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Mergers and Acquisitions

Mergers and Acquisitions are also known as M and A (M&A) .Mergers and Acquisitions are complex transactions between two or more entities. Around the globe, many companies utilize mergers and acquisitions services provided by consultants and investment banks. This area is broad and requires the experience and expertise of consultants. Mergers and Acquisitions encompass agreements and transactions between two parties. It is essential to understand the issues faced in a relevant merger or acquisition scenario.

Package inclusions:
  • Advice on the types of Mergers.
  • Advice on the types of acquisitions.
  • Legal Framework for mergers and acquisitions services.
  • Due Diligence Report for Mergers and acquisition services.
  • Procedure on Preparing Term Sheet.
  • Pre Merger Advice and Post Merger Advice.
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What are Mergers and Acquisitions?

Mergers and Acquisitions are transactions that involve the combination of two or more organizations into one. A merger is a combination of two or more entities into a single entity. An acquisition is a process where the company acquires another entity for increasing its resources and technical know-how. In a typical merger scenario, the parties in the transaction will be two or more entities. However, in an acquisition scenario, the parties are the following:

  • The Buyer - The buyer is also known as the acquiring company or the purchaser.
  • The Seller - The seller is also known as the acquired company, or in case if the seller has a subsidiary, the subsidiary is being acquired by the buyer.
  • Target - The Target company is the company that is being acquired by the buyer. The target is usually a subsidiary of the seller or maybe the seller also.

In a merger transaction, there is no buyer, seller, and target as both the parties in the transaction have some resources to offer. Mergers and acquisition services that happen domestically are known as domestic mergers, and if they occur internationally, they are known as cross border mergers. Cross borders mergers and acquisitions are complex and involve multiple parties in the process. These parties involve third-party consultants, such as investment bankers, lawyers, and risk consultants.

In India, mergers have been defined under the Companies Act 2013, which involves combining two or more companies to enjoy synergies and economies of scale and benefit. The previous Companies Act of 1956 did not define mergers and acquisitions.

Overview of Mergers and Acquisitions Services

Due to globalization in 2000, India has become a target for foreign companies. An increased amount of investment in India has developed it as a global M & A hub. Increase the use of digitization and development has improved the M & A climate in India.

2015 was considered a good year for mergers and acquisitions. This phase has extended from 2015 to 2019. Ever since the implementation of the Insolvency and Bankruptcy Code, more focus has been on companies' distressed assets.

On the global front, the M and A activity have contributed more than 3000 deals with a value of more than USD 300 billion. Some examples of top-notch mergers and acquisitions involve Walmart's acquisition of Flipkart, which improved the latter company's storage facilities.

The year 2020 is considerably slow compared to the previous years due to the current situation. Hence Mergers and Acquisition services are crucial for organizations.

Types of Mergers

Mergers can be divided into the following based on classification:

Types of Mergers
  • Vertical Merger - This merger is a transaction where the parties are at different levels of the production cycle. Companies are in different businesses in this form of merger. A typical example of this merger is between a drinks company and a bottle manufacturing company. By combining their resources, the company which is formed can obtain different synergies.
  • Horizontal Merger - A horizontal merger is when companies are present on the same line of production cycles. The products and services provided by the companies would be similar. For example, two law firms that merge would offer related activities to clients.
  • Conglomerate Merger - In this form of transaction, the parties are in entirely different businesses and production cycles. There is no link between the products and services sold by the companies. A typical example of this is a car manufacturing organization merges with a software organization.
  • Concentric Merger - In this form of transaction, the production processes may be different, but the end customer would be similar. A typical example of this would be a merger between a mobile phone company and a hardware company that provides touch screens for mobile phones.
  • Co-Generic Merger - Co generic mergers are something like horizontal mergers. In Co-Generic Mergers, the parties are related to one another.
  • Cash Merger - A cash merger is a transaction where the company's promoters or shareholders receive cash consideration for the merger.
  • Reverse Merger - Reverse merger is a transaction, where the entity mergers with another entity providing capital goods or raw materials.

Types of Acquisitions

Types of Acquisitions

Share Sale - Share sale is a transaction in which the buyer exchanges shares to the seller for the target company. In a typical share sale transaction, all the shares of the target company are acquired. All the assets, resources, employees, and intellectual property rights are transferred to the buyer.

Asset Sale - In an asset sale transaction, the buyer would only acquire a particular asset of the seller or the target company. This is beneficial to the buyer as a cherry-picking advantage is present with the buying company. If the buyer does not want any particular asset in the target, then the asset can be left as it is.

Objectives of Mergers and Acquisitions Services

Mergers and Acquisitions services are carried out for the following reasons:

  • In this day and age, competitors do not wish to take chances and instead merge to enjoy the benefits of the merger.
  • Economies of Scale.
  • Economies of Scope.
  • Merger and Acquisition Services are conducted to reduce the burden on conducting due diligence. Due Diligence survey is usually done by an external consultant or a third-party organization. An organization cannot waste time and expense in recruiting an in-house team to carry out due diligence. Hence an external consultant such as an accounting firm, consulting firm, law firm, or an investment bank is recruited to carry out due diligence on the target company.
  • Transactions that involve complex mergers require coordination between different parties. The parties involved in mergers and acquisitions include government agencies, law firms, investment banks, consultancy firms, technology firms, and audit firms. Due to this, mergers and acquisitions services are required by the companies.
  • Expert advice is required before conducting a merger or acquisition transaction.

Importance of carrying out Mergers and Acquisitions Services

Mergers and Acquisitions services are carried out to provide Businesses with an added benefit of assurance in the service provided. Businesses that merge have to be sure that the transaction is beneficial. Moreover, they have to synchronize the transaction with the future goals and plans of the business. The process of M & A is complex, and different parties are involved. Hence it is crucial to recruit quality professionals in carrying out mergers and acquisitions services.

Applicable Law for Mergers and Acquisitions services

As M & A is a complex process, different regulatory laws would be applicable for a merger.

The following laws would apply to a typical M and A scenario:

  • Company Law - The companies’ act, 2013 govern mergers and acquisitions transactions within India.
  • Securities Law - Companies are listed in recognized stock exchanges. Any company willing to list its securities in the stock exchange has to register with the Securities Exchange Board of India (SEBI). The Securities law that governs mergers and acquisitions in the SEBI Takeover code (Substantial Acquisition of Shares and Takeovers) Regulations, 2011.
  • Income Tax Law - Income Tax law would be applicable when it comes to asset sales- such as capital gains tax payable on the transfer of assets from one company to another. Even for the transfer of shares from one company to another, income tax provisions would be applicable. The Income Tax Act, 1961, would apply to all M and A transactions in India.
  • Competition Law - The appropriate competition authority will ensure that the merger is not detrimental to companies present in India. The Competition Commission of India (CCI) is the regulatory body for competition matters in India. The law that regulates antitrust in India is the Competition Act, 2002.
  • Foreign Exchange Law - If the transaction is cross border, then the provisions of foreign exchange law would also be applicable.

Procedure for Mergers and Acquisitions

The typical merger and acquisition process is as follows:

  • Drafting Term Sheet - This is the first step in a typical merger and acquisition process. The term sheet is also known as the letter of intent. This term sheet or letter of intent is a non-binding document that the parties intend to carry out the merger and acquisition transaction. It can be compared to the terms and conditions of a particular process. Both the buyer and seller of the merger transaction have to exchange term sheets with one another. The parties would discuss their intention and primary objective. 
  • Recruiting Third-Party Consultants - The parties have to hire experts to assist them in mergers and acquisitions services.
  • Purchase Price of the Transaction - This would involve the parties of a private acquisition transaction where the buyer and seller would have to negotiate a purchase price. The mode of payment (cash or shares) would also be discussed between the parties. The parties would also discuss the price mechanism. The parties can either use the following pricing mechanism for a merger and acquisition transaction:

a) Lock Box Method

b) Completion Accounts Methods

  • Negotiation of Employee Contracts - Depending on the type of transaction in mergers and acquisitions services, employees of the merged entity or the target company have contracts. Service agreements of directors would also be present. The consultant providing Mergers and Acquisitions Services should ensure that employee agreements, non-compete clauses are updated and amended.
  • Warranties and Guarantees - In a complex merger and acquisition transaction, the buyer should ensure that the seller or target company has given warranties. This must be cleared between the parties in the initial period of consultation that all warranties are true and as per the knowledge of the seller. If there is any form of misrepresentation or breaches, the buyer can sue the seller for breach of contract.
  • Clauses on Exclusivity - Exclusivity clause is a clause present in the merger transaction which prohibits the seller from seeking further bids for acquisition or merger. It is a remedy that can be used by the buyer in case the seller goes on and seeks additional bids.
  • Terms of Confidentiality - In a complex merger transaction, information is exchanged between parties. In the Initial Information Questionnaire, the seller has to disclose all the relevant information to the buyer. Apart from this, the buyer and seller must sign confidentiality agreements to avoid any distribution of information on clients and employees.
  • Due Diligence - Due diligence is an investigation conducted by the third party consultant on the target or merging companies. A thorough due diligence report must be provided by the third party consultant to the buyer on the merger or acquisition transaction.
  • Post Completion Work - The third-party consultant should ensure that the parties take post-completion steps.

Documents Required for Mergers and Acquisitions Services

  • Incorporation documents- Buyer and Seller- Memorandum and Articles of Association.
  • Term Sheet.
  • Process Letter.
  • Due Diligence Questionnaire.
  • Employment Contracts.
  • Non Disclosure Agreements.
  • Any other relevant documents.

Enterslice Advantage–Mergers and Acquisitions Services

  • Enterslice is a recognized management consultant in providing Mergers and Acquisitions services.
  • Experts at Enterslice have conducted Mergers and Acquisitions Services with the primary objective of adding value to your organization.
  • We have Multifaceted teams of professionals comprising Chartered Accountants, IT professionals, lawyers, and company secretaries.
  • We have extensive experience in handling matters related to mergers, taxation, and accounting matters in India.

How to reach Enterslice for Mergers and Acquisitions Services

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Frequently Asked Questions

Companies in the market consider these forms of services as they have to improve their strategies, grow, and develop their products. Moreover, combined synergies of economies of scale and scope help companies adapt by merging with other companies.

The following risks are present in an M and A transaction:

• No problem goals and strategies.

• Lack of skilled external advice.

• Assumptions of market forces.

• Poor Ideas and Leadership Strategies.

Directors are considered as agents of the company. Hence all the contracts which the company enters into have to be vetted by the directors. Apart from this, directors also play a significant role in disclosing any form of interest in the transaction. Therefore directors play a significant role in a merger and acquisition transaction.

The following due diligence can be carried out by a company in a typical M and A transaction:

• Legal Due Diligence

• Financial Due Diligence

• IT Due Diligence

• Commercial Due Diligence

• HR Due Diligence

The crucial step in an M and A transaction is the due diligence process. As it involves complex understanding of the transaction, many departments have to participate in the M and A transaction.

Yes, creating a checklist is important. However, constant follow up and implementation of the checklist is more important to make sure that there are no forms of flaws in the transaction.

Transition Services Agreement (TSA) is a document given by the seller to the buyer on the services provided after the close of the deal. The TSA will normally include the time period of services and the level of service provided.

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