About the author:
Megha Chauhan is a law student at Campus Law Centre, Faculty of Law, University of Delhi.
Mergers and acquisitions (M&A) is the process of consolidation of companies or assets through various sorts of financial transactions. Although the terms “mergers” and “acquisitions” are sometimes used interchangeably, their meanings are distinct. A merger is the combination of two businesses to form a new legal entity under a single corporate name. A merger occurs when two companies of similar size join forces to continue forward as a single new organization rather than remaining independently operated.
A merger of equals is the term for this action. However, an acquisition is when one firm buys another outright. An acquisition occurs when one company acquires another and establishes itself as the new owner. Mergers are indeed the combining of two firms into one, whereas acquisitions are the taking over of one company by another.
VARIETY OF REASONS FOR WHICH MERGERS AND ACQUISTIONS ARE DONE
- Improving firm’s performance and accelerating growth: The inflow of assets, labour, and funds from the company purchased or merged increases growth and performance opportunities.
- Diversification for high-growth products or markets: Diversification reduces overall risk. It’s the equivalent of not placing all your eggs in one basket.
- For tax purposes: the possibility to benefit from the losses of the firm being purchased or merged could be enticing for any business, as it would reduce that entity’s losses.
- Synergy: It refers to the total higher value of the merged firms in contrast to the sum of their units. If two organizations merge to create greater efficiency or scale, then it results in a synergy merge. Also, one can drive various benefits from synergies like increased revenues, combined talent, robust technology, cost reduction, and much more.
- Getting a better price by buying an undervalued target: Because it is relatively inexpensive, acquiring or merging firm could be a tremendous deal.
- Creating a technology shift and a strategic realignment: The merged or acquired company would have technologies that would improve the organization’s ease of doing business. This is something that the acquiring or merging entity will greatly benefit from.
TYPES OF MERGERS AND ACQUISITIONS
This type of M&A generally happens when the target company and the target seeking firm are both in the same industry, have the same or equivalent products or product lines, or provide similar services to the final consumer. It also implies that the companies are in the same industry and are in the same or similar stages of production. For Example: Integration of Facebook, WhatsApp, Instagram and Messenger. All of these were individual social media platforms founded by different companies, which were gradually combined into one large social media company over time. The platforms are still independent in the sense that numerous websites exist, but they are now part of Facebook Inc., headed by Zuckerberg.
This is quite similar to horizontal mergers, with the exception of a minor change linked to the stage of manufacturing. This type of merger and acquisition occurs between companies that are part of the same value chain and provide similar goods and services but differ in the stages of production. Vertical mergers occur when two or more company units in the same industry operate at distinct stages of production, with one being the producer of the product and the other being the supplier of the raw materials or services needed to produce that product. For Example: Walt Disney and Pixar.
In 2006, Walt Disney bought Pixar Animation Studios for $7.4 billion. Pixar was an innovative animation studio with a talented workforce. Walt Disney Corporation was a media and entertainment company. The merger turned out to be a strategic and successful one. Disney was also able to reduce its competition as a result of the merger.
When two companies operate in the same industry and have similar types of customers, but offer distinct types of products and services, a concentrated merger and acquisition occurs. The product can be complementary, but it will not be identical in any way. This type of merger and acquisition usually occurs to encourage buyers to purchase a product as a bundle rather than separately. It also aids the organization in diversifying its services and, as a result, generating larger returns. For Example: Heinz and Kraft’s $100 billion merger in 2015 is regarded as the world’s largest concentric merger.
Kraft-Heinz, a food industry powerhouse with $24.97 billion in revenue in 2019, was created as a result of the merger.Kraft was a leading producer of mayonnaise, salad dressing, cottage cheese, natural cheese, and lunch meat at the time of the acquisition. Meanwhile, Heinz was the world’s leading manufacturer of meat sauce, pasta sauce, and frozen appetisers. As a result of the concentric structure of the merger, their products were more complementary than competitive.
This M&A occurs when the target company and the target seeking company are in separate industries, have different product offerings, and are at different stages of production. For Example: Honeywell and Elster merger. Honeywell (who has a very active M&A portfolio) was interested in this 5.1-billion-dollar conglomerate merger in 2016 because Elster would lead to product and regional expansion.
STAGES INVOLVED IN ANY M&A TRANSACTION
STEPS PRIOR TO AN M&A TRANSACTION
Identify the needs of the company
Every aspect of a company’s operations is aimed at improving profits and efficiency. Businesses may reach a point when they must decide whether they can improve their earnings through their own resources or if they need to purchase the resources or the entire business of another organisation to expand and scale their profits. The company must make a decision based on its requirements.
Look for Potential Targets
If the acquiring entity determines that purchasing another entity would be a cost-effective option, it must examine the market for possible targets. Furthermore, if the existence of a specific target appears to be an appealing buy for the acquirer, the company may be motivated to proceed with the acquisition in order to expand. To look for a potential target, the management needs to keep certain things in mind. For Instance, the company’s management must determine which are the primary growth areas of the acquirer. After examining the situation and the precise area in which the potential target can grow, management must make an informed decision.
The acquirer searches for and evaluates possible target companies using the search parameters they’ve established. Management can construct a list of priorities focusing on the demands of that area once the specific area of growth has been recognized. This is a technique for generating a list of possible goals.
Preliminary Due Diligence
After the acquirer has completed its careful research on the target company, it can approach the target’s management with an expression of interest. If the target’s management approves, the deal will be completed. If the target’s management rejects the offer, the acquirer can move on to the next priority target on its list.The acquirer does preliminary due diligence shortly after that. Prior to signing the letter of intent, the acquirer can conduct preliminary due diligence as soon as the target acknowledges the acquirer’s declaration of interest.
Preliminary due diligence is carried out to establish a rapport with the target, identify red flags that indicate acquisition infeasibility, determine the price the buyer wants to offer the seller in the letter of intent, investigate the reasons for the target’s sale, and confirm whether the buyer truly wants to acquire the target and so on.
STEPS THAT ARE INVOLVED IN THE TRANSACTION
Letter of Intent- In M&A, a letter of intent (LOI) is a non-binding document that specifies an agreement in principle for the buyer to purchase the seller’s business, including the proposed price and terms. Before the acquisition is finalized, the letter of intent is used to ensure that both parties agree on the price and other terms. Price, acquisition price adjustments, transactional structure, due diligence timeframe, target and acquirer indemnity responsibilities, etc. are included in the letter of intent. The letter of intent is written by the acquirer’s legal counsel and sent to the target company.
Extensive Due Diligence
Following the submission of the letter of intent to the target firm, thorough due diligence is carried out, which includes a full assessment of risks connected to the target company’s corporate status, assets, contracts, securities, and human employment. The target’s financials, the truthfulness of the financials presented, and the target’s revenue generation capacity are all subjected to a legal review. After conducting due diligence, the parties seal the sale with a share purchase agreement.
Share Purchase Agreement
The SPA specifies whether the company’s stocks or assets are being sold. The agreement will also specify the purchase price, the price structure, and the money that will be held in escrow. The SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011 must be followed when a share acquisition is involved and the target is a publicly traded company. If the target is an unlisted firm that will continue to exist after the acquisition process is completed, however, simply signing the SPA will suffice.
When it comes to external transactions, the target companies usually stay the same, but when it comes to internal transactions, they vanish. A plan of arrangement must be completed in circumstances when the entities cease to exist, and the transaction must be approved by the National Company Law Tribunal.
During the closing, all of the final actions outlined in the share purchase agreement are completed. It is critical to not only finalize the share purchase agreement, but also to gather all of the signing paperwork and exhibits during the closing process. Furthermore, the parties should guarantee that all necessary approvals, such as consideration for the acquisition, legal opinion of counsels, consideration for the purchase, and so on, have been received.
SOME IMPORTANT CASES RELATING TO MERGERS AND ACQUISITIONS
Zomato Acquired Uber Eats
Zomato is a food delivery start-up that has acquired a total of 12 businesses around the world. On the 21st of January 2020, Zomato acquired Uber Eats equity for 350 million dollars. Zomato and uber Eats agreed to go for stock acquisition. The reasons behind this acquisition were: –
This will help Zomato gain a competitive advantage over Swiggy, since the combination of Zomato and Uber Eats will help the company boost its market share to more than 50%, putting it ahead of Swiggy. Zomato will now have more negotiation power with restaurants, lowering its losses.
Large acquirers buy smaller businesses in order to deliver faster, more efficient services at a lower cost. Although Zomato is a larger company than Uber Eats and they both operate in the same industry, Uber was unable to affect the market.
Disney Acquired 21 Century Fox
In 2019, Disney acquired 21st Century Fox Company. This was the largest and possibly most complicated merger of two media companies in history. Fox was a major player in the entertainment sector until Disney bought it. One of the six main studios and the world’s fourth largest media company. Disney was also the world’s largest media company, and under CEO Bob Iger’s leadership, the company had recently purchased major media assets and intellectual properties, including Pixar in 2006, Marvel in 2009, and Lucas film in 2012. But, amid Disney’s prosperity, a newcomer would emerge on the horizon, revolutionizing the entertainment sector… that newcomer would be Netflix!
On November 6, 2017, Disney and Fox discussed the possibility of a merger or acquisition. After a series of counter-offers, Comcast stated on July 19, 2017 that it was withdrawing its bid for the Fox assets, and Disney would purchase 21 Century Fox for $71.3 billion USD. Disney, already the world’s largest media giant, grew even bigger after the acquisition closed on March 20, 2019, accounting for nearly a third of the entertainment media landscape.
Apple Acquired Intel’s Smartphone Modem
Apple bought Intel’s smartphone modem division. Around 2,200 Intel employees joined Apple as part of the $1 billion deal. As part of the acquisition, Apple also acquired intellectual property from Intel. Intel also transferred patents to Apple for existing and future wireless technology. The company now has 17,000 patents in its portfolio related to wireless technologies. These protocols cover everything from cellular standards to modem architecture and operation.
Capital First Merges With IDFC First
IDFC Bank and Capital First, a non-banking financial corporation (NBFC), have completed their merger, giving the merged business IDFC First Bank a combined loan asset book of 1.03 lakh crores. The merged firm will be known as IDFC First Bank, subject to shareholder’s approval. According to the announcement, IDFC First Bank will now offer a broader range of retail and wholesale banking products, services, and digital innovations to a broader range of customer categories.
Through its 203 bank branches, 129 ATMs, and 454 rural business correspondent centers, the bank will service 7.2 million customers across the country. The merger presents an incredible opportunity to strengthen our banking capabilities, operate as a larger universal bank and bring immense benefits to customers. Infrastructure lender IDFC, which entered the banking space in 2015, has been on the lookout to grow its retail portfolio.
Vodafone India Merged with Idea Cellular
Vodafone is a major company based in the UK. It is one of the largest telecommunications conglomerates. It operates in more than 25 countries throughout the world. The Vodafone group offers a variety of services, including voice, text, data, and fixed communications. Aditya Birla is a Mumbai-based Indian multinational corporation. It belongs to the Fortune 500 list of firms.
The Birla group’s first worldwide enterprise was Idea Cellular. It was founded in 1995.Both companies have benefited greatly from this merger. It was a horizontal merger between two of the telecom industry’s top players. The total value of this merger was $23 billion. Vodafone – Idea underwent a rebranding in September 2020. The company renamed itself ‘Vi’ after the initials.
The rebranding came roughly two years after the merger, yet it exemplifies the spirit of cooperation. To mark the merger’s final lapse, the long-overdue rebranding was completed. After three years of merger talks and implementation, the two companies were finally merged.
Piramal Group Completes Acquisition Of DHFL
The Piramal group concluded the acquisition of DHFL by paying Rs. 34250 crore to creditors in the first ever financial services resolution under the Insolvency and Bankruptcy Code, and the largest this fiscal. The resolution’s total value is Rs. 38060 crore, which is about 46% of the total amount owed to creditors.
The Piramal group is paying Rs. 34250 crore, with the remaining Rs 3810 crore being a cash balance held by DHFL. Piramal Enterprises, a listed entity, will merge DHFL into Piramal Capital & Housing finance, a certified housing finance company. The merged entity’s loan portfolio is expected to be around Rs 65000 crore.
Renew Power Completed Its Merger with RMG Acquisition Corporation II
ReNew Power announced a merger with blank-check company RMG II in February, giving India’s largest renewable power producer an enterprise value of USD 8 billion and a NASDAQ listing.A blank-check company is one that is in the early stages of development and does not have a formal business plan.RMG II has become a wholly-owned subsidiary of ReNew Energy Global plc as a result of the business combination. The completion of the business combination with RMG II is a significant step forward in the Indian power sector’s decarbonization.
“Flaming excitement, backed by horse sense and persistence, is the attribute that most frequently makes for success,” Dale Carnegie said. It is clear from the preceding discussion, mergers and acquisitions are common across industries and are an important indicator of a country’s economic health. Mergers and acquisitions are strong markers of a healthy, growing economy. In terms of the present M&A scenario in India, the acquisition of distressed firms via the IBC resolution process has resulted in an increase in M&A deals.
The legal basis for any business restructuring must be simple and straightforward, not burdensome and riddled with bureaucratic and regulatory hurdles. The most significant barrier in the way of executing a merger or amalgamation remains the long judicial process required for the approval of a plan of arrangement. According to the JJ Irani report, legal approval of a “contractual merger” can go a long way toward removing barriers to mergers in India.