What are Mergers and Acquisitions (M&A)? Advantages, Disadvantages, and Classifications

Reading newspaper articles about larger companies acquiring smaller ones for strategic purposes is common nowadays. However, have you ever wondered why companies spend millions (or even billions) on acquisitions? 

Today’s blog aims to explain mergers and acquisitions to you.

Overview

Although generally used interchangeably, mergers and acquisitions have distinctly different meanings.

A merger is the process by which two or more companies come together to form a single new company. The combined entity, led by personnel from both organizations, often adopts a new name. Ultimately, the newly formed organization is stronger as both companies decide to merge.

The term ‘acquisition’ refers to the process of one company acquiring over 51% of another company and becoming its parent. Acquisitions are generally processed as a common decision from both parties, but the output can also be achieved via Hostile takeovers, which are done without the acquiree company’s management approval.

Advantages

1. Helps the company in expanding its performance and reach.
2. The newly formed company will help eliminate market competition.
3. Since a subsidiary firm’s profit and loss get consolidated at the parent level, mergers and acquisitions can occasionally enable a corporation to receive tax benefits. 
4. M&A activities help companies diversify their business.

Disadvantages

1. Many firms find it difficult to conduct M&A due to the high cost. Failure to draw out the intended value from the M&A can prove fatal for the company in the long run. 
2. Acquiree companies may have to experience mass layoffs in order to generate long term efficiency. 
3. Achieving the intended M&A goals may be challenging if the two merging organizations have different working cultures, which causes coordination issues. 
4. Financial risk can arise during an M&A because target companies are often overpaid and thus experience difficulties in achieving the intended outcomes. 

Reasons

There are various reasons for mergers and acquisitions, a few of which are mentioned below-

1. Growth – This is the primary driver behind corporate mergers and acquisitions, as increasing client base and market share is the main goal of operations. 
2. Expertise – In most cases, established companies acquire innovative startups with cutting-edge technology to incorporate into their own products.  
3. Tax Benefit – M&A between two different companies could potentially help in saving taxes.
4. Diversification – In order to reduce business risk, companies can diversify their business through mergers.
5. Competitive Advantage – Businesses engaged in similar types of activities may combine to create a monopoly and drive out competitors. 

Classifications of Mergers

1. Horizontal Merger – In this type of merger, the businesses belong to the same sector and use a similar supply chain.
2. Vertical Merger – This kind of merger involves businesses operating at different levels within the same industry. 
3. Conglomerate Merger – Conglomerate mergers occur when two unconnected businesses unite. An example would be the merger of a software company and a shoe company. 
4. Congeneric Merger – Two businesses with different customer bases in the same industry merge in a congeneric merger. As an illustration, a congeneric merger occurs when a car manufacturer joins up with a tire manufacturer. 
5. Statutory Merger – Acquiring firms gain control over the target company, which they manage but operate independently.

Classifications of Acquisitions

1. Asset Acquisition – Instead of purchasing the target company’s shares, the acquiring company purchases its assets, such as buildings, machinery, and intellectual property. 
2. Share Acquisition – Acquiring firms gain control over the target company, which is managed by them but operates independently.

Process of M&A

The process of merger and acquisition in India are as follows-

1.    The corporation must first determine whether or not its Memorandum of Association permits it to do so. If not, the MoA must be amended. 

2.    Listed companies must then notify the stock market of their plans by orders, notices, and resolutions. 

3.    The company must then develop a document for this purpose, and both companies’ boards of directors must ratify it. 

4.    Subsequently, an organization must apply to the National Company Law Tribunal to obtain approval for the merger and acquisition record. 

5.    Following the approval, all shareholders must receive information about the merger and acquisition process within 21 days.

6.    The next step in the process would be to take over the assets of the acquiring company or merge the assets and liabilities of both companies.  

7.    The new company will issue its shares to its shareholders after the M&A activity is completed.

Conclusion

The process of mergers and acquisitions encompasses much more than buying or selling a company; it is complex and multifaceted. While M&A can be a beneficial strategy for some businesses, some find it costly and ineffective. 

Gaining a deeper comprehension of the idea will help you understand the world of M&A. 

Frequently Asked Questions (FAQs)

Q1. What are the famous mergers and acquisitions in India?
Ans. A few well-known merger and acquisition deals in India include Walmart’s 2018 acquisition of Flipkart, Reliance Industries’ 2020 acquisition of Future Group, and Tata Steel’s 2018 acquisition of Bhushan Steel. 

Q2. What will happen to shareholders in case of M&A?
Ans. In the case of M&A, the updated quantity authorized by the ratio will be distributed to the shareholders along with the shares of the new organization. 

Q3. Are mergers and acquisitions good for shareholders?
Ans. Yes, if the M&A is successful, the company’s growth will accelerate, which will ultimately raise the share price. 

Q4. How long will it take to complete the process of M&A?
Ans. The duration of the M&A process typically ranges from six months to a year, depending on the deal’s complexity. 

Q5. What are the major steps involved in an M&A deal?
Ans. The M&A process has a lot of steps including identifying the target company, conducting due diligence, negotiating with the company, obtaining regulatory clearance, and integration with the new parent. 

Disclaimer: The securities, funds, and strategies mentioned in this blog are purely for informational purposes and are not recommendations.