Mergers and Acquisitions: An Overview
Updated: Jun 11, 2022
- Sia Shah and Mehak Qureshi
An entity’s increase in business is acknowledged over time with the wide usage of its products and services. It can also grow through an inorganic process, symbolized by the rapid increase in employees, demand and supply, and infrastructure and thus increasing total revenue and business profits. Mergers and Acquisitions are a catalyst for the inorganic growth process. A merger can be defined as the unification of two players into one business, acquisitions are cases in which one player buys another to consolidate the purchased business itself. It could be in the form of a buying or where one enterprise buys another or the management buys the enterprise from the owners. In addition, the division of one entity into two or more entities i.e., de-mergers also requires that they be recognized and treated equally with the merger and acquisition plan and consequently the lower mergers and acquisitions are also intended to cover cost-integration.
The concept of Mergers and Acquisitions is that two varied companies combined create more wealth as well as goodwill as compared to being on an individual stand.
Mergers and acquisitions are used as a critical tool that increases growth and is being accepted widely by Indian businesses as a vital business strategy. They are broadly used in many fields such as information technology, telecommunications, outsourcing businesses, and even traditional business processes to gain power, increase customer base, reduce competition or enter new market or product segment. With the ultimate goal of increasing revenue and maximizing profit, companies continue to explore various opportunities through the process of mergers or acquisitions.
Mergers and acquisitions may be made to reach the market through an established brand, gain market share, eliminate competition, reduce tax liability or acquire skills or reverse the accumulated losses of one entity against another.
Types of Mergers and Acquisition
There are various reasons why companies come together or acquire each other for the benefit of their business. Here are four ways that companies combine power:
1. Horizontal Merger/ Acquisition
Two companies assemble having similar goods or services. By merging, they increase their width but do nothing new. In 2002 Hewlett Packard took over Compaq Computers for $ 24.2 billion. The objective of this take-over was to create a leading personalized computer supplier by integrating PC products from both companies.
2. Vertical Merger/ Acquisition
The two companies are based in the same industry but are located at different points in the supply chain. They are integrated straightforwardly by improving logistics, mobilizing staff, and possibly reducing product marketing time. An automobile company merging with a company that supplies basic components or parts would be an example of a vertical merger.
3. Conglomerate Merger/ Acquisition
Two companies in different industries share power or one takes another with the objective of expanding their scope of services and products. This approach can help to reduce costs by combining office activities and reducing risk by working in a variety of industries.
4. Concentric Merger/ Acquisition
In some cases, two companies will share with customers but provide different services. An example would be Sony which made DVD players but did not buy the Columbia Pictures studio in 1989. Sony was now able to produce films that could be played on
their DVDs. Indeed, this was an important part of the strategy for launching Sony Blu- Ray DVD players.
Growth of Mergers and Acquisition
Research shows that M&A, which is on the rise between 2015 and 2019, has spent more than $310 billion on M&A in India. In terms of volume and volume, more than 60% of sales came from industrial, energy, telecommunications, and media products. Increasing market competition is having a huge impact on companies in the e-commerce industry. In recent years, the industry has paved the way for more aggressive mergers and acquisitions. An important factor influencing the mood of an M&A is the political climate of a country. This is because, unfortunately in India, financial needs are not the same as the strength of an unused market. This shortage is being filled by foreign companies.
Negative legislation, existing and recently enacted, has a significant impact on India's foreign investment opportunities. Government efforts to speed up integration and procurement are examples of government assistance. As a result of these measures, India has risen to 63rd place in the World Bank's Ease of Business Index.
M&A deals reached a high level with an ever-higher proportion of new buyers accounting for more than 80% of deals closed in 2020 and 2022.
Great Mergers and Acquisition Agreements in India
1. ZEE Entertainment and Sony India Merger
India's two largest news companies, Zee Entertainment Enterprises Limited (ZEEL) and Sony Pictures Networks India (SPNI), have agreed to a multi-billion-dollar merger. The merger of the two companies was permitted by Zee's board of directors. This program has the ability to convert a newly formed organisation into one of the biggest and most sought-after businesses in the country.
As part of the contract, Sony Pictures Entertainment will spend $ 1.575 billion on the newly merged company. Zee's board of directors has granted formal approval for the use of a non-binding term sheet with SPNI. In addition, both sides are preparing a non-compete agreement.
Both groups are expected to benefit from business and collaborative manufacturing, so as to not only accelerate the commercial enterprise boom but can even permit shareholders to participate in its future success.
2. Vodafone and Idea Merger
The telecom sector has long been in deep trouble. Government regulations and market forces have taken a toll on the industry since the 2G fraud allegations were raised. The merger gave birth to a telecom giant, but the advent of the Reliance JIO and the resulting price war forced both companies to do so. Both companies struggled as competition in the telecommunications business grew fierce. It has been a lucrative deal for both Idea and Vodafone, as Vodafone now owns 45.1 percent of the combined company, the Aditya Birla group owns 26 percent and Idea owns the rest. . The Vodafone Idea culminated in the merger of the two companies by announcing a new business ownership, ‘Vi’. After Airtel, the Vodafone Idea team is the second-largest mobile network in India. This amount is estimated at $23 billion. This is a combination of equal signs, unlike other combinations.
In today's world, concepts of mergers and acquisitions are increasingly popular. Integration and consolidation are considered to be the most effective way to restructure a company.
Companies are embracing M&A to restructure their businesses to a post-Covid world, and this escalation of the pace of contracts is driven by rapid change across all sectors. Savings and foreign direct investment are high, private equity (PE) dry powder is high, and interest rates are historically low.
Companies are reacting to the disruption and growth expected, and one of the ways they do that is to get it. M&A provides established businesses with new leases in life.
Sia Shah and Mehak Qureshi are second year students at Pravin Gandhi College of Law, Mumbai.
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