Mergers & Amalgamations:
There are primarily two ways of growth, organic and inorganic for a business organization. Instead of waiting for the organic growth, the promoters who opt for the sudden or synergistic growth will opt for inorganic growth by way of Mergers & Acquisitions:
Why do Companies Merge?
It is an effective tool to insulate from the Competition. As neither Governments nor consumers allow companies to insulate themselves through cartels, they have been taking mergers & Amalgamations route to achieve earnings growth and competitiveness. Now it is about concentration.
Synergy, is the idea that the value and performance of two companies combined will be greater than the sum of the separate individual parts is one of the reasons companies merger.
Motivations behind Cross Border Acquisitions:
Briefly stating companies go in for international acquisitions for a number of strategic or tactical reasons such as the following.
- Growth orientation: To escape small home market, to extent the markets served, to achieve economy of scale.
- Access to Inputs: To access raw materials to ensure consistent supply, to access technology, to access latest innovations, to access cheap and productive labour
- Exploit Unique Advantages: To exploit the Company’s brand, reputation, design, production and management capabilities.
- Defensive: To diversify across products and markets to reduce earning volatility, to reduce dependence on exports, to avoid home country political and economic instability, to compete with foreign competitors in their own territory, to circumvent protective trade barriers in the host country.
- Response to client’s need: To provide home country clients with service for their overseas subsidiaries, eg banks and accountancy firms.
- To exploit temporary advantages, eg a favorable exchange rate making foreign acquisitions cheap.
Categories of Mergers:
Mergers can be classifies as Vertical mergers, Horizontal mergers or Conglomerate mergers:
This class of merger is a merger between business competitors who are manufactures or distributors of the same type of products or who render similar or same type of services for profit. It involves joining together of tow or more companies which are producing essentially the same products or rendering same or similar services or their products and services directly to compete in the market with each other. Horizontal mergers result in a reduction in the number of competing companies in an industry and increase the scope for economies of scale and elimination of duplicate facilities. However the main drawback is that they promote monopolistic trend in the industrial sector.
In a vertical merger two or more companies complementary to each other, eg, one of the companies is engaged in the manufacture of a particular product, while the other is established and an expert in the marketing of the product. In this merger the two companies merge and control the production and marketing of the same product.
A vertical merger may result into smooth and efficient flow of production and distribution of a particular product and reduction in handling and stock holding costs. It also poses a risk of monopolistic trend in the Industry.
A conglomerate merger involves coming together of two companies in different industries ie, the businesses of the two companies are not related to each other, neither horizontally and or vertically. They lack any commonality either in their product, or in the rendering of any specific type of service to the society. This is a type of merger of companies which are neither competitors, nor complimentary nor supplier of a particular raw materials nor consumers of a particular product of supplies of a particular raw material not consumers of particular product of consumable. A conglomerate merger is one which is neither horizontal nor vertical. In this the merging companies operate in unrelated markets having no functional economic relationship.
This type of mergers can be again classified as: Cash Merger, Defacto Merger, Downstream Merger, Upstream Merger, Short-form Merger, Triangular Merger and Reverse Merger.
Reverse merger takes place when a healthy company amalgamates with a financially weak company. In the context of the provisions of the Companies Act, 1956 there is no difference between regular merger and reverse merger.
Reverse merger can be carried out through the High Court Route, but where one of the merging companies is a Sick industrial Company under SICA, such merger must take place through BIFR(Board of Industrial and Financial Re-construction) On the amalgamation becoming effective, the sick company’s name may be changed to that of the healthy company.
Difference between Merger and Amalgamation:
The terms merger, amalgamation and consolidation are sometimes used interchangeably and denote the situation where two or more companies, keeping in view their long-term business interests, combine into one economic entity to share risk and financial rewards. However in the strict sense, merger is commonly used for the fusion of two companies. Merger is normally strategic vehicle to achieve expansion, diversification, entry into new markets, acquisition of desires resources, patents and technology. It also helps companies in choosing business partners with a view to advance long-term corporate strategic plans.
Amalgamation is an arrangement for bringing the assets of two companies under the control of one company, which may or may not be one of the original two companies. Amalgamation signifies transfer of all or some part of the assets and liabilities of one or more existing business entities to another existing or new company.
The Regulatory Framework:
The Regulatory framework of Mergers & Acquisitions covers the following:
- The Companies Act, 1956 and or Companies Act, 2013
- Companies (Court) Rules, 1959
- Income-Tax Act, 1961.
- Listing Agreement.
- Indian Stamp Act, 1899
- Competition Act, 2002.
Taking through the Merger process, complying with all legal & Regulatory requirements needs professional expertness and experience. We at Hushai Consultants LLP provides expert advice on the different legal aspects of merger further serve you to complete the whole process of merger/amalgamation or reverse merger etc.