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Merger and acquisition is used as instrument of momentous growth. It is getting accepted by Indian business like never before as a tool of business strategy. In this article, we will discuss the types, benefits, differences between the Merger and Acquisition Process.
The term merger has not been defined under the Companies Act 1956 or Income Tax Act 1961, however, Companies Act 2013 explains the concept merger. 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 is:
The merger can be on the basis of these two:
On the basis of Integration:
On the basis of integration, merger can be classified into following types:
On the basis of Business Activity:
On the basis of business activity, merger can be classified into the following types:
The benefits of merger are as follows:
Companies Act 2013 provides fast-track Merger and Acquisition process. The procedure is as under:
1. Both the transferor and transferee shall convene the Board meeting separately and pass the following resolutions:
2. 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.
3. 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.
4. 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:
The objections received shall be considered and discussed at the general meeting and will be approved by the members of both the companies.
5. 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.
6. 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.
7. 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.
8. 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.
There are basically two forms of acquisition. They are as follows:
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.
The benefits of Acquisition are as follows:
1. 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.
2. Initial Contact:
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:
3. 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.
4. 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.
5. Due Diligence:
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.
6. Final Negotiations:
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. The process of due diligence will help in finding any major issues which will help in bargaining.
Mergers and acquisition are the two of the most misunderstood words in the corporate world. Although both words refer to the joining of two companies but there are differences that make them distinct.
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.
The significance of the Merger and Acquisition process is that they might result in sizeable revenues. For any additional information on Merger and Acquisition, contact Enterslice.
Read our article:Analysis of Mergers and Acquisitions