The Article is written by Abhishek Dubey student of BBA LL.B second year. This article deals with the details about the essential stages of merger and acquisition transactions and the role of a different person, the reason for merger and acquisition, etc.
Merger and Acquisition refers to combining the assets of two companies with a motive to increase the profits, to increase the competitive advantage and increase market share. A merger is an act in which one company absorbs the other company. An acquisition refers to the process when one company obtains the major stake in the target company but the name and legal structure of the company remains permanent.
Reasons for Merger and Acquisition
- Synergies: When the merger between two or more companies happens, the efficiency of companies increase and at the same time there is a reduction in cost because each company has rights and obligations towards the new company in terms of managing the company and contribution of capital.
- Growth: Merger can lead to the growth of the company. This gives an opportunity to the acquirer company to grow its share. For example, a beer company may choose to buy out a smaller competing brewery to sell it to a loyal customer base and produce more beer.
- Increases supply chain power: Buying out a supplier and distributor is known as a vertical merger. Buying a supplier and distributor reduces the cost compared to before and it also helps in the easy distribution of products.
- Eliminate competition: Many mergers and acquisitions deal with eliminating future competition and acquire a large market share. A lot of cost is required to convince the shareholders to accept the offer.
- Surviving: It is difficult for companies to survive in the long run. So, during the financial crisis from 2008 to 2012, the only option left with the companies was to either merge or acquire in order to survive in the long run.
Essential Stages in Merger and Acquisition
Merger and Acquisition are the corporate strategies that deal with buying, selling and combining different companies. But the decision of merger and acquisition is taken after analysis of various factors such as the current status of companies, the present market scenario and threats and opportunities.
The success of the merger and acquisition depends on strategies followed by the company. Many big companies look for smaller companies to diversify or expand the business or for strengthening the research work.
1. Merger and Acquisition Strategy Process
The merger and acquisition strategy process differs from company to company Following is the strategy process which the company has to deal with:
- Determination of business plans: The first step in finding out the strategy process is to find out the way to accelerate growth plans of the business through mergers and acquisitions. The factors considered for determining business plan is the geographical location of the business, the technology required to carry out the task, the risk factor, and other skills etc.
- Finding out financial constraints: Another step required is to find out Financial constraints. The funds can be arranged through loans, cash, public, and private equities but the factor to be considered while meeting out financial need is risk associated with credit or cash or equity and also the easy availability of risk, returns to the amount.
- Developing a summary profile of the acquiring company: The Next step is to make a profile of the acquiring company. Profile includes whether the company is private or public, investment bankers and investor and attorney, the recommendation of employees.
- Preliminary valuation: This stage deals with the cost and estimated returns through acquisition.
- Rating of acquisition candidates on the basis of their impact on business and ranking them accordingly: This process will help in ranking the relative impact of the acquisition.
- Review and approve the strategy: Now the process involves reviewing the merger and acquisition strategy and ensure that all the stakeholders of a company like the board of directors, members and investors are satisfied or not. If they are satisfied then the person can go-ahead with the merger and acquisition process.
2. Target identification strategies
Effective target identification is built on sound portfolio strategy. Companies need to ensure that target identification is based on solid research work. Companies that have done well research work have the opportunity to win and rise from the competitors.
The steps in target identification strategies are:
- Identify potential segments: By conducting a comprehensive evaluation of the industry future sources of profit can be identified such as customer choices, dispersive technologies etc.
- Developing a list of targets: Based on an interview with the company and market experts, the market segment in which the acquisition has the ability to create value can be recognized.
- Growing a Business by merger or acquisition: The business grows through the merger and acquisition, if the existing business has these problem assets of the business are not properly utilized, poor management, the manager is willing to leave or retire, etc.
- Prioritize targets: These steps include the owner identifying the target business. When planning for a merger, finding out whether a person or company being merged will be able to to work with the target company or not and if there is acquisition, finding out the motive of the owner acquiring the target company.
3. Information Exchange
After initial stages go well, and both parties have agreed to go ahead for the transaction, the documentation process starts which includes submission of a letter of intent to officially express interest in the transaction and signing confidentiality of information to ensure that the proceedings of deal and discussion will not go out. After that, the entities share their information with each other like financial statements, history of the company etc. so that they can inform the shareholders about the position of the company.
4. Valuation and Synergies
After sharing information with each other, assessment of target and of the deal as a whole is done. The seller tries to find out what would be the good price that would result in shareholders gaining from the deal. It also tries to know what would be a reasonable offer for the target or purchaser of business. The buyer tries to assess the amount of benefit that they can derive in terms of reduction in cost, Increase in market power.
5. Offer and Negotiation
After valuation and assessment the offer is given to the shareholders of the target. The offer can be in cash or stock. The seller analyzes whether the offer is reasonable or not and tries to negotiate for a better price. This step requires a lot of time and at the same time it is very complex. There is a competition among the buyer to offer better prices when the business or entity which is being targeted is attractive there is a competition among buyer ,buyers offer different price.
6. Due Diligence
After the acceptance of an offer the due diligence process by the buyer begins. Due diligence includes a review of target entity including products, customer base, financial books, human resource etc. The objective is to ensure that information is correct based on which the offer was made. If the wrong information is provided then revision is done to justify the actual information.
7. Purchase Agreement
After everything goes well, now the next step is to draft the agreements which outline the cash or stock to be given to target shareholders. It would also include the time when the payment would be made to shareholders.
8. Deal closure and integration
After the purchase agreement, both parties close the deal by signing the document and the buyer acquires the target company. The management, teams, of both the entity works together for merging the entity.
Regulation of Merger and Acquisition process
- The Companies Act 2013: Section 230 to 240 of the company act deals with mergers and acquisitions. Although a merger and acquisition is an agreement between two parties, the approval of the High Court is necessary for the transaction. Also, for the process of merger and acquisition, 3/4th of members and creditors should agree in the general board meeting. The law permits 210 days of going ahead for merger and acquisition and obligatory time for the claimant is 210 days before commencing of merger and acquisition transaction.
- Income Tax Act 1961: In case of slump sale and share sale and if the company is unlisted then tax deductible is 20 or 30 percent. In case of the share sale of the listed company, the company has to pay a rate of interest for 15 per cent depending upon the period of share held. And in amalgamation and demerger process where it involves the issuance of 3/4th of share then it is considered as tax-neutral no tax is deducted.
- Securities law: Any acquisition of share more than 25 per cent is considered as an open offer to public shareholders. And any merger and acquisition where the stock exchange is involved permission from NCLT and SEBI is required.
- Foreign Exchange Regulations: Sale of equity share involving resident or non-resident is allowed, subject to the permission from R.B.I and sectoral caps in FDI policy. Any transaction involving the issuance of shares to non-resident shareholders doesn’t require permission from R.B.I.
- Competition Regulation: If acquisition exceeds certain limits as specified by the Competition Commission Of India, it would require permission from CCI.
- Indian Stamp Act 1899: The stamp duty is charged at the rate of 0.25 percent on the value of the share. And if the shares are in the dematerialized form then there is no stamp duty charge. In case of asset sale at the conveyance of assets and in case of demerger and amalgamation at a conventional rate.
Roles of different persons in the merger and acquisition process
- Investment Committee: It includes the CEO and senior-level executive and the failure and success of any transaction depend upon them.
The role of the investment committee are:
- Ensure that the right person is in the right place and right team.
- To maintain teamwork and discipline.
- Maintaining long term goals of the organization.
- Bringing objectivity and also that deal is done for good reason.
- This group should involve the strategic process itself.
- Business Unit Leadership: Its role is critical but it is important to bring them. The role of this group includes:
- Tracking competitors’ actions.
- Effective leadership to ensure that due diligence process and integration process.
- In smaller companies having an effective business, the unit can play an important role and this is because fewer employees having more workloads and different roles.
3.Corporate Development: The role of corporate development is very crucial in whole transaction. The role of this group includes:
- Maintaining the pipeline of merger and acquisition transactions.
- Monitoring of targets
- Preparing for negotiating and bidding.
- Ensure that right capital available at the right time.
4.Transaction Lead:The role of this group will be at stage of integration and execution and at documentation stage. The Role of This group include:
- Finding out risk and challenges in transaction.and in transaction lead risk and challenges as well as opportunities can be better understood.
- External Advisor: Advisor role includes:
- Augmentation of company’s current capabilities.
- Providing needs as needed throughout the Merger and acquisition process.
- Providing assistance .during targets.
- Supporting negotiation, execution and due diligence.
- Some companies prefer to have an external advisor on a case to case basis and some may prefer advisor from the start of the transaction.
- Role of Investment Banker: With increasing competition and expanding of merger and acquisition due to globalization, the role of an investment bank has become important. The company will need this because of advice on potential targets.
The main role of investment banker includes:
- Establishing fair value of companies involved in the transaction.
- Analyzing potential future of the company.
- Determining the value of the share of the company with reference to the market.
- They also represent potential acquirer.
- Writing of selling memorandum.
- The role of the investment bank ends as soon as the buyer purchases.
- Provision of financing to purchase the business it will require money whether the money has to be financed through debt or offering a share to the shareholder.
In an era of increasing competition due to globalization, merger and acquisition activity has increased. The form of new business includes joint ventures and investments through foreign direct investment and there are various reasons for companies being merged such as to avoid competition, growth and non-availability of capital. But sometimes the transaction of merger and acquisition become very critical.
- Nishith Desai and associates
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