What is Mergers, Acquisitions and Corporate Restructuring ?


Introduction to Mergers

The merger refers to combining two or more companies into one companioning two or more companies into one company. It can either be done by merging of one or more companies into the existing company or framing a new to the existing company or framing a new company by merging two or more existing company. The word 'amalgamation is used for the merger by the Income Tax Act,

The merger is done in the following two types:

·   Merger by absorption:- Combining two or more companies into the existing company are known as absorption. In this merger, one company loses its entity and goes into liquidation and all other companies remain the same. For example, there are two companies A Ltd. and B Ltd., company B Ltd. is merged in the assets and liabilities of company B Ltd will be acquired by company A Ltd. and company B Ltd. will be liquidated. For example, in India there was a merger by absorption of Reliance Polypropylene Ltd. (RPPL) by Reliance Industries Ltd. (RIL) due to which RPPL was liquidated and the shareholders were given 20 shares of RIL for every 100 shares of RPPL presented with them.

·   Merger by consolidation:- The combination of two or more companies for forming one new company is known as consolidation. This is also called a triangular merger. Amalgamation is sometimes used in place of consolidation. In this merger, all the existing companies lose their identity and are liquidated for making the new company. All the assets and liabilities of the consolidating company are acquired by the new company or cooperation. The old assets are sold to the new company and the control and management are given to the new company. Like the two companies, A Ltd. and B Ltd. are merged to form a new company known as AB Ltd. or C Ltd. There is difference between merger through absorption and merger through consolidation. In absorption, one company acquire another company, no new company is made while in consolidation, both the companies are merged to make a new company. In consolidation, the companies are of the same size while in absorption the size of the companies is different. Usually, the small company is merged into a big company. Both absorption and consolidation are used correspondently while the ways and issues of both the forms of mergers are the same.


Introduction to Acquisitions

An acquisition is also known as a takeover. It is when one company buys another company. In other words, an acquisition is when the buyer company purchases the assets or shares of the seller by paying cash, the securities of the buyer and other assets of value to the seller. When there is stock purchase transaction then the shares of the seller are not going to be combined with the existing company of the buyer and may be kept separately as the new subsidiary or operating division while in the asset purchase transaction, the assets taken by the seller to the buyer becomes an extra asset for the company of buyer. It believes that the value of assets purchased will be more than the price paid over the time period. It will increase the value of the shareholder as a result of strategic or financial advantages of the transaction.

It is a friendly or hostile process. In friendly a takeover, the companies negotiate about the cooperation to be done by each other while in hostile the takeover is not informed to the target company and they are forced to go for a takeover. Thus, acquisition refers to when the large firm purchases small firm.


Introduction to Corporate Restructuring

Corporate Restructuring means any modification in the ownership, business mix and alliances for increasing the iconic of the shareholders. The important characteristic of the business and investment is corporate restructuring.

It consists of proceedings related to expansion and contraction of operations of the firms and changes in its assets or finiretal or ownership structure. Restructuring means the important changes required in the strategy and policy offers its site with the assets liability composition, equity and debt proportion financing and the operations. Company the restructuring includes all the activities undertaken for making balanced organization, profitable and help the organization in attaining the objectives of the company in an effective way as compared to the previous way.

Corporate the restructuring includes the following:-

1) Ownership Restructuring: The company by the help of activities like merger and acquisitions, leveraged buy-outs, buyback of shares, spin-offs, joint ventures and strategic alliances try to change the company ownership structure.

2) Business Restructuring: The business restructuring refers to the reorganization of the business units or divisions like diversification into new businesses, outsourcing, disinvestment, brand acquisitions, etc.

3) Assets Restructuring: Asset restructuring refers to the acquisition or sale of assets and their ownership structure. For example, sale and leaseback of assets, debt securitization, receivable factoring, etc.

What is Merger ?

A merger is an agreement that unites two existing companies into one new company. There are several types of mergers and also several reasons why companies complete mergers. Merger and Acquisition (M&A) are commonly done to expand a company’s reach, expand into new segments, or gain market share. All of these are done to increase shareholder value Often, during a merger, companies have to prevent purchases or mergers by additional companies.

Mergers and acquisitions (M&A) can be a sell or buy-side deal. Depending on which type of deal it is, determines what type of institutions are involved.

Examples of Sell-Side Firms

  •          Investment Bank (primary institution)
  •          Commercial Bank
  •          Stock Brokers
  •          Market Makers

Examples of Buy-Side Firms

  •          Hedge Funds
  •          Asset Managers
  •          Institutional Investors
  •          Retail Investors

A list of Successful Mergers and Acquisitions ( M&A ) in India

  •          Vodafone-Idea merger 
  •          Snapdeal and Freecharge 
  •          Flipkart and Myntra
  •          Ola and TaxiForSure

Examples Successful Mergers and Acquisitions ( M&A ) in India

  • Vodafone-Idea merger:- Vodafone India and Idea Cellular, two of India top wireless carriers, are merging operations in the country to create an entity that will be equally owned by UK’s Vodafone Group and India’s diversified Aditya Birla Group. The USD 23 billion deal has received the CCI's approval and is likely to be completed in 2018. This deal may well create India’s largest telecom operator.

  • Snapdeal and Freecharge:- E-commerce startup Snapdeal acquired mobile recharge service Freecharge in April 2015. The cash plus stock deal was pegged at USD 400 million, making it the biggest acquisition in the history of India's internet industry. When the deal took place, Snapdeal raised around USD 1.1 billion in funding, while Freecharge had total funding of USD 120 million. Freecharge continued to operate as a separate entity following the acquisition, which allowed Snapdeal to expand its digital commerce ecosystem. After a turbulent last few months, Snapdeal finally sold Freecharge to Axis Bank for USD 60 million.

  • Flipkart and Myntra:- After months of speculations, India's premier e-commerce startup Flipkart acquired its fashion-focused rival Myntra in May 2014, a move which was in light of Amazon's expanding presence in India. Neither party confirmed the exact value of the acquisition, but reports placed the cash and stock deal between USD 300 million and USD 330 million. Myntra remained a separate entity following the acquisition and continued to expand its presence in the country, as did Flipkart. Myntra founder and CEO Mukesh Bansal was appointed on Flipkart's Board and was made head of the fashion division of the e-commerce conglomerate.
  • Ola and TaxiForSure:- Ola, one of India's largest ride-hailing service, acquired the smaller-but-value-centric TaxiForSure for USD 200 million in a cash and equity deal in March 2015. The deal saw Ola expand its presence considerably in the country by adding TaxiForSure's 15,000-plus fleet across 47 cities onto its own platform. TFS COO Arvind Singhal was appointed the company's new CEO, while its founders Aprameya Radhakrishna and Raghunandan G served in advisory roles for a month before quitting. Even as both companies initially operated as separate entities, Ola shut down TFS in August 2016 and laid off 1,000 of its employees.

Types of Mergers

  • Horizontal Merger:- The merger is said to be horizontal when the companies that are combined operate in the same industry or deal in similar lines of business. The market share of the newly formed company is greater than the individual entities. It is aimed at reducing competition, increasing market share, economies of scale and research and development.

  • Vertical Merger:- Vertical merger takes place when companies are having ‘buyer-seller relationship’, join to create a new company. It is an integration of two companies that are working in the same industry, though at a different stage of production and distribution. It can be upstream or downstream, i.e. where the business takes over its suppliers, then it is an upstream merger while if the company extend to its distribution entities, the merger is termed as downstream.

  • Conglomerate Merger:- A type of business integration, in which the merging companies are not related to each other, i.e. neither horizontally nor vertically. In a conglomerate merger, two or more companies operating in different business lines combine under one flagship company. This is further divided into, managerial conglomerate, financial conglomerate and concentric conglomerate.

  • Congeneric Merger:- In the congeneric merger, the firm of the same industry are merged but they do not have anything in common like buyer, customer or supplier like a merger between man salon and female salon. For example, Prudential's acquisition of Bache & Company.

  • Reverse Merger:-  In the reverse merger, a profit-earning the company merges into the loss bearing company and the identity of profit earning company is lost. It is the opposite of an ordinary merger in which the profit-earning company takes over the loss earning company. The reverse merger are the easy method of going public without any expenditure and less time is required as in case of raising the IPO and it also helps in making use of the provision of Income Tax Act, 1961 which lets the company carry forward the losses to set off against the profit.

  • Other Kinds of Merger:- The various other types of mergers are as follow.
  1. Cash Merger: In this type of merger the firm acquires the share of the company in exchange for cash in place of exchanging their own shares. It is done when the shareholder of the target firm wants to be related to the new firm made due to the merger. In this, some shareholders want cash for their shares while the other wants shares in the surviving company.  
  2. Short-Form Merger: In this merger, the parent company acquires the total voting rights in the subsidiary company. It does not follow any provision of statutory compliance and is also economical. It is done without the approval of shareholders under the following conditions when:

a) The shares of the company are given to the small group of shareholders which approves the merger.
b)  The various legal provisions of states allow the short-form of the merger.

If these conditions are satisfied then the majority of shareholders and board of directors will support the merger without the concern of minority shareholders. In various legal provisions, there is a method of merging in which approval is not required. 

What is Acquisitions?

An acquisition is when one company purchases most or all of another company's shares to gain control of that company. Purchasing more than 50% of a target firm's stock and other assets allows the acquirer to make decisions about the newly acquired assets without the approval of the company’s shareholders. Acquisitions, which are very common in business, may occur with the target company's approval, or in spite of its disapproval. 

The acquiring company buys the shares or the assets of the target company, which gives the acquiring company the power to make decisions concerning the acquired assets without needing the approval of shareholders from the target company.

Types of Acquisitions

There are various takeovers according to the type of acquiring a business and the business being acquired and also the method required for acquiring business to purchase the other. The various types of acquisition are as follows:

  • Friendly Takeover:- The takeover when both the companies agree for the takeover is known as a friendly takeover. The shareholder of the acquired company gets cash or may receive some number of shares from the acquiring company.

  • Hostile Takeover:- In this takeover, one company acquires the other company without agreement. It is done only in public business because the acquiring companies take control of shares in the stock of the target company.

  • Reverse Takeover:- In the reverse type of the takeover, the small company buys the bigger company or private company buys the public company for avoiding the security regulation required to become a public company.

  • Back-Flip Takeovers:- This is a rather uncommon type of takeover in which the acquirer company becomes a subsidiary of the target company. After the takeover, the business is carried out in the name of the acquired company.

Process of Acquisitions

Benefits of Acquisitions

  • Reduced entry barriers:- With M&A, a company is able to enter into new markets and product lines instantaneously with a brand that is already recognized, with a good reputation and an existing client base. An acquisition can help to overcome market entry barriers that were previously challenging. Market entry can be a costly scheme for small businesses due to expenses in market research, development of a new product, and the time needed to build a substantial client base.
  • Market power:- An acquisition can help to increase the market share of your company quickly. Even though competition can be challenging, growth through acquisition can be helpful in gaining a competitive edge in the marketplace. The process helps achieves market synergies.
  • New competencies and resources:- A company can choose to take over other businesses to gain competencies and resources it does not hold currently. Doing so can provide many benefits, such as rapid growth in revenues or an improvement in the long-term financial position of the company, which makes raising capital for growth strategies easier. Expansion and diversity can also help a company to withstand an economic slump.
  •  Access to experts :- When small businesses join with larger businesses, they are able to access specialists such as financial, legal or human resource specialists.
  • Access to capital:- After an acquisition, access to capital as a larger company is improved. Small business owners are usually forced to invest their own money in business growth, due to their inability to access large loan funds. However, with an acquisition, there is an availability of a greater level of capital, enabling business owners to acquire funds needed without the need to dip into their own pockets.
  • Fresh ideas and perspective:-M&A often help put together a new team of experts with fresh perspectives and ideas and who are passionate about helping the business reach its goals.

What is Corporate Restructuring ?

The terms “corporate restructuring' refers to the complete process in which the company combines its business operations and increase its positions for attaining the predetermined goals, stay in the competition and earn more profits. The basic goal of corporate restructuring is to manage the business operations in an effective, efficient and competitive manner for increasing the market share, brand power and synergies of the organization. It consists of significant re-orientation, reorganization or realignment of assets and liabilities of the organization through conscious management actions with the objective of drastically altering the quality and quantity of the future cash flow streams. In the present situation, the joint ventures, alliances, mergers, amalgamations and takeover is the simple and fast way of increasing ability and obtaining the large number of market share.

Reasons for Corporate Restructuring 

  • The companies have to open new export houses in order to survive in the cut-throat competition due to globalisation. As only the producers having a lower cost of production can exist in the market according to the global market concept. Hence, restructuring of the companies becomes compulsory.
  • The companies are compelled to approach a new market and new types of customers due to the modification in fiscal and government policies such as deregulation or decontrol.
  • In order to enhance the performance of the organisation, it becomes very important for the companies to accept the alterations made in the sector of information technology.
  • There are numerous companies divided into the smaller business segment The corporate restructuring also arises due to the wrong division of the businesses? The division of product that is not suitable for the company must be disposed of. The companies are forced to re-launch themselves due to cut-throat competition.
  • The reduction in the number of personnel becomes important both at work and managerial level to increase the level of productivity and to minimise the cost.  
  • The various medium scale companies are influenced to work in the global markets because of the easy convertibility of rupee.
  • The companies operating in the competitive market requires to emphasis on the basic activities of the business for earning synergy benefits, lowering the operating costs, to increase the productivity of the operations and to make use of managerial knowledge so that the business can earn a profit.
  • The combination of various abilities and development of activities will help to attain the economies of scale.
  • The business risk can be reduced by expanding and changing the business activities which will help the firm to attain the minimum target rate of return.
  • The unprofitable company by the help of re-structuring can be transformed into a profitable company.