What is the Meaning of Mergers and Acquisitions?
Mergers and Acquisitions often called as M&A in short form. Companies globally adopt these strategies to grow or survive in the competitive market. The merger has been defined in the Companies Act, 2013 as the combination of two or more business entities to make a new entity. The acquisition, on the other hand, involves one party selling out to another wherein the buying party combines both the entities to make it into a single entity.
In the layman language, the merger is an agreement that is based upon the two existing companies that pursuit to form an all-new company. A merger is basically done for the purpose of expansion of business unit and to broaden the hands in every corner of the market making an entry to new segments for gaining market limelight.
Whereas, the acquisition is when an existing company or new company acquires the other company with a legal agreement is called the acquisition.
What is the Reason behind Mergers and Acquisitions?
Merger and Acquisition are paramount tools that are considered by the companies for the purpose of flaring their service around the world and also to render sustainable development. Hence the following are the purpose behind mergers and acquisitions-
- Eliminate competition
- Establish a bigger market share
- Create a stronger brand
- Reduce tax liabilities
- Set off the losses of one entity against the profit of the other.
What are the types of Mergers and Acquisitions in India?
Now, come to the type of Mergers and Acquisitions in India. Merger and Acquisition are typically categorized in the following types –
- Horizontal mergers – a merger between entities that deal with the same or similar product or services.
- Vertical mergers – this is a merger between entities that provide complementary goods or services.
- Co-generic mergers –this is a merger between entities that are related to each other
- Conglomerate mergers - is a merger between entities that have different types of business
- Cash mergers – is a merger where shareholders receive cash instead of shares of the merged entity.
- Forward mergers – when an entity merges with its buyer
- Reverse mergers – when an entity mergers with its supplier of raw materials
They are also known as the takeover that involves selling and purchasing of whole business between the involved parties. It could be friendly or hostile. Typically the process involves either acquisition of assets and liabilities of the target company or acquisition of shares of the company. A demerger is also a form of acquisition where a single entity is split into two or more entities.
C. Joint Ventures
When two or more entities come together for a defined purpose – it could be entering a new market or a new business or for a specific skill, that adjoining is called the Joint Venture. It could be for a limited period or for an unlimited duration.
What is the Process of Mergers and Acquisitions in India?
The whole process of Merger and Acquisition takes place according to the Companies Act, 2013. In the process of mergers and acquisitions, we work in the analyses and insights and access the information and conclusions about how the best mergers and acquisitions in India can be done. A complete execution is followed for Merger and Acquisition with a strategy to maximize benefits while keeping the transaction risk to minimum.
The following are the steps you need to cover while going for Mergers and Acquisitions in India-
- Dig into Memorandum to Examine the Object Clause
- Share a word with Stock Exchange
- Draft a Merger Proposal
- File an Application to the High Courts
- Notice dispatched to Shareholders and Creditors
- Filing of the Orders with the Registrar of the Companies
- Assets and Liabilities of both the Company should be Merged
- The issue for Subscription of Shares and Debentures
The very first thing which you need to do while going for m&a in India is to examine the memorandum of the association of the company to conduct a search and check whether the power of merger is vested in it or not. The only purpose to examine the MOA of both companies is to render what all activities are permitted.
It is prominent to inform the stock exchange about the proposed merger and acquisition taking place and send all copies of resolutions, notices and the orders to the stock exchange in a timely manner.
The Board of the Director of both the companies will present a confirmation on the draft of the merger proposal and also pass the resolution for authorizing its key managerial personnel and other executives to further pursue the matter.
After getting the confirmation on a proposal by the Board of the Director, the merger companies should file an application to the Hon'ble High court of the respective state where the company headquarters is situated.
With the prior approval of the High court, a notice should be sent to all the shareholder and creditor of the companies about the meeting to be held and 21 days advanced notice is required. The notice shall be published in two newspapers one in the vernacular language of the state and the other one is an English newspaper.
The true certified copy of the order of the High Court of the state must be filed with the registrar of the companies within the limit as specified by the High Court.
The assets and the liabilities of both the company should be conveyed to the merged company.
Once the merged companies come to the existence as a separate legal entity then the company can issue shares and debentures after listing on stock exchange.
Some More Steps to Cover for Mergers and Acquisitions
- Market Valuation by the acquiring company of the target company
- The acquiring company contacts the target company
- NDA (Non-disclosure Agreement) is signed between both entities
- All documents and related information is transferred to the acquiring company as per the Due Diligence list sent by the Acquiring Company and a Letter of Intent is signed.
- The final bargain happens and the Definitive Purchase Agreement is made.
Why are M&A Advisory Services Required?
Mergers and Acquisitions in India have been evaluated at USD 61.26 billion in 2017-18 whereas it was USD 27.62 billion in the previous financial year, 2016-17.
Mergers and Acquisitions are great means to achieve growth for a company but involve complex steps and processes to be followed by the involved entities to form the new business. The Companies Act, 1956 and 2013 needs to be followed for M&A to get through, with involvement from Court, SEBI (Securities Exchange Board of India) in case of listed companies, the Central Government in the form of an Official Liquidator (OL) and the Regional Director of the Ministry of Corporate Affairs etc. Since there are different parties involved, the process is long drawn, tedious and at times problematic.
Hence it is wise to consult a professional for the merger and acquisition or to take mergers and acquisitions advisory services as the process involves stringent implication of laws and rules and contravening which, creates a problem in future. There is a number of Mergers and Acquisitions advisory firms who guide their clients through this transformation process involving complicated financial, legal and accounting issues.
Mergers and Acquisitions services are provided by different firms:
- Investment Banks that act as financial advisor to their clients. They specialize in underwriting, also act as brokers and take up mergers & acquisitions advisory roles too.
- Law Firms - leading international and domestic law firms to provide M&A consulting services especially to business entities that are being merged or acquired cross borders.
- Audit & Accounting Firms – these firms specialize in auditing, accounting, and taxation matters. They provide expert financial advice as M&A advisory firms.
- Consulting and M&A advisory firms – these firms provide dedicated M&A support whether it is cross-industry or cross-border as their team has industry experts to help decide the best M&A strategy.