- Diversification is a key factor in why businesses choose to merge and acquire other businesses. The necessity for an M&A strategy arises when a firm seeks to diversify its business interests.
- The 2013 Companies Act's Chapter XV, Sections 230–240, governs mergers and acquisitions.
- The new rules in the Companies Act, 2013 are intended to speed up the procedure, increase transparency, and make it simpler for companies to propose mergers while ensuring that there is a strong system of checks and balances in place to guard against the misuse of these rules.
On December 7, 2016, the Ministry of Corporate Affairs announced the implementation of 90 sections of the Companies Act, 2013, which took effect on December 15. These parts also contain the Chapter XV provisions on Compromises, Arrangements, and Amalgamations (Sections 230- 240).
The 2013 Companies Act's Chapter XV, Sections 230–240, governs mergers and acquisitions. These are a unique category of compromise and arrangements. The Companies (Compromises, Arrangements, and Amalgamations) Rules, 2016, were released by the Ministry of Corporate Affairs, Government of India, by notification on December 14, 2016.
Mergers and acquisitions are seen as powerful tools for growing a company. Due to their M & A strategy, several businesses across various industries, including the pharmaceutical, communications, automotive, food, and beverage industries, have experienced remarkable growth.
In India during the past few years, M&A techniques have increased in a variety of ways. India's inbound M&A activity has reportedly increased to the highest levels. There may be a number of causes, but the value centred on it is frequently the one that unites several existing businesses. Because of the strengths and disadvantages of the two companies, businesses frequently want to merge.
Diversification is a key factor in why businesses choose to merge and acquire other businesses. The necessity for M&A strategy arises when a firm seeks to diversify its business interests. For instance, a company looking to expand its operations might buy a business that sells a different kind of product in order to increase its overall wealth and profit margins. To grow and enhance its market share, a company can also just acquire or merge with a competitor.
Types of Mergers
- Horizontal Merger: A horizontal merger is the joining of two companies that produce the same products or are in the same industry. Reduced competition, monopolistic status, and market control are the major goals of this kind of merger. For instance, Facebook, WhatsApp, Instagram, and Messenger integration.
- Vertical Merger: There are two ways that this merger can take place. One is when a company buys a company that produces the raw material it uses. Another way is when a company buys another business to put it in a better position to serve its clients. For E.g.: A $85 billion merger between AT&T and Time Warner was announced in 2016.
- Co-Generic Merger: This is the joining of two or more companies that have similar clientele, job functions, or technological capabilities.
- Conglomerate merger: The merger of two companies engaged in unrelated industries
Stages of Mergers and acquisitions
- Formulation of Strategy: The company's strategies will determine how well mergers and acquisitions go. Knowing what a company stands to gain from the merger is crucial. A successful acquisition strategy relies around the acquirer having a clear understanding of what they hope to achieve from the transaction and why they are buying the target company in the first place, such as to increase their product offerings or get access to new markets.
It must focus on the idea of synergy and be object-oriented. The concept of synergy is crucial since it frequently serves as the impetus for mergers and acquisitions. If the predicted value and performance of the combined entities is more than the total of its parts, a merger and acquisition is justified. Thus, developing a strong acquisition strategy is the first and most important phase in the M&A process.
- Identification of Cost-Benefit Analysis: In this step, the cost of the merger process is assessed, as well as the post-synergy revenue. Cost-benefit analysis is essential before making any decisions regarding the agreements in order to increase the likelihood of M&A success and forecast where resources will be allocated. In order to support M&A decision-making, the cost-benefit analysis component is crucial in giving the data regarding the costs of managing the acquisition and the value of the target company. Companies who have done thorough study have a chance to succeed and surpass rivals. The success of M&A depends on a preliminary valuation that includes the cost and anticipated returns from the acquisition.
- Due Diligence Process: The effectiveness of the company's due diligence procedure will determine how successful the M&A transaction is. Prior to the signing of a contract, it entails a research of the target company's activities, human capital, tax and legal structure, and financials.
This step involves a thorough analysis of every facet of the target company's activities. Making sure the data on which the offer was based is accurate is the goal of due diligence. If it is incorrect, a modification is made to support the real data.
- Valuation Process: This phase entails a review and assessment of both current and potential market value. One of the most important milestones in the M&A process is this. The acquirer may request detailed information from the target company to help it further assess the target as a stand-alone company and as a potential acquisition prospect.
The seller looks for the fair price at which stockholders would profit from the transaction. Additionally, it seeks to determine what a fair offer for the target or buyer of enterprises would be. A company engaging in M&A develops a number of valuation models that might aid in the decision of whether to pursue a deal or not.
- Post-Integration Issue: The main goal of this phase is to operationalize the merged organisation in order to meet the strategic value expectations. Following the transaction's completion, the management teams of the two businesses collaborate to create a seamless integration of the two operations. It entails integrating many systems, processes, and strategies.
Steps involved in Merger & Acquisition
The first and most important step when thinking about a merger and acquisition in India is to review the company's memorandum of association to determine whether or not merger authority is allowed. The second and equally important step is that all necessary documents for the proposed merger and acquisition, such as notices, resolutions, and orders, must receive stock exchange approval within a specific time frame.
Following the stock exchange's processing of the appropriate paperwork, an affirmation of the merger plan and an administrative decision permitting key participants to pursue the matter further is required from both companies.
Initially, mergers and acquisitions can be carried out through mutual agreements; however, this does not waive the need for the high court's approval. An application must be submitted before the high court can grant authorization, which must be followed by a 21-day notification period for investors and creditors. According to the deadline established by the state's high court, a copy of the request must be filed with the registrar of companies.
The transfer of assets and liabilities to the newly merged entity is the next step. The combined company can then issue shares and debentures on its behalf after becoming a separate legal entity, becoming listed on the stock exchange.
The newly announced sections in the Companies Act, 2013 Act will cause a paradigm shift in India's approach to corporate restructuring. The new rules are intended to speed up the procedure, increase transparency, and make it simpler for companies to propose mergers while ensuring that there is a strong system of checks and balances in place to guard against the misuse of these rules.
Additionally, the NCLT's authority over these issues will provide uniformity and speed to the entire process. Many of the corporate restructuring techniques that were in use earlier with judicial approval now have statutory effect with respect to the 2013 Act.