Mergers and Acquisitions

What is Mergers and Acquisitions?
Mergers and Acquisitions (M&A) are powerful tools for business growth and change. In simple terms, a merger happens when two companies come together to form a new company. Both original companies usually cease to exist and create a new, united business. It’s like two teams combining to work better as one.
An acquisition, on the other hand, is when one company buys another. The buying company (acquirer) takes control of the other (target), which may either continue as a part of it or get fully absorbed. Think of it as one business taking over another to grow bigger or stronger.
In India’s fast-changing business world, M&A deals help reshape industries. They influence everything, from the brands we use to job markets and investment trends. Understanding how mergers and acquisitions work is key to grasping how companies grow, survive, or adapt in a competitive market.
What is the Difference Between a Merger and an Acquisition?
Though often used interchangeably, mergers and acquisitions are different in structure and intent. The table below highlights the key distinctions:

Aspect                                                              Merger                                                                                                   Acquisition

Definition                Two companies of similar size combine to form a new entity.               One company takes over another, becoming its new owner.
Ownership Structure       Shared ownership; both companies typically have equal influence.          The acquiring company gains full or majority control.
Resulting Entity          A completely new company is formed.                                       The target company is absorbed; only the acquirer usually continues.
Business Size             Generally between companies of similar size or strength.                  Typically, a larger company acquires a smaller one.
Example                   Vodafone India + Idea Cellular = Vodafone Idea (Vi), 2017                 Walmart acquiring Flipkart, 2018
Control & Management      Shared leadership and board; integrated operations.                       Acquirer controls leadership, strategy, and operations.
Legal Identity       Both original entities cease to exist; a new legal identity is created.   The acquirer retains its identity; the target may lose its separate status.
Nature of Transaction     Collaborative and negotiated as equals.                                   Often unilateral; the acquirer leads the transaction.
Branding Impact           Often rebranded under a new name.                                         Acquirer may retain the acquired brand or merge it into its own.

·         Diversification of products, services, or business lines

·         Improvement in operational efficiency and cost reduction

·         Achieving long-term business sustainability and growth

M&A offers significant benefits to businesses when executed strategically:

·         Accelerated growth compared to organic expansion

·         Increased market share and customer base

·         Improved economies of scale and operational synergies

·         Better utilization of financial and human resources

·         Risk diversification and enhanced financial stability

·         Increased shareholder value and profitability

M&A deals are not all the same. They can be classified based on the relationship between the two companies involved. Understanding the different types of Mergers and Acquisitions helps to see the strategic goals behind a deal.

·         Vertical Mergers
         A vertical merger occurs between two companies that operate at different stages of the same industry's supply chain. For example, a car manufacturer might merge with a           company that supplies car parts.
·         Purpose: The goal is to create a more efficient supply chain, have greater control over supplies, and reduce costs.
·         Example: If a company like Reliance Jio (a telecom service provider) were to acquire a company like Sterlite Technologies that manufactures fibre optic cables, it would               be a vertical merger.
·         Concentric Mergers
          A concentric merger takes place between two companies that are in the same broad industry but do not offer the same products. They serve the same customer base                  through different products.
·         Purpose: The aim is to leverage a common customer base and distribution network to sell more products. It helps in product line expansion.
·         Example: If a company like HCL, which makes laptops, acquires a company that produces computer printers, it's a concentric merger. Both products are part of the                       broader electronics market.
·         Other Important M&A Structures in India
          Besides these main types, there are other structures used in India:
·         Reverse Merger: A private company acquires a public company. This allows the private company to become publicly listed without going through the lengthy Initial Public            Offering (IPO) process.
·         Asset Sale: One company buys the assets of another company, such as its equipment, inventory, or brands, without buying the company itself.
·         Management Buyout (MBO): This is when a company's existing management team purchases the business it operates. While MBOs remain relatively uncommon in                    India due to limited access to financing, they have started gaining traction in private equity-backed transactions, where funding support is more readily available.

Key Legal and Regulatory Rules for M&A in India
The M&A landscape in India is governed by a framework of laws and regulations. These rules ensure that transactions are fair, transparent, and in the public interest. Here are the key laws you should know about.

·         SEBI Takeover Code

The SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011, also known as the Takeover Code, is crucial for listed companies. It aims to protect the interests of minority shareholders. If an acquirer buys a certain percentage of shares in a listed company (triggering a threshold), they must make an open offer to buy additional shares from the public shareholders.
Under these rules, if an acquirer purchases 25% or more of the voting rights in a listed company, it triggers the obligation to make an open offer. This means the acquirer must offer to buy additional shares from the public shareholders, giving them a fair chance to exit.
Additionally, any further acquisition of more than 5% of voting rights or shares within a financial year also requires an open offer. These provisions fall under Regulation 3 and Regulation 7 of the Takeover Code.

·         FEMA and RBI Guidelines for Cross-Border Deals

When an M&A deal involves a foreign company acquiring an Indian company or vice versa (a cross-border deal), the Foreign Exchange Management Act (FEMA), 1999, comes into play. The Reserve Bank of India (RBI) and the government set guidelines for foreign direct investment (FDI). These rules specify the sectors in which foreign investment is allowed and the procedures to be followed.

·         Insolvency and Bankruptcy Code (IBC), 2016

The Insolvency and Bankruptcy Code (IBC), 2016 is crucial when one of the companies involved is facing financial difficulties. It sets a structured process for handling insolvency and restructuring, which may include mergers or asset sales. Under the IBC, creditors are given priority, and a company may need to go through the corporate insolvency resolution process (CIRP) before completing an acquisition or merger.
This helps ensure that the deal follows legal procedures and protects creditors while enabling smoother restructuring in distressed M&A situations.

For Shareholders
The impact of a merger and acquisition on shareholders can be positive or negative.
Shareholders of the Target Company: They often benefit from an acquisition, as the acquirer usually pays a premium over the current stock price.
Shareholders of the Acquiring Company: The impact can be mixed. In the short term, the stock price might fall due to the high cost of the acquisition. In the long term, if the merger is successful and creates value, the shareholders will benefit from higher profits and a rising stock price.
For Customers
The impact on customers can also vary.
Potential Benefits: A merger could lead to better products, more innovation, and lower prices if the cost savings are passed on to consumers. A larger company might also offer better customer service and a wider range of products.
Potential Drawbacks: If a merger reduces competition, it could lead to higher prices and fewer choices for customers. There is also a risk that the quality of service might decline during the chaotic integration period.