Mergers And Acquisitions

Definition
A merger is said to occur when
two or more companies combine into one company
an existing company or
entirely a new company.

Laws in India use the term amalgamation for merger.

For example, the Income Tax Act, 1961 defines

amalgamation as the merger of one or more companies
with another company or the merger of two or more
companies (called amalgamating company or companies)to
form a new company(called amalgamated company)
Merger or amalgamation may take two
forms:

Merger through absorption.

Merger through consolidation

 Merger through absorption

An absorption is a combination of two or more

companies into an existing company.

All companies except one lose their identity in a

merger through absorption.
example : Reliance Petroleum by Reliance industries.
 Merger through consolidation
A consolidation is a combination of two or more
companies into a new company.

In a narrow sense, the terms, amalgamation and

consolidation are sometimes used interchangeably.

An example of consolidation is the merger or

amalgamation of Hindustan Computers Ltd., Hindustan
Instruments Ltd. and Indian Reprographics Ltd.
 Acquisition

An acquisition may be defined as an act of acquiring

effective control by one company over assets or
management of another company without any
combination of companies.

Thus, in an acquisition two or more companies may

remain independent, separate legal entity, but there
may be change in control of companies.
 Horizontal Merger

This is a combination of two or more firms in similar

type of production, distribution or area of business.
Example,

India cement acquired Raasi Cement as well as Vishnu

Cement.

Grasims acquisition of Digvijay Cement and Dharani

Cement.
 Vertical Merger
This is a combination of two or more firms involved
in different stages of production or distribution. For
example,

TV manufacturing company and a TV marketing

company.

Merger of Reliance Petroleum Ltd with Reliance

Industries Ltd.
 Economic forces leading to mergers and
acquisitions
Enhanced competition,
Free flow of capital across countries and globalisation
of business etc,
Limit competition
Utilise under-utilised market power.
Overcome the problem of slow growth and
profitability in ones own industry.
Gain economies of scale and increase income with
proportionately less investment.
 True motives and advantages

Maintaining or accelerating a companys growth,

particularly when the internal growth is constrained
due to paucity of resources.

Enhancing profitability, through cost reduction

resulting from
economies of scale,
operating efficiency and
synergy.
 Reducing tax liability because of the provision of
setting-off accumulated losses and unabsorbed
depreciation of one company against the profits of
another.

Limiting the severity of competition by increasing the

companys market power.
 Managerial processes in mergers and
acquisitions

Formulation of the strategies for acquisition.

Due diligence.

Merger negotiations to decide the terms of

acquisitions/mergers.
 Increased Market Power

A merger can increase the market share of the

merged firm. For example,

Universal Luggage was acquired by Blow Plast for

limiting competition for increasing market power.

Acquisition of Cement Business of L&T by Grasim.

Strategic objectives: (Types of M&A)
Overcapacity M&A:
Eliminate capacity, gain market share
More efficient operation

Geographic roll-up M&A:

Expand geographically, operating units remain local

Product or Market extension M&A

Extends a companies product line.

M&A as R&D
in lieu of in-house R&D to build a market position quickly.

Industry convergence M&A

New industry emerging, positioning for being a part of the new
industry