Nowadays, Merger and Acquisition is the pathway businesses choose to reach exponential heights and continue to engender attention. The Indian Merger and Acquisition sector works in a similar fashion and has observed various large M&A deals in the past few years in the banking, insurance, and telecom sectors. Hence, over a period, M&A has become an essential part of the Indian Economy.
Further, time and again. M&A are misunderstood as one since both the terms denote consolidation of two or more companies. However, they are complete opposites in terms of their implementation.
The term “merger” means a combination of two or more companies that agree to merge and structure a new company. Moreover, the process of merger is carried out with the intent to boost business growth and increase its goodwill and reach. In contrast, acquisition is an act where an acquirer company acquires a target company by way of a legal agreement.
The process of Mergers and Acquisitions in India is considered by the companies to augment their business at a global level and ensure sustainable development of their business. The following are the reasons why companies choose M&A:
- For reducing competition;
- For establishing a larger share in the market;
- For developing a powerful brand name;
- For minimising tax liabilities;
- For diversifying risk;
- For setting off losses of one entity with the profit of another entity.
Reuters reported the Vodafone Idea merger to be valued at $23 billion. Although the deal resulted in a telecom giant it is safe to say that the 2 companies were pushed to do so due to the entry of Reliance Jio and the price war that followed. Both companies struggled amidst the growing competition in the telecom industry. The deal worked both for Idea and Vodafone as Vodaphone went on to hold a 45.1% stake in the combined entity with the Aditya Birla group holding a 26% stake and the remaining by Idea.
On the 7th of September, Vodafone Idea unveiled its brand new identity ‘Vi’ which marked the completion of the integration of the 2 companies.
The concept of merger and acquisition in India was not popular until the year 1988. During that period a very small percentage of businesses in the country used to come together, mostly into a friendly acquisition with a negotiated deal. The key factor contributing to fewer companies involved in the merger is the regulatory and prohibitory provisions of MRTP Act, 1969. According to this Act, a company or a firm has to follow a pressurized and burdensome procedure to get approval for merger and acquisitions.
The year 1988 witnessed one of the oldest business acquisitions or company mergers in India. It is the well-known ineffective unfriendly takeover bid by Swaraj Paul to overpower DCM Ltd. and Escorts Ltd. Further to that many other Non-Residents Indians had put in their efforts to take control over various companies through their stock exchange portfolio.
The terms “mergers” and “acquisitions” are often used interchangeably, but they differ in meaning. In an acquisition, one company purchases another outright. A merger is the combination of two firms, which subsequently form a new legal entity under the banner of one corporate name. A company can be objectively valued by studying comparable companies in an industry and using metrics.
In a merger, the boards of directors for two companies approve the combination and seek shareholders’ approval. For example, in 1998, a merger deal occurred between the Digital Equipment Corporation and Compaq, whereby Compaq absorbed the Digital Equipment Corporation. Compaq later merged with Hewlett-Packard in 2002. Compaq’s pre-merger ticker symbol was CPQ. This was combined with Hewlett-Packard’s ticker symbol (HWP) to create the current ticker symbol (HPQ).
In a simple acquisition, the acquiring company obtains the majority stake in the acquired firm, which does not change its name or alter its organizational structure. An example of this type of transaction is Manulife Financial Corporation’s 2004 acquisition of John Hancock Financial Services, wherein both companies preserved their names and organizational structures.
One size doesn’t fit all. Many companies find that the best way to get ahead is to expand ownership boundaries through mergers and acquisitions. For others, separating the public ownership of a subsidiary or business segment offers more advantages. At least in theory, mergers create synergies and economies of scale, expanding operations and cutting costs. Investors can take comfort in the idea that a merger will deliver enhanced market power.
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