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Mergers and acquisitions in India and its effect on the operating efficiency of an acquiring company

September 21, 2021

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This article is written by Pranav Sethi, from SVKM NMIMS School of Law, Navi Mumbai. This article analyses Mergers and Acquisitions in India and its effect on the operating efficiency of acquiring a company.

Introduction

Governmental agencies in India were the first to propose corporate restructuring through mergers and acquisitions. This analysis aims to examine mergers and acquisitions in Indian firms across a variety of industries, including banking, telecommunications, and pharmaceuticals, as well as the concerns and obstacles faced by different firms during the merger and acquisition process. Due to increased competition among domestic manufacturers in both the domestic and international markets, the majority of corporations in India have opted to join through M&A (Mergers and acquisitions) transactions.

The current practice of mergers and acquisitions has grown in importance in the modern corporate world around the country. For the restructuring of multiple trade organizations, merger and acquisition procedures are often considered. In today’s marketplaces, most corporations’ main goal is to produce worldwide consumer interference and benefit from it. Global consumer influence can be achieved by partnering with other existing or establishing enterprises both domestically and abroad. M&As as a foreign growth strategy has risen in popularity as a result of the increased implementation of deregulation, privatization, globalization, and liberalization (LPG) in most countries throughout the world. M&As have shown to be an all-encompassing means for expanding creation portfolios, entering new markets, gaining knowledge, expanding access to research and development, and gaining access to the assets that allow a firm to operate on a worldwide scale.

Merger

Merger refers to the combination of two or more business entities into a single business entity, with one company continuing to operate while the other ceases to do so. The assets, liabilities, and stocks of the defunct company or companies are acquired by the existing corporation. The buyer is usually an existing firm, whereas the seller is usually a startup firm. Mergers are typically done to increase a company’s market share, lower operating costs, expand into new locations, connect commonplace items, increase revenues, and increase benefits—all of which can result in money for the company’s shareholders.

Acquisition

Acquisition usually refers to a larger commercial entity acquiring a smaller company. The acquisition of all or a portion of a company’s assets for the desired business is known as acquisition. The development of an acquired firm to assemble the power or weaknesses of the acquiring firm is known as company acquisition. A merger is similar to an acquisition, but it refers to the merging of the interests of two companies into one stronger entity. As a result, the industry will grow at a faster and more profitable rate than typical organic expansion would allow. An acquisition means the acquiring of one firm by another without the creation of a new company.

The idea behind companies scaling up

The general idea underlying M&A is that when two distinct organizations work together, they create greater value than if they worked alone. Companies continue to evaluate different options through mergers and acquisitions with the primary goal of maximizing wealth. The combining or merging of two companies always creates synergy benefits in this case.

Revenues (greater revenues), Expenses (lower expenses), or the cost of capital can all be used to determine the synergy value (lowering of the overall cost of capital).

Both sides of an M&A negotiation will have varying viewpoints about the valuation of an acquiring company: the seller wants to value the company as high as possible, while the buyer wants to secure the best deal possible. There are, however, a plethora of valid methods for determining a company’s worth.

The most frequent way for valuing a company is to compare it to similar companies in the same industry, but dealmakers use a range of other approaches and tools when evaluating a target company.

The following are a few of them:

Comparative Ratios

Comparative Ratios are a type of ratio that is used to compare two things. Two examples of the numerous comparable indicators on which purchasing corporations may base their offers are as follows:

Price-Earnings ratio (P/E ratio)

An acquiring business offers to pay a multiple of the target business’s earnings using this ratio. The acquirer can obtain a decent idea of what the target’s P/E multiplier should be by examining the P/E for all the companies in the same industry group.

Replacement cost

Acquisitions are rarely made based on the cost of replacing the company’s management. Assume that a company’s value is equal to the sum of all of its equipment and personnel costs just for simplicity. The acquiring corporation has the power to order the target to sell at that price, or it can build a competitor at the same price. Naturally, assembling strong management, acquiring property, and obtaining the necessary equipment takes time.

Enterprise-Value-to-Sales ratio (EV/sales)

With this ratio, the purchasing business wants a deal based on multiple revenues, while also keeping in mind the industry’s price-to-sales ratio.

Discounted Cash Flow (DCF)

This is a crucial valuation technique in mergers and acquisitions. A discounted cash flow analysis calculates a company’s current value based on projected future cash flows.

Forecasted free cash flows (net income + depreciation/amortization capital expenditures change in working capital) are discounted to present value using the company’s weighted average capital costs (WACC).

The premium for potential success

Almost often, acquiring businesses pays a significant premium above the stock market value of the business they buy. The argument for doing so almost usually boils down to the concept of combination: a merger rewards shareholders when the value of prospective synergy enhances a company’s post-merger stock price. If rational owners would profit more from not purchasing, they would be exceedingly unlikely to sell. It means that, irrespective of what the pre-merger valuation says, bidders will have to pay extra if they want to buy the company.

Companies engage in mergers and acquisitions for a variety of strategic business reasons, the majority of which are economic in origin.

These include leveraging economy of scale in any, some, or all areas of research and innovation, production, and marketing (horizontal mergers); expanding distribution network or entering new markets to increase market share; diversifying the variety of products and services (diversification of business); gaining professional leadership by being purchased (by a smaller company); and diversifying the array of goods and services (diversification of business).

Other incentives can be considered, such as gaining distribution network pricing efficiency through the acquisition of a distribution channel (vertical merger) or even eliminating future competition. The activity of mergers and acquisitions has resulted in the internationalization of company activities. Mergers and acquisitions have become more popular as a quick and successful convergence technique, particularly in the cross-border scene. These are mostly driven by the volatile global economic environment, with emerging-market corporations scrambling to acquire cross-border assets at attractive rates, particularly following the 2008 Global Financial Crisis.

Many Indian businesses are exploring international partners, particularly in the West, to expand their market share and improve efficiencies. This transition is most noticeable in information technology, metals, pharmaceuticals, and life sciences, as well as the automobile and ancillary industries.

The primary reason for mergers and acquisitions is to maximize shareholder value, which is achieved by increasing the firm’s market value as a result of the merger. This can be accomplished through boosting profits, which can be accomplished through cost efficiency of scale, economies of scope, and economies of vertical integration, as well as synergies through cost savings—research and development, rationalization, purchasing power, the creation of internal capital markets, and financial savings-tax and interest rates.

Mergers and acquisitions have recently proven to be a panacea for highly leveraged corporations. This phenomenon became more apparent after 2015 when the banking sector tightened its lending standards. Unlike in the past, when most M&A agreements were driven by growth, overleveraged corporations tried to decrease debt by selling assets.

Mergers and Acquisitions in India’s various sectors

In the case of mergers & acquisitions, India has recently demonstrated the biggest potential. In the Indian market, it is effectively cooperating in a variety of areas. Many Indian corporations have grown organically to gain entrance to new business firms, while many foreign corporations are targeting Indian firms for advancement and growth. It has spread far and wide across all commercial platforms.

Pharmaceutical sector

Multiple mergers and acquisitions are taking place in the pharmaceutical industry around the world. Within a specific pharmaceutical genus, there is a dearth of competent research and development centers.

The enhanced shape items also have a significant role to play in the evolving M&A in the industry. In the Indian pharmaceutical sector, several companies have participated in mergers and acquisitions for example, merger of Ranbaxy and SunPharma, acquisition of Primal Healthcare by Abbott. Restructuring of the Indian Pharmaceutical Sector during M&A based on business-related deliberations and business goals is a must. It is also acknowledged on a global scale. M&A is the only way to get a competitive advantage both nationally and internationally, and as a result, a wide range of businesses are looking for planned acquisitions both domestically and internationally. The total number of companies acquiring numerous branches of other businesses has demonstrated that Indian pharmaceutical diligence is positioned to be a major player in this scenario.

Banking sector

In all parts of the globe, a large number of international and domestic banks are engaged in merger and acquisition activity. As a result, mergers and acquisitions have become commonplace in the majority of countries around the world. After M&A, the primary goal of the banking division is to receive recompense in economies of scale. M&A in the Indian banking sector has become a popular trend across the country. The primary motivation for M&A in the banking sector is to obtain repayment of financial scales. M&A is seen to be a relatively quick and efficient way to enter new markets and incorporate technological advances.

The goal of a company’s policy is to improve and maintain its competitive advantage. With the help of M&A in the banking sector, banks can achieve significant growth in their businesses while also reducing their charge to a manageable level. Another key benefit of such M&A is that it reduces competitiveness by eliminating competitors from the banking industry.

Sector of Telecommunications

The telecommunications industry is one of the most profitable and rapidly growing businesses in the world, and the number of mergers and acquisitions in this area has been steadily increasing. It is recognized as an essential part of the global utility and services sector. The telecommunications industry works with a variety of communication media, including mobile phones, landlines, and internet and broadband connections.

With more than 1.20 billion subscribers, India is the world’s second-largest telecommunications market, and it has experienced rapid expansion in the last 15 years. The Indian mobile business is booming and will contribute significantly to the country’s GDP. Telecom mergers and acquisitions are classified as horizontal mergers because the parties involved are in the same industry, namely the telecommunications business. The primary motivation for such mergers is to gain competitive advantages in the telecommunications industry. M&A activity in the telecommunications sector has been on the rise in recent years, and economists predict that this trend will continue.

Mergers come in a variety of forms

There seem to be a plethora of various mergers, from the perspective of commercial companies. Mergers are categorized into the following categories from an economist’s perspective, based on the relationship of the two business units:

Conglomerate merger

Typically, a merger of companies that have no shared business sectors or relationships of any kind. Combined firms may sell similar commodities or share distribution and marketing networks, as well as manufacturing methods. The following types of mergers can be generally defined:

Product-extension merger

Companies offering separate but related items in the same marketplace or selling non-competing items and using the same marketing strategies of the manufacturing process are merged into conglomerates. Phillip Morris-Kraft, Pepsico-Pizza Hut, Proctor and Gamble, and Clorox are just a few examples.

Pure conglomerate merger

When two companies merge, there is no visible tie between them. Hughes Electronics, for example, is a part of BankCorp of America.

Market-extension merger

Businesses that offer the same items in multiple regions/geographic areas join to form conglomerates. Morrison stores and Safeway, for example, as well as Time Warner-TCI.

Horizontal merger

It occurs when two enterprises in direct competition maintain the same product categories and markets, resulting in the merger of direct competitors. Exxon and Mobil, Ford and Volvo, Volkswagen and Rolls-Royce, and Lamborghini are just a few examples.

Vertical merger

A client and company or a supplier and business, i.e. a merging of companies with an existing or perceived buyer-seller connection, such as Ford and Bendix or Time Warner and TBS.

Analysis & key points

According to a basic study, horizontal mergers remove sellers and hence modify the marketing strategy, i.e. they have a direct impact on seller concentration, whereas vertical and conglomerate mergers have no direct impact on market structures, such as seller concentration. They don’t have any anticompetitive effects.

Every merger has its own set of conditions and reasoning, and these factors influence how the deal is handled, addressed, managed, and implemented. The success of a merger, on the other hand, is determined by how well the dealmakers can combine two organizations while keeping day-to-day operations running. Each transaction has its own set of flips, which are shaped by several external factors like the human capital element and command structure. Much relies on the company’s management and capacity to retain important employees who are critical to the company’s long-term success.

All parties must have a clear understanding of the motivation for such a purchase, i.e. there must be a consensus- ad- idiom. Earnings, proprietary information, and customer base are either marginal or fundamental to the acquiring firm, and the purpose will influence the overall risk of such a merger and acquisition. Before the start of any transaction, due diligence is usually performed to assess the risks involved, the number of assets and liabilities to be purchased, and so on.

Merger, amalgamation, and takeover – legal procedures

The Indian Companies Act, 1956, is the foundation law for mergers, and it operates in collaboration with various statutory regulations.

Sections 391 to 396 of the Companies Act, 1956, which relate to the settlement and arrangement with creditors and shareholders of a company required for a merger, contain the fundamental rules on mergers, amalgamations, and reconstructions.

Section 391 grants the Tribunal the authority to sanction, subject to specific criteria, a compromise or arrangement between a firm and its creditors/members. The Tribunal has the authority under Section 392 to compel and/or monitor such adjustments or settlements with creditors and members.

When creditors and members of the affected company agree to such an agreement, Section 393 ensures that the information requested by them is available.

By making an adequate application to the Tribunal, Section 394 offers measures for aiding company reconstruction and amalgamation.

Section 395 gives the power and responsibility to acquire the shares of shareholders who disagree with the majority’s scheme or contract.

Section 396 relates to the central government’s ability to facilitate the merger of corporations in the national service.

Both the amalgamating company or firms and the merged firm should conform with the procedures outlined in Sections 391 to 394 and provide information of all procedures for the Tribunal’s consideration. It is insufficient if one of the companies completes all of the essential requirements on its own.

Sections 394 and 394A of the Companies Act relating to the processes and practices to be undertaken to accomplish company amalgamations, as well as regulations related to the Tribunal’s and the central government’s authorities in this regard.

Following the filing of the application, the Tribunal will issue instructions setting the hearings dates and providing a copy of the application to the Registrar of Companies and the Regional Director of the Company Law Board following Section 394A, as well as the Official Liquidator for the report verifying that the corporation’s activities have not been administered in a prejudicial-like manner that might affect the interest of the shareholders or the public. Before authorizing the plan of merger, the Tribunal must notify the national government of any request brought to it under Sections 391 to 394, and the Tribunal must consider the government’s submissions, if any, before delivering any order granting or denying the scheme of merger. As a result, the central government is given a role in the topic of company mergers before the Tribunal approves or rejects the proposal.

The Company Law Board, through its Regional Directors, exercises the central government’s duties and responsibilities in this area. The Tribunal would allow the petitioner firm an opportunity to respond to all concerns presented by shareholders, creditors, the government, and others when considering the petitions of the firms following the plan of amalgamation. As a result, the organization must remain prepared to deal with a variety of arguments and difficulties.

As a result of the Tribunal’s order, the amalgamating firm’s assets and liabilities are passed to the merged firm. The Tribunal is particularly entitled under Section 394 to make particular provisions in its decision certifying an amalgamation for the transfer to the merged company of the whole or any portion of the merged company’s properties, liabilities, and so on. Only in those situations where the Tribunal specifically instructs so in its order would the workers of the amalgamating firm’s rights and responsibilities be moved to the merged firm.

By the Tribunal’s order authorizing a plan of amalgamation, the assets and liabilities of the transferor company are directly routed to the merged company. The Tribunal also sets guidelines for payments to the covered entity companies’ shareholders, the continuance by or against the issuing corporation of any court proceedings ongoing by or against any share capital, the dissolution (without winding up) of any transferor company, and any other incidents. The corporation to which the decision relates must produce the decision of the Tribunal providing sanction to the scheme of amalgamation (i.e., the merging and amalgamated companies) to the Registrar of Companies within 30 days for certification.

Benefits of Mergers and Acquisitions

M&A are two permanent forms of corporate combinations used to manage, control, or administrate a company’s operations. While purchasing the company, shareholders benefit from the M&A since the premiums offered to promote approval of the M&A because it provides a much higher fee than the rate of shares. Typically, companies engage in M&A to combine their market influence and control.

Synergy is created by combining two businesses that are sufficiently influential to boost trade recital, financial growth, and overall shareholder value over time.
Competitive Advantage- The new company’s merged assets aid in obtaining and sustaining a competitive advantage in the market.
“Cost Efficiency- The merger increases the company’s spending power, which aids in bulk order negotiations, resulting in cost efficiency.”
Improved product range and industrial exposure – Businesses acquire other businesses to expand their market reach and profit.
A merger may increase the marketing and distribution capabilities of two organizations, opening up new sales prospects.
A merger can also help a company’s reputation with investors: larger companies frequently have a better time obtaining funding than smaller companies.
Economic remuneration may encourage mergers and companies to fully utilize tax shields, improve financial control, and take advantage of alternative tax benefits.
Geographical or other capital investment: this is aimed to smooth a firm’s earnings outcomes, which in turn smooths the stock price over time, providing conservative investors more confidence in the company. However, this does not necessarily result in shareholder value.
Resource transfer: Because resources are allocated differently across organizations, the interplay of target and purchasing company resources can generate value by resolving knowledge asymmetry or merging limited resources. For example, layoffs, tax cuts, and so on.

India’s top five Mergers and Acquisitions

Tata and Corus Steel

The acquisition of Corus Steel by Tata in 2006 was estimated at more than $10 billion. Tata’s opening offer was £4.55 per share, but after a bidding battle with CSN, Tata increased its offer to £6.08 per share. Following the merger, Corus Steel was renamed Corus Steel, and the corporation became the fifth-largest steel producer in the world.

Vodafone Hutch-Essar

Vodafone, the world’s largest mobile provider by revenues, paid $11.1 billion for a 67 percent interest in Hutch Essar. Vodafone later spent $5.46 billion to purchase out Essar’s balance interest in the company in 2011. The purchase of Essar by Vodafone signalled the company’s foray into India and, ultimately, the formation of Vi. Unfortunately, the Vodafone group was soon entangled in a tax dispute with the Indian Income Tax Department over the purchase.

Arcelor Mittal

The largest merger, worth $38.3 billion, was also the most turbulent. Mittal Steel made an initial bid for Arcelor of $23 billion in 2006, which was eventually boosted to $38.3 billion. The executives disapproved of the arrangement since it was affected by the nationalistic economics of numerous nations. The French, Spanish, and Luxembourg governments were among them. The French, American, and British media all slammed the ferocious French opposition. After which, Commerce Minister Kamal Nath even claimed that any effort by France to scuttle the agreement will result in a trade war between the two countries.

Walmart Acquisition of Flipkart

Walmart’s purchase of Flipkart signified the company’s entrance into the Indian market. Walmart defeated Amazon in a bidding war and paid $16 billion for a 77 percent interest in Flipkart. Following the agreement, eBay and Softbank divested their Flipkart stakes. Flipkart’s logistics and supply chain network was expanded as a consequence of the transaction. Flipkart had already bought other eCommerce startups, including Myntra, Jabong, PhonePe, and eBay.

Vodafone Idea merger

According to Reuters, the Vodafone Idea merger is worth $23 billion. Even though the acquisition created a telecom conglomerate, it is safe to claim that the two businesses were driven to do so by Reliance Jio’s arrival and the ensuing price war. In the face of increasing competition in the telecom business, both companies struggled. The deal benefited both Idea and Vodafone, since Vodafone now owns 45.1 percent of the combined firm, with the Aditya Birla group owning 26 percent and Idea owning the rest. On September 7th, Vodafone Idea launched its new corporate identity, ‘Vi,’ marking the conclusion of the two businesses’ unification.

Conclusion

This article demonstrates why organizations choose mergers and acquisitions and what incentives they receive as a result of the process. This can also be turned into a stock and flow model that can be simulated with the right inputs. The purpose of the study was to see if the type of purchase, i.e. domestic or cross-border, had a different impact on the acquiring firms ’ performance. The results and analysis of the acquiring business’ main financial indicators reveal that the impact of mergers differed for domestic and cross-border acquisitions. The sort of purchase appears to have a significant impact on the business’ performance, and it does make a difference. The financial accounts, such as the company’s profit and loss analyses, are deemed to be the most important factors in determining the benefits of mergers and acquisitions. The success of M&A is determined by elements like the company’s profit and loss, market share, shareholder interest, and corporate growth. The success rate can be easily determined by looking at the company’s market worth.

References

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Mergers and acquisitions in India and its effect on the operating efficiency of an acquiring company

Introduction

Merger

Acquisition

The idea behind companies scaling up