26 Feb Merger And Acquisition in India: A Comprehensive Guide
Under The Companies Act, 2013, various provisions governed Merger and Acquisition, yet a precise definition remained elusive. Traditionally, Merger and Acquisition were distinct concepts. Merger occurred when two companies of comparable size amalgamated to form a new entity, while Acquisition involved one company absorbing another by acquiring a majority stake.
Advantages of Merger and Acquisition
- Merging or acquiring companies consolidated market control.
- Cost efficiencies were achieved, as expansion through merger proved more cost-effective than establishing new ventures.
- Reduced competition alleviated price pressures and maintained market stability.
- Economies of scale were realized through resource and service sharing.
- Substantial tax benefits were attained, allowing losses from one entity to offset profits from another, thereby minimizing tax liabilities.
Types of Merger and Acquisition
Merger:
- Horizontal Merger: Involving entities dealing with similar products or services.
- Vertical Merger: Combining entities involved in different stages of product or service delivery.
- Conglomerate Merger: Merging unrelated entities without business correlation.
- Co-generic Merger: Uniting entities sharing customer groups, technology, or functions.
- Forward Merger: Directly merging with the buyer to enhance profits.
Acquisition:
- Friendly Acquisition: Mutually agreed acquisition benefiting both entities.
- Hostile Acquisition: Acquisition without the target company's consent, often through a takeover.
Structure of Merger and Acquisition
Three structuring options were available:
- Stock Purchase: Buyer acquired stock from target company stockholders, assuming control under new ownership.
- Asset Acquisition: Buyer obtained target company assets, ideal for cash transactions, with the flexibility to select desired assets.
- Merger: Two companies merged to form a new legal entity, simplifying the process as all liabilities and assets merged into the new entity.
Parties Involved in Merger and Acquisition
Various parties played crucial roles, including lawyers, bankers, investment banks, government, regulatory bodies, external agencies, and international bodies.
Basic Steps for Merger and Acquisition Process
- Plan of Action: Identifying motives, transaction processes, and investment amounts.
- Target Entity Identification: Selecting suitable entities and expressing interest.
- Information Exchange: Sharing financial, management, and historical data.
- Valuation: Evaluating target entity financials to optimize cost and profit.
- Offer and Negotiation: Making an offer followed by detailed negotiations.
- Due Diligence: Thoroughly assessing target entity details for transparency.
- Purchase and Sale Agreement: Reaching a final agreement for asset or share purchase.
- Integration and Closure: Finalizing the deal and integrating entities into a single entity.
Conclusion
While Mergers and Acquisitions offered tax benefits and financial assistance amid intense market competition, they also posed risks such as business conflicts and employee turnover. Entities considering Merger and Acquisition should conduct thorough verification to ensure gains without significant losses.
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