Merger

• The legal definition of a merger states that “a

merger requires the consolidation of two
companies into a single entity with a new
ownership and management structure.” A
merger helps companies to enlarge their
reach, obtain increased market shares, and
diversify their services.
 Reasons for Adopting the Merger

• Elimination of Operating Inefficiency

One of the primary benefits of merging two or more companies is that it increases the
number of operating economies. Under the supervision of superior management, the
possibility of any duplication in accounting, marketing, or purchasing gets minimized.
• Synergy
Synergy is the higher combined value of merged companies in contrast to the total
sum values of individual firms. When a company having few resources and operating
heads merges with another company possessing plenty of resources, it results in a
more potent firm than a single entity.
• Enlarge Diversification
Every company excels in different domains; the merger helps companies to expand
their realm with diversification. It lessens the risk factor for the individual organization
that singlehandedly tries its hands in a new field. Since both the companies hold
competency in diverse areas, they can efficiently deal with any obstacle once merged.
• Optimum Financial Planning
• The newly merged company has the leverage to perform optimum utilization of
resources. With the availability of abundant collective finances, the merged company
can create various innovative plans to use it effectively. Thus improves the financial
position of the company as a whole.
 Acquisition?

• An acquisition refers to a corporate transaction

wherein a company purchases a portion or entire
shares/assets of another company. The acquisition
is ideally processed to take charge of the target
company’s strengths and seize synergies.
• During the execution of such corporate transaction,
the acquiring company buys the target company’s
shares or assets, which provides a sense of authority
to the acquiring firm to make any decisions in
regards of acquired assets without needing the
consent of shareholders from the target company.
 Benefits of Acquisition

• Access to Capital
By embracing acquisition, one gets access to the capital of a larger company. Usually,
Entrepreneurs owning small businesses face the trouble of investing their own money to sustain
growth. Acquisition facilitates a handsome amount of capital, enabling the required funds to
Entrepreneurs without the need for descending their pockets.
• Larger Pool of New Talent
The acquisition provides many benefits; one of them involves access to more competent and skilled
resources , which helps to boost revenues and ultimately improving the growth scale of the
company.
• Improved Market Power
One has to be ahead of his competitors to secure a supreme position in the market, having said
that, an acquisition speedily helps to escalate the market share of a company. Moreover, it reduces
the competition’s progress. To survive in an extremely competitive market, one needs to adopt a
smart strategy like acquisition, which will not only help your company in the growth aspect but also
decreases the capacity of competitors.
• Lessens Entry Restrictions
If one acquires the shares of a progressive company, then it eases its way to diverse product lines
and new markets instantly with an esteemed brand having a client base already. Companies can
overcome the strict market barriers through acquisition. The process of acquisition has simplified
the market entry for small companies who were earlier compelled to bear considerable expenses in
the development of new products, market research, and investing much time to form an ample
client base.
 Amalgamation

• An amalgamation is a type of merger in which

two or more companies join their businesses
to create an entirely new company/entity. It is
an adequate arrangement of two or more
companies that operates the same industry;
thus; amalgamation plays a vital role in
reducing the operational cost.
 Advantages of Amalgamation
• Operating Economics
The operating economics refers to the expenses associated with day to day activities of the
business. When two companies amalgamate, their business operation expands, which further
assists them to optimize the economies of a larger entity’s production and distribution. Also, it
decreases various internal expenses of the company, like managerial cost, operating cost, etc.
• Financial Perks
The amalgamated company earns an array of financial benefits such as tax benefits specifically
when a company loss making company amalgamates with a profit making company.
• Speedy Growth
As per a report, an amalgamated company grows at a faster pace than an individual company.
The central reasons behind the rapid growth of amalgamated companies are sufficient ability
to face competition, can leverage joint expansion plans, and share past experiences when
needed.
• Access to Effectual Managerial
There is no shortcut to success; one requires the right guidance and managerial skills to obtain
the desired outcome. An amalgamated company can improve its managerial effectiveness by
replacing the inefficient staff with a competent group of managers. They have the liberty to
hire skilled professionals with enough experience in the concerned industry.
• Now that you have attained enough knowledge of merger, acquisition, and amalgamation, so
it’s time to resolve the central query which revolves around these terms i.e., the difference
between a merger, acquisition, and amalgamation.
 Basis of Merger Acquisition Amalgamation
Differences

Required Minimum 2 companies are Minimum 2 companies are Minimum 3 companies are
Number of required as only one required wherein one required since amalgamation of
Entities company will remain after company takes over the 2 results in a new entity.
absorbing the target shares and assets of another
company. company.

Size of the Both the companies Small to medium size firms The sizes of the target companies
Companies involved are equal in terms are acquired by the larger are comparable.
of size. companies.

Impact on Shares of the absorbing The buyer company purchases Shares of the new entity are
Shares company are given to the more than 50% shares of the given to the shareholders of
shareholder of absorbed target company. existing firms.
company.

Resultant One of the existing The acquired company ceases Existing companies lose their
Entity companies absorbs the to exist and becomes the part identity to form an entirely new
target company for to of acquiring company. company.
retain its identity.
Driver for Mergers are usually Acquisition is driven by Amalgamation is initiated
Consolidation driven by the the buyer company with by both the companies with
absorbing company. or without consent of the equal interest.
acquired company.

Accounting Assets and liabilities One firm acquires all the Assets and liabilities of the
Treatment of absorbed assets and liabilities of the existing firms are
company are target firm. transferred into the balance
consolidated. sheet of the newly form
company.

At least two entities

At least two entities At least two entities are
are involved and
are involved and involved and one takes over the
No. of Entities create a new entity
one will cease to assets and shares of others and
Involved after consolidation.
exist. A+B influences the voting rights. All
A+B —————> AB or
————–> A or B companies might exist together.
C
 Reasons for Mergers and Acquisitions
• 1) Synergy Effect: The combined value of two entities is generally more
than the sum of their individual values. This additional value creation is
called Synergy Effect.
• 2) Desire for Quick Growth: Organic Growth can happen only step-by-
step, and takes a longer period of time. On the other hand, inorganic
growth, that is growth by acquisitions, helps a company to grow faster
and quicker, the reason being the shortening of ‘Time to Market’
• 3) Reduction in Business Risk through Diversification: Merger between
two unrelated companies would lead to reduction in Business Risk. It
will increase the market value due to reduction in Discount Rate or
Required Rate of Return.
• Generally, greater the combination of statistically independent or
negatively correlated income streams of Merged Companies, there will
be higher reduction in the Business Risk, in comparison to Companies
having income streams which are positively correlated to each other.
• 4) Taxation: Provisions of Set off and carry-forward of losses
as per Income Tax Act can also be a reason for M&A, since
there will be a tax saving or reduction in tax liability of the
Merged Firm. Tax Saving is one of the main reasons for
“Reverse Merger”
• Also in case of acquisition, the losses of the Target Company
will be allowed to be set off against the profits of the
Acquiring Company.

• 5) Other Reasons
• a. Consolidation of Production Resources
• b. Increased Market power and Market Share
• c. Entry into new markets
• d. Better access to funds and Cash Flow Management
 Types of Mergers
• 1. Horizontal Merger
• It is a Merger when the companies which have merged are in
the same industry, i.e. producing either same or competing
products.
• Advantages -
• 1. High Market Share for new consolidated Company
• 2. Moving closer to being a monopoly, economies of Scale
• 3. Optimum Size
• 4. Curbing off Competition
• 5. Usage of unutilized capacity.
 Vertical Merger
• When two companies having “Buyer-Seller” relationship
(or potential buyer-seller relationship) come together.
• Advantages –
• 1. Improved co-ordination of activities
• 2. lower inventory levels
• 3. higher market power of the combined entity
• 4. Lower costs and eliminating avoidable Sales Tax and
/or Excise Duty.
 Conglomerate Merger

• It involves two companies that merge are in different fields altogether,

i.e. unrelated type of business operations.
• The business activities of the Acquirer and the Target are not related to
each other horizontally or vertically.
• There are no important common factors between the Acquirer and the
Target Companies in Production, Marketing, R&D and Technology.
• Advantages –
• 1. Unification of Different kinds of businesses under one flagship
Company
• 2. Utilization of financial Resource
• 3. Enlarged debt capacity and enlarged debt capacity and synergy of
managerial functions.
 Congeneric Merger

• In these mergers, the Acquirer and the Target

Companies are related through basic technologies,
production processes or markets. The Acquired
Company represents an extension of product-line,
market participants or technologies of the
Acquirer.
• These Mergers represent an outward movement
by the Acquirer from its current business scenario,
to other related business activities within the
overarching industry structure.
 Reverse Merger

• Takeover of Big or Profits making Company by Small or Loss

making Company.
• Reverse Merger happens when, in order to avail benefit of
carry forward of losses which are available according to tax
law only to the Company which had incurred them, the
profit making company (Target Company/Big Company) is
merged with Companies having Accumulated Losses
(Acquirer or Small Company).
• It can also be described as acquisition of a public company
by a private company so that the private company can
bypass the lengthy and complex process of going public.
• Features –
• (a) In a Reverse Merger, a smaller company gains control
over larger one.
• (b) The entire undertaking of the healthy and prosperous
company is merged and vested in the Sick Company
which is non-viable and whose net worth has eroded.
• (c) Reverse takeover is also applicable to the purchase of
a Listed Company by an Unlisted Company with control
passing to the Shareholders and Management of the
Unlisted Company. This is known as a Back Door Listing.
 Mode of Consideration
• The acquiring company has to decide about the mode of consideration
to be payable to target company. The Purchase Consideration is
discharged in Cash Mode or in the form of Shares.

• 1. Cash Mode

• It leads to sale of shares by Members of Target Company and attracts

Capital Gains Tax.
• There is No dilution of control as far as the members of acquiring
company are considered.
• It will affect the liquidity position of acquiring company.
• It is certain to receive fixed amount per share.
• The members of Target Company will prefer the cash mode.
Share Exchange Mode
• Basis of Share Exchange of Share Exchange Ratio –
• It can be defined as Number of shares to be offered
by the acquiring company to the members of the
Target Company.
• For Example, 3:4 share exchange gains can be
defined as acquiring company will issue “3” New
Shares for every “4” existing shares held in Target
Company.
 Gains from Mergers or Synergy Effect
• Synergy may be defined as
• VAB > VA + VB
• Combined Values of Two Firms will be more than the individual values.
• Synergy represents increase in performance of the Combined Firm, over
and above what the two Firms are already expected or required to
accomplish as Independent Firms.
• Reasons –
• (a) Complimentary Activities - One Company having a good networking of
Branches and Sales Centers, and the other company having efficient
production system. Thus, the merged company will be more efficient than
individual companies.
• (b) Economies of Scale –
• “Real” Economies of Scale arises reduction in factor input per unit of output
• “Pecuniary” economies of scale arise paying lower prices for factor inputs
for bulk transactions.
 Demerger
• It is a form of Corporate Restructuring, an Undertaking
transferred or sold to another entity.
• Even after Demerger, the existing company continues to
exist, as only part of the entity is sold or transferred.
• Reasons –
• 1. Need to pay attention to core areas of Business
• 2. Downsizing of the firm, in case if it is too big
• 3. Selling off of loss making divisions, in order to Optimize
the Profits
• 4. Window of Opportunity, possibility to sell at a attractive
price
• 5. Lack of adequate capital to continue the project
• 6. Need for immediate cash