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.