Analysis of Mergers and Acquisitions

Varun Hariharan

19 Nov, 2020

A merger can be understood as a combination of two or more entities.  This term is synonymous with the other terms that are used in day to day business. Some of the terms used in the business world are amalgamations, arrangements, and combinations. Though these terms are used in business, the meaning which they bring about is the same. Mergers take part in everyday business and are not just limited to companies that are private and public. They happen in partnerships, trusts, and even proprietorship concerns. Therefore, the merger market is not only limited to companies, but also apply to all forms of business structures.

Companies merge to combine their collective strengths to compete in the market. Hence a merger is beneficial for a business. However, there can be various issues related to a merger. Such issues can arise in the pre-completion phase of the merger or post-completion phase of the merger. The parties that are involved in a merger transaction have to keep in mind various factors that affect the transaction. Some of these factors may be legal, financial, market, pricing, and competition factors.  During a merger transaction, there has to be proper coordination between government authorities, financial institutions, lawyers, accountants, and the benefactors of the merger. Hence before there is a merger or acquisition, there has to be proper broad-based understanding of the analysis of mergers and acquisitions.

History of Mergers and Acquisitions in India: Analysis of Mergers and Acquisitions

Before going to the analysis of mergers and acquisitions, it is significant to understand the history of Mergers and Acquisitions in India.  In the colonial era, there was the establishment of the East India Company, which had monopoly and control in the Indian markets. There was a requirement of taking permission during this time for forming companies. After the Second World War and post-independence, the merger market has evolved.  The Indian government has brought out various laws and regulations that required the nationalization of multiple companies. This step brought out a reduction in the number of public companies that were operating in India.

Some of the sectors, such as Insurance, had more than fifty such insurers. All these insurers were brought under the control of a single Insurer, the Life Insurance Corporation of India. However, during the pre liberalised period, the Indian government brought out various regulations in order to restrict situations such as monopoly and oligarchy. Some of the regulations brought out were the Foreign Exchange Regulation Act, 1973 (FERA) and the Monopoly and Restrictive Trade Practices (MRTP Act). These regulations have restricted the amount of economic activity in India and concentrated more on the national businesses for Indian growth.

Foreign companies were not allowed to conduct business in India because of various regulations under FERA, and companies that take part in a merger transaction were not allowed to control markets under MRTP law. From the above analysis of mergers and acquisitions, it is understood that though the regulations brought out by the government were beneficial for the economy; it would not allow access to the development of the economy. Due to constant government intervention, some regulations were repealed as they would be a deterrent to the Indian economy. Due to the effect of this, there was a requirement to relax the markets for entry of foreign competitors.

Liberalization took part in 1990, which eased the markets in India. This led to many international firms, setting their footprint in India. This indirectly affected the competitiveness of Indian companies. To compete with multinational giants, companies came up with strategies and priorities to survive in the market. Therefore for companies to benefit from economies of scale and economies of scope, they considered alternatives to engage the competition. The options related to mergers and acquisitions were available to them.

From the Analysis of Mergers and Acquisitions in India, it is understood that the development of the merger markets in India is due to wide-scale regulation.  However, not only law developed the merger markets in India. International factors also contributed to the development of the merger market before the year 2000.

Difference between a Merger, Acquisition and Joint Venture – Analysis of Mergers and Acquisitions

In a Merger, there is a combination of two or more entities. Both the companies and the respective business structures are merging their strengths to compete against the competition. The literal meaning of the merger has not been defined under any law in India. From the analysis of mergers and acquisitions in India, the meaning is not provided in the Companies Act 1956 or the law related to Income Tax 1961.

However, according to the Companies Act 2013, a merger can be understood as a combination of two or more entities to improve the position of their overall assets and liabilities.  Many advantages are obtained from a merger, such as- access to new information, research and development, technologies, and product benefits. The outcome of the merger is that the formed entity is treated as a new entity in the eyes of the law. The merging parties are not existence post merger.

An Acquisition, on the other hand, means to have control over another entity. The literal meaning of an acquisition is to take over the business or shares of a company. There are significant differences between a merger and an acquisition.  An acquisition can be defined as the process where a company takes over the share capital of another company or acquires the business of another company.  In the acquisition process, the concerned parties are called as the following:

Selling Company- This is the party that sells the company owned by it or controlled by it.

Target Company- This is the company that is a wholly-owned subsidiary of the Selling Company. Wholly owned subsidiary of the selling company means that the selling company owns a hundred percent shares of the target company.

Buyer/ Acquiring Company- The Company that acquires the Target Company is called the Buyer or the Acquiring Company.

In an acquisition transaction, the buyer will either acquire the shares of the Target Company or the assets of the Target Company. Therefore an acquisition or a takeover is a process where all the share capital is acquired of the company. The analysis of mergers and acquisitions provides a difference between a merger and an acquisition.

Joint Venture (JV)

In a joint venture process, the parties of the arrangement will enter into a specific agreement to fulfil a particular purpose or particular project. Usually, there will be a definite period for the Joint Venture. Once the particular purpose of the JV has been established, the JV agreement would come to an end.

Companies consider taking the Joint Venture route, as it would only be for a particular purpose and the period is limited. Apart from this, the challenges and risk faced by the parties in a JV are also limited. Apart from the above considerations, the parties consider getting new skills and technologies from the JV.

Though the JV is another form where there is a shared benefit of the business, companies prefer to opt for this form of venture as there is a lesser amount of risks. From the perspective of the analysis of mergers and acquisitions, the risk and challenges faced by a Joint Venture are lower.

Analysis of Mergers and Acquisitions- Types of Mergers

From the perspective of a Competition Law for analysis of Mergers and Acquisitions, mergers can be divided into the following:

• Vertical Mergers

Vertical Mergers is a business process where the companies are in different lines of business. A classic example of a vertical merger is between a company that is producing drinks and a company that is providing tetrapak containers for storing juices.  This form of integration benefits the company in various ways. A company would not have to depend on another company for production processes and can be self-sufficient in its production processes.

• Horizontal Mergers

The entities are in the same line of business in this form of merger. A classic example would be a merger between two dairy companies that are in the same production line and product cheese and milk. One of the primary purposes of this merger is to control more market share and also deter competition. In this form of merger, the entities that compete against each other prefer merging instead of having aggressive competition.

• Conglomerate Merger

Conglomerate merger is a merger between two entities that are in totally different business segments. This form of merger is where businesses are not associated with each other in any way. A classic example of this is a merger between a food company and a finance company. There are particular objectives of this form of merger, even though there is no association with the products and services. For some companies would be having financial difficulties and liabilities. In order to reduce their burden, these companies would opt for this form of merger process. Financial problems could not be the only reason for this form of merger. There can be other reasons also.

• Tripartite merger

In this form of a merger, there would be three entities where the merger is between the target and the acquirer subsidiary. There will be some form of tripartite arrangement between the parties to the merger agreement.

 A broad-based analysis of mergers and acquisitions shows that entities can opt for any form of merger based on their requirements of the business.

Types of Acquisition- An Analysis of Mergers and Acquisitions

Like Mergers, there are also different types of acquisitions. The Acquisitions are classified into the following:

1. Share Sale- A share sale is a form of private acquisition where the buying company takes an overall or a limited part of the shares of the target company.  The target company is a subsidiary of the selling company. In this form of acquisition, the only change is the shares of the target get acquired by the buyer. The target company would be acquired by the buyer. In terms of balance sheet changes, all the assets and liabilities would be acquired. There would be no changes to the companies, and they would be operating in a particular manner. A share sale is a simple process. However, the only disadvantage of a share sale is that if the target company is in debt, then the buying company would have no other choice to take over the whole company along with the liabilities.
2. Asset Sale- This form of acquisition is called as a business sale. The main difference between a share sale and asset sale is that in an asset sale, the buying company would only acquire certain assets of the target company.  For this, the types of assets are the following:
   • Land
   • Equipment machinery
   • Movable Property
   • Good Will of the business
   • Intellectual property- Trademarks, Copyrights and Design Rights of the business
   • Employees

So in an asset sale, the buying company would only acquire some assets or any particular asset of the business. If there is a transfer of the employees of the business, then if there are any specific forms of legal notices or court orders/ third party liabilities against these employees, then this also will be transferred to the buyer business. However, the buyer would get the advantage of choosing what assets to consider buying from the business of the Seller/ Target Company. This would give the buyer an added benefit to calculate the risks of a particular asset before purchasing them. Therefore in the process of an asset sale, the obligations are transferred along with the business. An analysis of mergers and acquisitions portray that before considering an acquisition/ takeover, the buyer has to consider the overall performance of the company.

Applicability of Regulations – Legal Analysis of Mergers and Acquisitions

From the Legal analysis of mergers and acquisitions, the following regulations would apply:

• Corporate / Company Law- This law would relate to the applicability of merger provisions. It would also cover various aspects related to the type of arrangement/ merger/ Acquisition. The companies act 2013 / 1956 would apply to regulations regarding mergers and acquisitions in India.

• Income Tax Law- This would cover tax provisions that would apply to a particular type of law. Tax on a company, post-merger tax, capital gains tax, and tax payable on the property would come under the provisions of this regulation. The Income Tax Act 1961 would apply to mergers and acquisitions in India.

• Securities Law- This would apply to mergers and acquisitions. In a share sale (acquisition), this would primarily be of importance. In India, one such law that applies to takeovers is the SEBI takeover code (Substantial Acquisition of Shares and takeovers) regulations 2011.

• Foreign Exchange Law- In case there is a transnational merger or a cross border merger that takes place, then provisions related to foreign exchange law would apply. The Foreign Exchange Management Act 1999 would apply to provisions related to mergers and acquisitions. Securing consents on foreign exchange law would be required if the capital instruments are transferred from one country to another in the transaction.

• Competition Law– Antitrust and competition law would also apply to mergers and acquisitions. The competition authority will ensure that the merger would not be a deterrent to the economy. Apart from this, the competition authorities would also ensure that the merger/ acquisition would not create a monopoly in the market.

Parties in a Merger- Analysis of Mergers and Acquisition

The following parties are involved in a merger and acquisition transaction:

• Lawyers
• Accountants
• Bankers
• Investment Bank
• Government and Regulatory Authorities

An analysis of mergers and acquisition indicate that not only the above parties are involved, but also external agencies/ international bodies play a significant role in a Merger and Acquisition Process.

Analysis of Merger and Acquisitions- Advantages of a Merger

• Increased Market Presence.
• Innovation.
• Economies of Scale/ Economies of Scope.
• Reduction in Operating cost.
• Lesser Competition.

Considerations required before a Merger/ Acquisition- Analysis of Mergers and Acquisitions

• Exchange of Agreements between the parties of a Merger/ Acquisitions.
• Signing Confidentiality Agreements between the parties.
• Conducting Due Diligence of the Target/ Seller Company:
  • Financial Due Diligence;
  • Legal Due Diligence; and
  • Commercial Due Diligence.
• Informing Concerned Authorities- Registrar of Companies/ Income Tax Authorities.
• In case of an Acquisitions- an Exclusivity Clause must be signed.

Conclusion for an Analysis of Mergers and Acquisition