The term “mergers and acquisitions” refers to a broad range of financial and business operations, such as tenders, the purchase of assets, and the management of acquisitions, that combine organisations or capital assets. Sometimes, the phrase “mergers and acquisitions” refers to the department within a business that handles these operations.
In corporate transactions called mergers and acquisitions, a company’s ownership rights are transferred to another company. Transferring business units, operating units, and companies are all included in this transaction. As a management tactic, mergers and acquisitions enable businesses to grow or contract as well as alter their competitiveness.
Mergers & Acquisitions: What Are They?
Acquisitions and mergers are frequently used interchangeably. But there are slight variations between the two. An acquisition is when one organisation successfully takes control of another and becomes the new owner. From a legal standpoint, the target firm will cease to exist and the acquirer will continue to absorb the entity; nonetheless, the shares of the absorber will continue to trade and the shares of the ceasing company will cease to exist.
Acquisitions are those bitter contracts in which the target companies do not want to be purchased but are nonetheless purchased. Therefore, depending on whether the transactions were forced or deliberate, purchase deals are classified as mergers or acquisitions.
However, the following parties are involved in an acquisition scenario:
The Buyer -is also referred to as the acquiring business or the purchaser.
The Seller – The seller is also referred to as the acquired company or, if the seller has a subsidiary, the subsidiary that the buyer is acquiring from the seller.
Target – The Target firm is the one that the Buyer is purchasing. The target is frequently one of the seller’s subsidiaries or perhaps the seller itself.
In India, mergers have been defined under the Companies Act 2013, which involves combining two or more companies to enjoy synergies and economies of scale and benefit. The previous Companies Act of 1956 did not define mergers and acquisitions.
Types of Mergers
There are five basic categories or types of mergers:
- Horizontal merger: A merger between businesses that compete directly with one another in their markets and product lines is known as a horizontal merger.
- Vertical merger: A union of businesses that are connected by the same supply chain (e.g., a retail company in the auto parts industry merges with a company that supplies raw materials for auto parts.)
- Market-extension merger: A merger between businesses selling comparable goods or services in separate markets is known as a market-extension merger.
- Product-extension mergers -Mergers of businesses selling various but related products or services in the same markets are known as “product-extension mergers.”
- Conglomerate merger: Combination of businesses engaged in unrelated industries (e.g., a clothing company buys a software company)
Forms of Integration: Mergers and Acquisitions
- Statutory- Statutory mergers typically take place when the acquirer, who is significantly larger than the target, buys the assets and liabilities of the target. The target company no longer exists as a separate entity following the purchase.
- Affiliate-In a subsidiary merger, the target keeps running its business while becoming a subsidiary of the acquirer.
- Consolidation -When two businesses merge, they stop existing following the merger, and a brand-new company is created.
Different types Acquisitions
- Stock Purchase: In a stock purchase, the acquirer exchanges shares of the target company for cash and/or stock from the target firm’s stockholders. In this case, the shareholders of the target, not the target, receive compensation. When buying stocks, there are a few things to keep in mind:
- All of the target’s assets and obligations, even those that are not shown on the balance sheet, are taken on by the acquirer.
- The shareholders of the target must unanimously accept the transaction for the acquirer to be paid, which can be a drawn-out procedure.
- As they receive their reward directly, shareholders are responsible for paying the taxes.
- Asset purchase: In an asset buy, the acquirer pays the target directly after purchasing the target’s assets. When purchasing an asset, a number of factors should be taken into account, including:
The acquirer won’t take on any of the target’s liabilities because it only buys the assets.
- Unless the assets are substantial (i.e., more over 50% of the company), shareholder approval is typically not needed because the payment is delivered straight to the target.
- The compensation is taxed as capital gains by the target at the corporate level.
- An acquirer merely exchanges cash for the target’s shares in a cash offer.
- Method of payment: Stock and cash are the two acceptable forms of payment. However, a mixed offering—a combination of the two—is frequently used in M&A deals.
- Stock: In a stock offering, the buyer issues fresh shares and pays the target’s shareholders with them. Based on an exchange ratio that is decided in advance owing to stock price variations, the number of shares received is determined.
- Share Sale – A share sale is an exchange in which the buyer trades shares of the target firm with the seller. In a normal share sale deal, the target company’s whole share base is bought. All of the company’s resources, personnel, intellectual property rights, and other assets are given to the buyer.
- Asset Sale – In an asset sale, just a specific asset of the seller or the target company would be acquired by the buyer. Due of the buying company’s cherry-picking advantage, this benefits the buyer. Any asset in the target that the buyer does not want may be left just as it is.
Reasons for Mergers and Acquisitions (M&A) Activity
Mergers and acquisitions (M&A) can take place for various reasons, such as:
- Creating synergy: The primary goal of mergers and acquisitions (M&A) is to maximise synergies so that the merged business is more valuable than the two separate businesses. Synergies may result from lower costs or higher sales.
While revenue synergies are frequently produced through cross-selling, gaining market share, or raising prices, cost synergies are produced as a result of economies of scale. Cost synergies are the easier of the two to quantify and calculate.
- Faster expansion: When opposed to organic growth, inorganic growth through mergers and acquisitions (M&A) is typically a speedier manner for a firm to increase revenues. Without having to assume the risk of developing the same internally, a corporation can win by acquiring or merging with a company that has the most advanced skills.
- Greater market influence: A horizontal merger will give the new organisation a larger market share and the ability to control prices. Vertical mergers also increase a company’s market power because they provide it more control over its supply chain and help it avoid supply shocks from outside sources.
- The use of variety: Businesses in cyclical industries feel compelled to diversify their cash flows in order to minimise losses when their sector experiences a downturn. A business can diversify and lower its market risk by acquiring a target in a non-cyclical industry.
- Tax advantages: When one business generates a sizable amount of taxable income and another experience tax loss carry forwards, tax benefits are examined. The acquirer can use the tax losses to reduce its tax obligation by purchasing the business with the tax losses. Mergers, however, are not typically carried out only for tax purposes.
Valuation for mergers and acquisitions (M&A)
In a merger and acquisition, both the acquirer and the target participate in the appraisal process. The target will demand the greatest price, whilst the acquirer will prefer to pay the least for it.
Because it helps the buyer and seller determines the final transaction price, valuation is a crucial component of mergers and acquisitions (M&A). The target is valued using the three main approaches listed below:
- Discounted cash flow: The target’s value is determined using the discounted cash flow (DCF) method using its projected future cash flows.
- Comparable company analysis: The worth of the target is estimated using comparative valuation indicators for publicly traded companies.
- Comparable transaction analysis: The value of the target is estimated using valuation parameters for prior comparable deals in the sector.
Mergers and acquisitions process
The following is a typical merger and acquisition process: The first step in a conventional merger and acquisition procedure is to draught the term sheet. The letter of intent is another name for the term sheet. This term sheet, also known as a letter of intent, only states the parties’ intention to proceed with the merger and acquisition transaction. It is comparable to the rules and regulations of a specific procedure. Term papers must be exchanged between the buyer and seller of the merger transaction. The parties would talk about their intentions and main goals.
Choosing Third-Party Consultants – The parties must work with professionals that specia0lise in mergers and acquisitions.
Purchase Price of the Transaction – Here, the buyer and seller of a private acquisition transaction would bargain over the purchase price. The parties would also consider the payment method (cash or shares). The price method would also be discussed by the parties. For a merger and acquisition deal, the parties may choose to utilise either of the following price structures:
1) Lock Box Technique
2) Methods for Completion Accounts
Employee Contract Negotiation – Depending on the kind of transaction, employees of the combined firm or the target company have contracts in mergers and acquisitions services. Directors’ service contracts would also be present. Employee contracts and non-compete terms should be updated and altered, according to the consultant providing mergers and acquisitions services.
Guarantees and Warranties – The buyer in a complicated merger and acquisition deal should make sure that the Target Company or seller has provided guarantees and warranties. The parties must agree during the initial consultation session that all warranties are truthful and accurate to the seller’s knowledge. The buyer may bring a breach of contract claim against the seller if there is any misrepresentation or breach.
Exclusivity clauses – The exclusivity clause in the merger agreement forbids the seller from soliciting additional acquisition or merger bids. It is a remedy that the buyer may utilise if the seller continues to seek out higher offers.
Terms of Confidentiality – Information is shared between parties throughout a complicated merger deal. The seller must provide the buyer with all pertinent information in the Initial Information Questionnaire. In addition, confidentiality agreements between the buyer and seller must be signed to prevent the disclosure of client and personnel information.
Due Diligence – Due Diligence is an investigation of the target or merging companies by a third-party consultant. The third party consultant must give the buyer a detailed due diligence report on the merger or acquisition transaction.
Post Completion Work – The third-party consultant should ensure that the parties take post-completion steps.
Documents Needed for Services Related to Mergers and Acquisitions
Buyer and Seller’s Memorandum and Articles of Association are the incorporation documents.
- Term Paper.
- Formal Letter.
- Questionnaire for due diligence.
- Employment Agreements.
- Nondisclosure pacts.
- any further pertinent records.