MERGERS AND ACQUISITIONS

Mergers and acquisitions are the most popular means of corporate 

restructuring or business combinations in comparison to amalgamation, 

takeovers, spin-offs, leverage buy-outs, buy-back of shares,

 capital reorganisation, sale of business units and assets etc. Corporate 

restructuring refers to the changes in ownership, business mix, assets 

mix and alliances with a motive to increase the value of shareholders. To 

achieve the objective of wealth maximisation, a company should ?

 continuously evaluate its portfolio of business, capital mix, ownership

and assets arrangements to find out opportunities for increasing the

wealth of shareholders. There is a great deal of confusion and

disagreement regarding the precise meaning of terms relating to the

business combinations, i.e. mergers, acquisition, take-over,

amalgamation and consolidation. Although the economic considerations

in terms of motives and effect of business combinations are similar but

the legal procedures involved are different. The mergers/amalgamations

of corporates constitute a subject-matter of the Companies Act and the

acquisition/takeover fall under the purview of the Security and Exchange

Board of India (SEBI) and the stock exchange listing agreements.

A merger/amalgamation refers to a combination of two or more

companies into one company. One or more companies may merge with

an existing company or they may merge to form a new company. Laws in

India use the term amalgamation for merger for example, Section 2 (IA) of

the Income Tax Act, 1961 defines amalgamation as the merger of one or

more companies (called amalgamating company or companies) with

another company (called amalgamated company) or the merger of two or

more companies to form a new company in such a way that all assets

and liabilities of the amalgamating company or companies become assets 

and liabilities of the amalgamated company and shareholders holding not

less than nine-tenths in value of the shares in the amalgamating

company or companies become shareholders of the amalgamated

company. After this, the term merger and acquisition will be used

interchangeably. Merger or amalgamation may take two forms: merger

through absorption, merger through consolidation. Absorption is a

combination of two or more companies into an existing company. All

companies except one lose their identity in a merger through absorption.

For example, absorption of Tata Fertilisers Ltd. (TFL) by Tata Chemical

Limited (TCL). Consolidation is a combination of two or more companies

Into a new company. In this form of merger, all companies are legally ?.

dissolved and new company is created for example Hindustan Computers

Ltd., Hindustan Instruments Limited, Indian Software Company Limited

and Indian Reprographics Ltd. Lost their existence and create a new

entity HCL Limited.

Types of Mergers

Mergers may be classified into the following three types- (i)

horizontal, (ii) vertical and (iii) conglomerate.

Horizontal Merger

Horizontal merger takes place when two or more corporate firms

dealing in similar lines of activities combine together. For example,

merger of two publishers or two luggage manufacturing companies.

Elimination or reduction in competition, putting an end to price cutting,

economies of scale in production, research and development, marketing

and management are the often cited motives underlying such mergers.

Vertical Merger

Vertical merger is a combination of two or more firms involved in 

different stages of production or distribution. For example, joining of a

spinning company and weaving company. Vertical merger may be

forward or backward merger. When a company combines with the

supplier of material, it is called backward merger and when it combines

with the customer, it is known as forward merger. The main advantages

of such mergers are lower buying cost of materials, lower distribution

costs, assured supplies and market, increasing or creating barriers to

entry for competitors etc.

Conglomerate merger :

Conglomerate merger is a combination in which a firm in one 

industry combines with a firm from an unrelated industry. A typical 

example is merging of different businesses like manufacturing of cement 

products, fertilisers products, electronic products, insurance investment 

and advertising agencies. Voltas Ltd. is an example of a conglomerate 

company. Diversification of risk constitutes the rationale for such 

mergers.