Mergers and Acquisition.

Author: Geet Jain, Indore Institute of law, Indore( M.P).

Introduction:

Merger takes place when two similar sized firms’ entities come together and form a new entity is called merger. When a larger firm buys smaller firms which becomes a subsidiary of it in a target entity is called acquisition, merger provides India had a great year in 2018 in terms of mergers and acquisitions in 2018, and the same trend could continue till 2019. The biggest mergers-and-acquisitions boom in Indian history has investment bankers preparing for even more deal-making to come. Transactions involving Indian companies have reached $104.5 billion in 2018, trouncing the previous annual record with almost four months left in the year, according to data compiled by Bloomberg. The actions of mergers and acquisitions have achieved considerable importance in today’s corporate world. This process is largely used for restructuring business organizations. In India, the concept of mergers and acquisitions was proposed by government bodies. Merger provides number of employment opportunities to youngster even helps in rising in economy of the country, even mergers help weaker section banks to survive in largest capital market. Acquisition occurs when company buys another company. An acquisition when Target Company wants to bring its friendly acquisition. Its buy’s all or almost target firm’s shares in order to earn profit, when it does not want to be brought are a hostile acquisition or a friendly takeover over company’s profit.

Merger and Acquisition:              

Merger and Acquisition have been a very important market strategy as well as expansion strategy; it gives a new life and new idea to the society. Law in India Used the term Amalgamation for Merger. Merger assists the company in uniting their strength, resources and weakness. Merger leads to reduction in trade barriers and competition. Acquisition is the purchase of an entity by an entity. This can be done either by acquiring ownership over 51% of its share capital or by taking over assets of the company. Acquisition and Merger provides numbers of advantages to country are:

  1. Diversification
  2. Economies of large Scale business.
  3. Synergy
  4. Tax Assessments.
  5. Financial Benefits.
  6. Elimination of competition.
  7. Adoption of modern technology.
  8. Lack of technical and Managerial talent.

History of Merger and Acquisition:

The concept of Merger and Acquisition comes from 1988, at that time people are not known about it some businessman combined their business in one roof and earns a lot of profit, at that time mergers and acquisition take place. The economic boom that followed the post World War I gave rise to these mergers. Technological developments like the development of railroads and transportation by motor vehicles provided the necessary infrastructure for such mergers or acquisitions to take place. Mergers were financed from equities; the investment banks no longer played an important role. Mergers took place between the oil and gas industries, pharmaceutical industries, banking and airline industries. Merger is more like a corporate wedding, marriage between same and equal status groups.

Meaning of Merger:    

Merger means 2 Similar Sized firms combine together and form a new entity is called merger. One of the parents usually emerges as dominant management. Merger assists the companies in uniting their strength, resources, and weakness. Merger leads to reduction in trade barriers and competitors. At the time of merger, company’s assets, liabilities and stock of one company stand transferred to Transferee Company in consideration of payment in the form of Equity Shares, Debentures, Cash and A miser of the above more. In accounting an amalgamation, or consolidation, refers to the combination of financial statements.  For example, a group of companies reports their financials on a consolidated basis which includes the individual statements of several smaller businesses. Amalgamation performs consolidation through companies because it access to new markets, new technologies, new clients, cheaper finance for bigger companies, saving cost achieved through bargaining power with supplier and clients and eliminating competition amalgamation.

Types of Merger:

Horizontal Merger: When 2 Entities, 2 Industries, 2 Stage of companies are combined together is called horizontal merger. It occurs when two companies sell a similar product to the same market. It helps in increasing market share and surviving from fair competition.

For Example Flipkart Merges Mantra.

Vertical Merger: It helps two organizations that may not compete with each other, but exists in the same supply chain. It plays 2 roles forward merges and backward merges.

  • For Example Tata Motors Finance / Capital Merger
  • In 1968( Reliance Case: Details of Manufacturing)
  1. Product Extension: Complementary Products in Market merge when they sell products into different niches of the same markets.
  2. Market Extension: Complementary Market, It helps two organizations that may provide similar products and service grows into market where they are currently weak.

Conglomerate Merger: When 2 firms combine together but businesses are unrelated with each other, 2 companies that have no common business area.

  • For Example: Sun framer combines their business with Power Company.
  • City Bank acquires transport business.

Reverse Merger: A small private entity acquires a larger private entity.

  • For Example: Tik Tak to acquire ly through by tedance technology Co.

Meaning of Acquisition:

Acquisition is the purchase of an entity by another entity. This can be done either by acquiring ownership over 51% of its share capital or by taking over assets of the company. The acquiring company is more influential in terms of structure, operations and size as compared to Target Company. When a target company is acquired by another company, the target company ceases to exist in a legal sense and becomes part of the purchasing company. Acquisitions are commonly made by using cash or debt to purchase outstanding stock, but companies can also use their own stock by exchanging it for the target firm’s stock. Acquisitions can be hostile, friendly and buyout.

Types of Acquisition:  

Friendly acquisition: Both the companies approve of the acquisition under friendly terms.

Reverse acquisition: A private company takes over a public company.

Backflip acquisition: A very rare case of an acquisition in which, the purchasing company becomes a subsidiary of the purchased company.

Hostile acquisition: Here, as the name suggests the entire process done by force.

Mergers and Acquisition take place when:

Friendly / Negotiated Merger

Reverse bid/ Counteroffer (Counter offer from itself)

White Knight

Management puts lords of activities.

Synergy (Come together and do something extra)

Valuation of Merger and Acquisition are:       

Valuation of merger and acquisition take place when:

Asset-Based Valuation.

Earning Based Valuation.

Discounting Cash allowing techniques

Multiple Valuations

  • P/E Multiple Valuation
  • 2/3 Companies come together and set up a new business.

Important Merger takes place in 2018 are:

4 Banks Combined together:

On 19 June 2018, the government is mulling merger of 4 public sector banks namely Bank of Baroda, Industrial development bank of India, Oriental Bank of Commerce and Central Bank of India, these banks have accumulated combined losses of almost Rs. 22 crore in the financial year 2017 and 2018, mergers entity second largest bank in India. State-run banks control around over 70% of country’s banking Market and huge scarcity of government-owned banks. Merger aimed at helping weaker banks to survive in a large economy. Merger and acquisition have been a very important market strategy as well as expansion strategy; it gives a new life and new idea to society.

After Amalgamation benefits of bank are:

  1. Stronger and globally competitive.
  2. 3rd largest bank entity in India.
  3. Economies of Scale.
  4. Rise in Customer based.
  5. Market reach and Operational Efficiency.
  6. Increase lending capacity.

Amalgamation process takes place:

  • Merger time takes 6 Months to 1 year in every industry, company and firm.

Amalgamation procedures:

  • Formation of Schemes.
  • Parliament’s Approval.
  • Economies of scale
  • Transferring Competencies.
  • Share Infrastructure.

Latest Mergers and acquisition take place in 2018 are:

  1. Tik Tak acquires Musical.ly by Bytedance technology Co.
  2. Walmart acquires Flipkart as 77% stakes and investment was 16 billion dollars.
  3. In 2017, flicker acquires photo related company and in 2017 Verizon acquires yahoo and in 2018 yahoo acquires oath and finally oath buy smug mug.
  4. Time Inc acquires Warner Media.
  5. Syntel acquires Virgin American.

Case Law:

Pr. Commissioner of Income tax v/s M/S Nvp Venture Capital India pvt, 18 September 2018

The Hon’ble ITAI was justified in directing not to consider the case of Motilal oswal investment advisors pvt. Ltd operational income from advisory fees, the same as that of assessed and instead to place reliance on director’s report which had categorized activities engaged by said company as equity capital market mergers and acquisition, private equity syndication and structured debt would not make such reliance against the ambit of rules.

Conclusion:

According to my perspective, at the time of merger and acquisition companies learn from mistakes of another, defines future objectives very clearly, make complete strategies to achieve a goal and appoint expertise to interpret the changes in firm and do the process of merger and acquisition it requires lawyers, accountants, investment bankers and executives at each of the combing companies and requires potential upsides and potential risk of the merger

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