Merger and Acquisition (M&A)

Mergers and Acquisitions (M&A) is a general term that refers to the consolidation of companies or assets. M&A may include different transactions, such as:

MERGERS, in a merger, the boards of directors for two companies approve the combination and seek shareholders’ approval. Then, the acquired company ceases existence and becomes part of the acquiring company.

ACQUISITIONS of company, the acquiring company obtains the majority stake in the acquired firm, which does not change its name or legal structure.

ACQUISITIONS of assets, one company acquires the assets of another company, this usually happens in case when the acquired company is insolvent or bankrupt. 

DIFFERENCE BETWEEN MERGERS AND ACQUISITIONS

• In case of Mergers, two separate companies with equivalent and comparable forces comes together, whereas, an Acquisition refers to purchase of a smaller entity by a larger one.
• In case of Mergers, all together a new company is formed, whereas, in case of Acquisitions, only the existing company is modified, no formation of new company is done.
• A Merger requires two companies to consolidate into a new entity with a new ownership and management structure (ostensibly with members of each firm). An acquisition takes place when one company takes over all of the operational management decisions of another.
• The more common interpretive distinction rests on whether the transaction is friendly (merger) or unfriendly (acquisition).

 TYPES OF MERGER AND ACQUISITION

1. MERGERS

• HORIZONTAL MERGERS
  Two companies that are in direct competition and share the same product lines and markets. 
• VERTICAL MERGERS

 A customer and company or a supplier and company. 

 A customer and company or a supplier and company. 

• CONGENERIC MERGERS

Two businesses that serve the same consumer base in different ways.

• MARKET-EXTENSION MERGER

Two companies that sell the same products in different markets.

• PRODUCT-EXTENSION MERGER

Two companies selling different but related products in the same market.

• CONGLOMERATION

Two companies that have no common business areas. There are two types of mergers that are distinguished by how the merger is financed. Each has certain implications for the companies involved and for investors:

1. PURCHASE MERGER: It occurs when one company purchases another. Purchase can be through cash or any other long term finances.
2. CONSOLIDATION MERGER: It occurs when a brand new company is formed and both companies are bought and combined under the new entity.

PROCESS OF MERGERS UNDER COMPANIES ACT 2013

1. Considering proposal for M&A by BOD’s of Companies.
2. Finalisation of scheme of Amalgamation, Valuation and Fairness Opinion.
3. Recommendation of Scheme and valuation report by audit Committee.
4. Approval of scheme and Valuation report by the BOD of company.
5. Filing of scheme, valuation report and fairness opinion with SEBI, in case of listed companies.
6. Filing application to NCLT.
7. Notice of meeting and valuation report sent to the Stakeholders, creditors and every other mandatory legal bodies such as SEBI, ROC, Stock Exchange, etc.
8. Obtaining NOC from Stakeholders and Creditors and submitting it with the NCLT.
9. Final Hearing with NCLT.
10. Compliance with the orders of NCLT.

DOCUMENTS REQUIRED IN CASE OF MERGERS AND ACQUISITIONS IN INDIA

1. PRELIMINARY AGREEMENTS

It shall include:

• A term sheet, a memorandum of understanding or a letter of intent.
• A confidentiality or non-disclosure agreement.
• An exclusivity agreement (requiring the parties, or generally the target, not to solicit competing bids for a specified period); this can form part of the aforesaid agreements.

• PRINCIPAL DOCUMENTATION

These may vary depending upon the terms and conditions of the M&A,

• A merger, amalgamation or a demerger involves preparation of the scheme of arrangement between the relevant companies, their members and the creditors.
• A share acquisition involves a share subscription agreement (for investment in new shares) or a share purchase agreement (for the purchase of existing shares). 
• An asset or business transfer involves an asset purchase or a business transfer agreement.
• A host of ancillary documents may be required depending on the nature and type of transaction, including:
  • Employment agreements;
  • Transfer agreements concerning intellectual or real property;
  • The novation or assignment of contracts; and
  • Non-compete agreements with existing or exiting shareholders.

WHY M&A?

M&A provide varied benefits to the company, such as

1. CAPACITY AUGMENTATION

It may not only pertain to the manufacturing operations, but a company may also want to expand its capacity in technological platform.

• ACHIEVING COMPETITIVE EDGE

Horizontal Mergers are done with companies dealing in same products, thus, M&A helps an organization to come together and achieve the desired goals.

• DIVERSIFICATION

Diversification is simply adding products in the portfolio which is not part of current operations. 

Major Examples of M&A till date are:

1. VODAFONE AND IDEA
2. SNAPDEAL AND FREECHARGE
3. FLIPKART AND MYNTRA
4. MYNTRA AND JABONG
5.  ZOMATO AND URBANSPOON

CASE STUDIES ON M&A

1. ADIDAS AND REEBOK :

Adidas-Salomon AGÂ 2005 announced its plan to acquire Reebok North America in 2005 at an estimated value $ 3.78 billion. Adidas offered to pay over 34% premium over last closing price for Reebok.

• NOKIA AND MICROSOFT

Microsoft announced its plan to merge with Nokia in 2013, the entire acquisition price was around $7.6 billion.

• WHATSAPP AND FACEBOOK

In the month of February 2014, Facebook acquired WhatsApp, a mobile application developer, for $19 billion.

• IDEA AND VODAFONE

This is a latest merger expected to be completed in mid of calendar year 2018. It aims to combine 270,000 GSM sites and a mobile broadband network of over 300,000 sites (3G and 4G), which can cater to 700 million subscribers, compared with their total user base of over 433 million at the end of March.