In this article, we will discuss the types, benefits, differences for the Mergers and Acquisitions process.
What is Merger?
The term merger has not been defined under the Companies Act 1956 or Income Tax Act 1961, however, Companies Act 2013 explain the concept merger. The merger can be defined as a combination of two or more entities to make a new entity. In merger 2 or more than 2 entities are involved. Two entities are:
Merging Company: The entity which transfers its assets to other entity.
Merged Company: The entity to which all the assets are transferred by the merging company.
In the merger, the Board of Directors firstly approve the scheme and take shareholders’ approval for the same and after the shareholders grant their approval the scheme is executed.
The Main Aim of the Merger:
- To gain market share.
- Expand new territories.
- Unite common products.
Types of Merger:
The merger can be on the basis of these two:
- on the basis of integration
- on the basis of business activity.
1. On the basis of integration:
On the basis of integration merger can be classified into following types:
- Statutory Merger: It is a type of merger in which all the assets of the smaller company is acquired by the bigger company as a result of which the smaller company loses its existence. The Smaller company is known to be an acquired entity and bigger company is known to be acquiring the company.
- Subsidiary Merger: In this type of merger the target company becomes the subsidiary of the acquiring company. The existence of both companies continues. The main reason for this type of merger may be the popularity of the brand of the target company.
- Consolidation Merger: It is the type of merger when both the entities i.e. the acquiring entity and the acquired entity loses its existence and a new entity comes into existence. This type of merger takes place when both the entities are of the same size.
2. On the basis of business activity:
On the basis business activity merger can be classified into the following types:
- Horizontal Merger: It is a merger between two entities which are dealing with the same products or providing similar services. In other words, it is a merger between entities which provide substitute goods or services.
- Vertical Merger: It is a merger between two or more entities which are providing services or goods to make finished products. In other words, it is a merger between entities which provide complementary goods or services.
- Conglomerate Merger: It is a merger between entities which are dealing or operating in an entirely different business. In other words, it is a merger between entities which are totally unrelated to each other i.e. the business of acquiring entity will be totally different from the business of acquired entity.
- Co-generic Merger: It is a merger between two or more entities which are related to each other in terms of customers group, functions or technology.
- Forward Merger: It is a merger when the entity mergers itself with the buyer. This kind of merger helps in increasing the profit of the firm.
- Reverse Merger: It is a merger when the entity merges itself with the entity which provides raw material to complete the product or make finished goods.
Benefits of Merger:
- Tax benefits.
- Entry in the global market.
- Helps to face competition.
- Increase in the global market.
- Increase in goodwill.
The Procedure of Merger:
Companies Act 2013 provides fast-track procedure for the merger. The procedure is as under:
- Both the transferor and transferee shall convene the Board meeting separately and pass the following resolutions:
- Approving the scheme.
- Fixing date, time and place for Shareholders Meeting.
- Fixing date, time and place for Creditors Meeting.
- After holding the Board Meeting both the Transferor Company and the transferee company shall publish the notice of the proposed scheme to invite any objections or suggestions regarding the same. The copy of the notice shall be sent to the Registrar of Companies and the Official Liquidator.
- Before convening the meeting of members and creditors both the transferor and transferee company shall file with the ROC of their state where their registered office has situated a declaration of solvency.
- A notice of a meeting of members should be given at least 21 clear days before the meeting by both the transferor and the transferee company. The notice of the meeting shall contain the following:
- Details of compromise and arrangement.
- Declaration of insolvency.
- Copy of scheme.
The objections received shall be considered and discussed at the general meeting and will be approved by the members of both the companies.
- After convening the meeting of members a notice of creditors shall be given at least 21 clear days before the meeting by both the transferor and transferee company. The scheme of the merger to be executed has to be approved by the creditors representing 9/10th in value.
- The transferee company shall within seven days of the conclusion of the meeting of members file a result of a meeting of members with the Regional Director, Registrar of Companies and Official Liquidator.
- After the scheme is filed and the Registrar and the Official Liquidator does not have any objections the Regional Director shall register the same and will give a confirmation regarding the same.
- If there is some kind of objection to the Registrar or Official Liquidator they shall communicate the same to the Regional Director within the period of 30 days.
- After the RD receives the objection by the Liquidator or Registrar and is of the opinion that the scheme is not in public interest or in the interest of creditors he shall within the period of 60days communicate the same to the tribunal and request to consider the same.
- If the Tribunal is of the opinion that the scheme is appropriate it shall pass the order that the procedure given in Section 232 shall be followed. The order of the tribunal should be given in writing.
- If the scheme is approved by the Regional Director then both the transferor and the transferee company shall within the period of 30 days from the date of confirmation of the scheme file the confirmation order with the ROC where the registered office of the transferee Company is situated he shall register the same and give a confirmation letter regarding the same that confirmation letter is filed with the ROC of the Transferor Company.
It is a type of corporate action. In this process, 2 companies are involved i.e. The Acquiring Company and the Acquired Company. Acquiring Company is the merged company and the acquired company is the merging company.
It is a procedure in which one company buys another company’s stake or ownership. In this procedure the buying company should acquire at least 50% control or ownership in Target Company, for acquiring the control over the target company, the acquirer company shall purchase the shares of the target company and will pay some consideration to the shareholders of the target company.
The acquisition is generally done as a part of the Company’s growth strategy. There is no technical difference between the takeover and acquisition.
Types of Acquisition:
- Friendly acquisition.
- Hostile acquisition.
In a friendly takeover, there is an agreement between the target company and the acquiring company. The acquiring company offers the target company which is accepted by the target company. This type of acquisition is generally done for the mutual benefit of both companies.
Unlike a friendly takeover, there is no agreement in a hostile takeover. The acquiring company secretly acquires the target company. Generally, in this kind of take over, there is no or little mutual benefit. This kind of takeover takes place when the target company do not agree or gives its consent to the acquisition. Majority stake or ownership is taken secretly to force the acquisition.
Benefits of Acquisition:
- Greater market share.
- Increased synergy.
- Cost reductions.
- An easy way to enter the foreign market.
The Procedure of Acquisition:
Researching Target Companies:
Before acquiring any company detailed research about the company is necessary which will avoid the problems in the future. A matrix of the company should be made regarding the profitability, cash flow, growth rate etc. Research should be done through various sources.
After the research have been completed the acquiring company should contact the target company so that many issues can be clarified which would take place in the future. Contact can be made through the following ways:
- Discrete contact: In this type direct contact is made with the owner of the target company. This process can take several days or months. It is not necessary that it may affect the immediate acquisition.
- Joint Venture: It is one of the best methods to enter into a joint venture agreement with the target company. This agreement will give detailed information about the company’s activity and operational detail. This detailed information will help the acquirer to deal with the target company.
- Third party: There may be situations when the target company does not want to give any information to any other company regarding its business, In this case the acquirer company can appoint an investment banker who will work on the behalf of the acquirer company in taking general inquiries of the target company regarding the willingness of the owner about the acquisition.
Non- Disclosure Agreements:
This agreement is entered between the Acquirer Company and the Target Company. This agreement can be entered only after the target company has approved the offer of acquisition. In this agreement, it is stated that all the documents or information disclosed by the target company to the acquirer company shall remain confidential and will not be disclosed to anyone. However this agreement is difficult is to enforce but on the other hand, it is necessary to be entered.
Letter of Intent:
As soon as the acquirer company and the target company sign the Non-Disclosure Agreement the target company will transfer all the documents, historical background and detailed information to the acquirer company based on which the acquirer company can take the decision to whether proceed with the deal or not.
In this step, the acquirer company shall give a list of due diligence to the target company. This process may take a considerable amount of time as the documents may not be easily available with the target company as it may not be prepared for selling itself. Audited financial statements will help a lot as it will depict the true financial position of the company.
After the due diligence has been completed it may be possible that the acquirer company may be in a position to do bargaining or negotiation in relation to the price demanded by the target company for the acquisition. As the process of due diligence will help in finding any major issues which will help in bargaining.
Difference between the Mergers and Acquisitions:
The merger is when two or more than two entity generally of the same size combine to form a new entity or joint organization, in merger both the entities may be equal partners.
In Acquisition procedure one entity purchases the other entity. Generally, the acquiring entity is bigger than the acquired entity.
In merger new entity comes into existence but in the acquisition, no new entity is formed because the entity is acquired by the existing entity.
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