M&A : A Conceptual Understanding to the Strategic Deals of Business

–Ananya Nanda (Class of 2022, IBS Hyderabad)

Merger is when two companies combine to become one. This happens when two businesses that are same in size and also recognize advantages like increasing sales, efficiencies, profit maximisation and capabilities. The terms of the merger are often fair and mutually agreed to and thus the two companies become equal partners within the new venture.

In Merger, A + B = C

Acquisition is when one company buys another company and adds it into its operations. Sometimes the acquisition is friendly and sometimes it is hostile, when both the companies or firms cooperate and mutually decide to form a single entity.

An acquisition is possible when a company buys most or all the shares of the acquiree’s company.
A company or an organisation gets the control of the company if it buys more than 50% of the shares.

In Acquisition, A + B = A

Some of the advantages, which we get from the mergers and acquisitions are as follows:-

Synergy-The synergy by the merger of two companies is powerful enough to strengthen not only the business performance, but also in other aspects like profits, and overall shareholders value in longer run.

Cost Efficiency-The merger leads to improving the purchasing power of the company which helps in negotiating the bulk orders and ends up in cost efficiency. The reduction in staff reduces the salary costs. The rise in production volume causes per cost resulting in benefits from economies of scale.

Competitive Edge-The resources of the new company help it gain and maintain a competitive edge. It would help them to achieve the competitive advantage, this indeed can acquire more resources from the target firm for producing more products leading to more profits. The innovations can lead to decide if the companies can have sustainable developments or not. Acquisitions also help the companies to acquire some patents and technological skills which can save cost and budget for training their employees to operate on the machines. New Markets-The market reach is improved by the merger due to the diversification or the mixture of two businesses. This leads to better sales opportunities. It can help in the expansion of business, which can indeed take advantage of revenue synergies and make more money in many ways.

Reduction in competition.
Open New Territories.
Access to New Markets.
Expand the consumer base.

Mergers and acquisitions have few drawbacks that are mentioned below:-

Loss of differentiation: With the merger, competition will reduce in the industry and thus the new company may have higher pricing power.

Decrease in Jobs: A merger may end up in job losses. An acquiring company may stop the working of the under-performing segments of the company.

Dis-economies of Scale in a few occasions: The increased size may cause dis-economies of scale for the new company. It’s going to not have the control required for running a far bigger company

TYPES OF MERGERS AND ACQUISITIONS

Horizontal – A horizontal merger happens between two companies that operate in similar industries which won’t be direct competitors.

Vertical -A vertical merger takes place between an organization and its supplier or a customer along its supply chain. The corporate aims to manoeuvre up or down along its supply chain, thus consolidating its position within the industry.

Conglomerate-This type of transaction happens for diversified reasons and is between companies in unrelated industries.

FORMS OF INTEGRATION OF MERGERS AND ACQUISITIONS

Statutory: Statutory mergers usually occur when the acquirer is far more than the target and acquires the target’s assets and liabilities. After the deal, the company concludes to exist as a separate entity.

Subsidiary: In a subsidiary merger, the target becomes a subsidiary of the acquirer but continues to take care of its business.

Consolidation: In a consolidation, both companies within the transaction conclude to exist after the deal, and a very new entity is created

VI: Vodafone Ltd Merges with Idea Cellular Ltd .

Vodafone Idea merger was to be valued at $23 billion. Although the deal resulted in a telecom giant,it’s safe to mention that the two companies were pushed to try and do so because of the entry of Reliance Jio and also the price battle that followed. Both companies struggled amidst the growing competition within the telecom industry. The deal worked both for Idea and Vodafone as Vodafone went on to carry a 45.1% stake within the combined entity with the Aditya Birla group holding a 26% stake and therefore the remaining by Idea. On the 7th of September, Vodafone Idea unveiled its fresh identity ‘Vi’ which marked the completion of the combination of the two companies.

Walmart Inc Acquires Flipkart Pvt Ltd

Walmart won the bidding war against Amazon and went onto acquire a 77% stake in Flipkart for $16 billion. Following the deal, eBay and Softbank sold their part in Flipkart. The deal resulted within the expansion of Flipkart’s logistics and provide chain network. Flipkart itself had earlier acquired several companies within the ecommerce space like Myntra, Jabong, PhonePe, and eBay.

CONCLUSION

Companies that target what they’re going to get from procurement are less likely to succeed than people who target what they need to grant. People that focus more on giving than on taking within the interpersonal realm do better, within the top, than those who concentrate on maximizing their own position. Creating value by being a much better investor works well in countries with less-developed capital markets and could be a component of the great success of Indian conglomerates like Tata Group and Mahindra Group. They acquire (or start up) smaller companies and fund their growth during some way that the capital markets don’t.

REFERENCE