acquisition have become part of corporate strategy today.

Mergers, acquisitions and corporate restructuring business in India has grown by leaps and bounds in the last decade.

The terms ‘mergers; ‘acquisitions’ and ‘takeovers’ are often used interchangeably in common parlance. However, there are differences. While merger means unification of two entities into one, acquisition involves one entity buying out another and absorbing the same. In India, in legal sense merger is known as ‘Amalgamation’.

The amalgamations can be by merger of companies within the provisions of the Companies Act, and acquisition through takeovers. While takeovers are regulated by SEBI.M & A deals fall under the Companies Act. In cross border transactions, international tax considerations also arise.

The term “amalgamation” is used when two or more companies are amalgamated or where one is merged with another or taken over by another.

An acquisition is when both the acquiring and acquired companies are still left standing as separate entities at the end of the transaction. A merger results in the legal dissolution of one of the companies, and a consolidation dissolves both of the parties and creates a new one, into which the previous entities are merged.

Amalgamation signifies the transfer of all or some part of the assets and liabilities of one or more than one existing company to another existing company or of two or more existing companies or to a new company, of which transferee company or all the members of the transferor company or companies become, or have the right of becoming, members and generally, such amalgamation is accomplished by a voluntary winding-up of the transferor company or companies.

Under an amalgamation, merger or takeover, two (or more) companies are merged either de jure by a consolidation of their undertakings or de facto by the acquisition of a controlling interest in the share capital of one by the other or of the capital of both by a new company.

Types of Mergers

A merger is generally understood to be a fusion of two companies. The term “merger” means and signifies the dissolution of one or more companies or firms or proprietorships to form or get absorbed into another company. By concept, merger increases the size of the undertakings. Following are major types of mergers:

• Horizontal Merger: The two companies which have merged are in the same industry, normally the market share of the new consolidated company would be larger and it is possible that it may move closer to being a monopoly or a near monopoly to avoid
• Vertical Merger: This merger happens when two companies that have ‘buyer-seller’ relationship (or potential buyer-seller relationship) come
• Conglomerate Mergers: Such mergers involve firms engaged in unrelated type of business In other words, the business activities of acquirer and the target are neither related to each other horizontally (i.e., producing the same or competiting products) nor vertically (having relationship of buyer and supplier).In a pure conglomerate merger, there are no important common factors between the companies in production, marketing, research and development and technology. There may however be some degree of overlapping in one or more of these common factors. Such mergers are in fact, unification of different kinds of businesses under one flagship company. The purpose of merger remains utilization of financial resources, enlarged debt capacity and also synergy of managerial functions.
• Congeneric Merger: In these mergers, the acquirer and the target companies are related through basic technologies, production processes or The acquired company represents an extension of product-line, market participants or technologies of the acquirer. These mergers represent an outward movement by the acquirer from its current business scenario to other related business activities within the overarching industry structure
• Reverse Merger: Such mergers involve acquisition of a public (Shell Company) by a private company, as it helps private company to by-pass lengthy and complex process required to be followed in case it is interested in going public.

Sometimes, it might be possible that a public company continuously a public traded corporation but it has no or very little assets and what remains only its internal structure and shareholders. This type of merger is also known as ‘back door listing’. This kind of merger has been started as an alternative to go for public issue without incurring huge expenses and passing through cumbersome process.