A company is a legal entity formed by a group of individuals to get indulged in business. Companies in order to gain profits and reduce competition from the market often involve in activities like mergers and acquisitions. Mergers and acquisitions are a type of reconstruction that helps in expanding the business. Reconstruction is the building up of a completely new structure or description of which one has only a few parts or only partial evidence. In the case of John Holt Nigeria Ltd & Anor v. Holts African Workers Union & ors, Ademola CJN held that it was lawful for the company to re-organize by way of a reconstruction plan to improve its business and profits. Mergers and acquisitions are terms describing the consolidation of companies or assets through various types of financial transactions. Mergers refer to a process when a larger company or company of similar size merges to form a single unit. Acquisitions happen when a larger company acquires a smaller company.
Mergers and Acquisitions in other words can be stated as a business tactic in which the senior executives of the companies foresee the market strategies of economic growth, market competition, higher revenues, and adhering to higher synergies by merging or acquiring a target company to create a higher share in the market. Microsoft acquisition of Intuit (1994-1995); In 1994, Microsoft proposed a deal that would be the largest acquisition ever made in history. Microsoft saw an opportunity in Intuit’s recurring fees for processing online check-writing transactions. If the deal would have fixed Microsoft would have accounted for 90% of the market. The deal was later called off as the U.S. Justice Dept. of April 1995 sued to stop the deal, stating that the combination could lead to higher prices in the market and less competition. In June 2022, the largest acquisition ever made was the takeover of Mannesmann by Vodafone occurred in 2000. Vodafone, a mobile operator company, acquired Mannesmann, a German-owned industrial conglomerate company.
Mergers and acquisitions are some of the best business restructuring processes that have gained substantial prominence in the present-day corporate world. Virtual mergers and acquisitions have become a trend, especially in Covid period but during Covid lockdown mergers and acquisitions were down by 57% in 2020 as compared to 2019. The modern world requires creative space for the management of its affairs. Mergers and acquisitions help in getting the required technology and the labor for running that technology.
Types of Mergers and Acquisitions Transactions
- Horizontal- Horizontal merger happens when companies with similar kind of work merge together. This type of merger kills the competition in the market and increases revenue.
- Vertical- Vertical merger takes place between a company and its supporting small businesses. This helps in expanding business by expanding in the early stages but which later leads to reducing the cost of purchasing.
- Conglomerate- It is between companies with a completely different types of businesses. It is usually for diversification reasons. Usually, at the time of off-season or when a certain business is growing through losses, it is important that the businesses must have a certain level of investment in other businesses set up to overcome losses from one side of the business.
- Concentric- When two companies operate in the same business but it is not identical but rather complementary to each other merges.
All these types of mergers have their own significance in the corporate business. All the mergers revolve around the fact that the acquirer company wants to gain profit, eliminate competition from the market, keeping themselves updated with technological advancement.
Forms of Integration
- Statutory- When an acquirer company is much larger than the target company, the acquirer company after acquiring the target company takes all the assets and liabilities of the target company and that company ceases to exist as a separate entity.
- Subsidiary- In this form of integration, the target becomes a subsidiary to the acquirer and also maintains its business.
- Consolidation- In this type of integration, the earlier identity of both the companies ceases to exist and a completely new entity is formed.
The word integration suggests coming together for a cause. Here, companies integrate for meeting their company’s goals and objectives.
Forms of Acquisition
- Stock purchase: The acquirer pays the target entity shareholders cash or shares in exchange for shares of the target company. Shareholders also bear the tax liability.
- Asset purchase: The acquirer purchases the target’s assets and pays the target directly. The acquirer will not assume any of the target’s liabilities.
Mergers and Acquisitions Deal Structure
It is a binding agreement between the parties involved in a merger or acquisition. It states what each party involved is entitled to and what they are obliged to do according to the principles laid down by the agreement. Deal structure is simple terms, talks about the terms and conditions of a merger and acquisition. The deal is made on the basis that the top priorities of both the parties are kept upfront and it is made sure that they are satisfied, along with the risk that each party must bear. Three ways of structuring M&A deals are asset acquisition, stock purchase, and mergers.
Stages in Merger and Acquisition
- Merger and Acquisition Strategy Process: The first step is to look at the accelerating business through mergers and acquisitions. The factors involved for the same can be location, raw material, technology, labour, skills etc. Another most important factor is to arrange finance through loans, cash etc. The third step is to look for a suitable company which can match the expectations lay down by the acquirer company. It is very important to develop a preliminary valuation with the target company.
- Target Identification Strategies: In this stage of merger and acquisition, it is important for acquirer companies to have a strong research work setup for target identification. The future course of actions and estimated profits are calculated through customer choices, technological setup, management etc. of both acquirer and the target company before merging or acquiring its business. Before entering into the transactions of merging or acquiring it is very important for an acquirer company to produce a list of target companies, to know the risk involve in such transactions, take advice from the market experts etc.
- Information Exchange: When both parties agree to go ahead with the deal the documentation process starts. A binding legal document is formed to carry out the process of mergers and acquisitions. After that, the entities share their company details with each other to know about the position of both the companies.
- Valuation and Synergies: Both the parties wish to strike a deal where they can earn profits. Agreement is reached between the parties only when both the parties feel that the offer is reasonable. Buyer tries to assess the situation by keeping in mind the perks of the target company which won’t be possible without the merger and acquisition.
- Offer and Negotiation: At this stage, an offer is given to the shareholders of the target company. Both the parties try to negotiate the prices to strike a deal that can be beneficial to both of them.
- Due Diligence: Due diligence includes a review of the target entity including products, customer base, financial books, human resources etc. The objective is to ensure that information is correct based on which the offer was made. In case of any wrong information, revision is done to justify the actual information.
- Purchase Agreement: At this stage of Mergers and Acquisitions a draft of the agreement is outlined about the cash and stock to be given to target shareholders. It also includes the date and time of the payment.
- Deal closure and integration: After the purchase agreement, both the parties close the deal by signing the document and the acquirer company acquires the target company. The management staff of both companies works together to act as a single identity.
Each and every step of mergers and acquisitions is important and requires various skill sets, research, time, and resources to fulfil. Any mistake regarding any of these steps might result in huge losses. The merger of America Online and Time Warner is one of the biggest failures in the history of mergers and acquisitions. The managers behind this deal failed to analyze the dynamics of new media landscape and got rushed into getting a new media platform. Thus, the company reported a loss of US$ 99billion- which is one of the largest annual net loss ever reported.
Advantages of Merger and Acquisition
- The common goal of mergers and acquisitions is to create synergies with the mutual perks of the single entity thus formed, which won’t be possible if the companies would have worked separately.
- It provides higher revenues and strong market powers by merging and acquiring a company with upgraded capabilities without having to take the risk of developing the same internally.
- When a company acquires a completely different business it helps it in diversification of cash flows and avoidance of losses during a slowdown in their industry.
- Start-ups usually have skills and knowledge but they lack resources to expand their innovation. M&A provides these start-ups a way to reach out to companies with financial stability and these start-ups will provide human resources to the companies.
Disadvantages of Merger and Acquisition
- Mergers and acquisitions eliminate or reduce the competition in the market. This increases profit for the acquirer company but at the same time, it leads to a substantial increase in prices. The company can now increase its prices thus acquiring the monopoly power in the market. The consumers will not be left with many choices rather than to purchase those products at high prices.
- Merger and acquisition lead to job losses owing to the fact that the acquirer company has its own working staff and thus it takes few people in employment from the target company who are highly skilled. Thus, underperforming staff’s jobs are taken away.
- When the size of an acquirer company increases, the situation might lead to the loss in the same degree of control that earlier prevailed. Workers might lose interest in their work.
- Any mistake in the valuation of the whole process might lead to huge losses.
Laws Governing M&A in India
In India, the process of mergers and acquisitions are court driven and requires the sanction of National Company Law Tribunal. Other than court-based M&A, the legislative reforms have introduced short-form mergers that can be carried out privately without invoking the domain of the courts. On the regulatory front, SEBI has been active in making and implementing regulations governing takeovers.
Companies Act, 2013
Mergers & Acquisitions are governed under the Section 230-240 of Chapter XV of the Companies Act, 2013. It lays down various steps and procedures to be followed during mergers and acquisitions. It regulates and prohibits anti-competitive agreements.
Mergers and acquisitions bring out the idea of extracting the best out of everything. They lead to innovation and growth in various fields. The laws regarding mergers and acquisitions are made in a way to regulate competition and fluctuations in money flows. Mergers and acquisitions have given the corporate world different perspectives looking into business objectives.
- Wild C. and Weinstein S. (2009) Smith and Keenan’s Company Law; Pearson Education Ltd, 14th Ed.
- Aina K.O.; Company Law and Business Associations 1, Law 534, National Open University of Nigeria.
- Companies Act 2013, Act of Parliament,2013(India).
This article is written by Rishita Vekta, B.A.LL.B (2nd Year) student from Lloyd Law College, Greater Noida U.P.