This article has been written by Kanishk Bansal pursuing a Diploma in M&A, Institutional Finance and Investment Laws (PE and VC transactions) course from LawSikho.

This article has been edited and published by Shashwat Kaushik.

Introduction

In recent times/years, corporate restructuring through mergers and acquisitions has become a very common practice in the corporate world. Government agencies in India were the first to propose corporate restructuring through mergers and acquisitions.
Mergers and acquisitions is a common corporate strategy that involves consolidation of two or more companies to form into a single entity. The main goal of this practice is to achieve financial synergies, diversification, increased market share, etc.

Mergers and acquisitions have a great impact on operational efficiencies and shareholders wealth. In this article, we will discuss these impacts through real-life M&A transactions. First, let us discuss the concept of M&A in brief.

Merger

A merger is the consolidation of two or more companies/ business entities to form a single entity. Usually, a merger takes place between two companies of the same size to form one single, strong entity. In mergers. The assets, liabilities, operational units, etc all combine and work in a single unit. This could be understood through an equation:

A (merging entity) +B (merging entity) = AB (merged entity)

Acquisition

Acquisition is a corporate practice where one bigger or stronger entity, acquires or buys a smaller or emerging entity in order to cut or defeat the competition. In acquisition, the target company completely loses all of its existence and gets absorbed into the acquiring company. Unlike merger, acquisition transactions are not that friendly. This could be understood through an equation:

A (Acquiring Company) + B (Target Company) = A (After Acquisition)

Impact of mergers and acquisitions on shareholder wealth and operational efficiency:

A fundamental aspect of this corporate strategy involves attaining financial synergy, which essentially refers to the generation or enhancement of value. This value creation is achieved in the form of increased efficiency in business operations and shareholder wealth.

Ways by which shareholder’s wealth and operational efficiencies are impacted

There are certain ways by which shareholder’s wealth and operational efficiencies are impacted. These are:

Market efficiencies

The market efficiency reflects the stock prices. All the information available in the market that is related to the merger or acquisition of a company affects the stock prices directly. If the market believes that a merger of companies would be good for the company, then the stock prices might go up, but if the market believes that it won’t be a good decision, then the stock prices might go down. Likewise, in an acquisition, if the company is acquired at higher bids, then there are chances that the stock price might go up, whereas if the company is acquired at a lower bid (than the company’s actual value), then the stock price of that acquired company might go down.

High volatility

When companies are merged or acquired, there is high uncertainty in the market related to those companies. This uncertainty is due to less certainty about the functioning, efficiency of the newly merged company, and because of this uncertainty, investors don’t want to invest in the stocks of the newly merged company. This is what is known as high volatility. Due to this, the prices of stocks can fluctuate to a great extent.

Mergers and acquisitions in India and their effect on shareholder wealth and operational efficiencies

Tata Steel’s acquisition of Corus Steel

Tata Steel is one of the most profitable steel producing companies in India. During 2005-2006, Tata Steel had a revenue of 5 billion USD. Being one of the most profitable steel producing businesses in India, Tata Steel was on a mission to expand its business and operations globally.

In 2005, Corus Steel was the second largest producer of steel in Europe and the largest producer of steel in the United Kingdom. In 2005, Corus Steel had a revenue of 9.2 billion pounds.

On September 2, 2006, Tata Steel began the process of acquiring Corus Steel, which ended on July 2, 2007. The whole transaction was valued at 12 billion USD. Though the deal seemed to be very promising in the beginning, there was something due to which the deal proved to be a failure, due to which there was an impact on the wealth of shareholders and the operational efficiencies of the entities.

After the acquisition, the value that was achieved was way less than the value that was expected to be achieved after the acquisition. By the end of two years, there had been a decline in the profitability of Corus steel. The share price was reduced to 20%, which created a sense of fear in shareholders and hence affected shareholder wealth after the acquisition.

Cultural issues were also one of the reasons behind this failed acquisition. Tata Steel and Corus Steel were a cross border acquisition deal where one country was Indian and the other was based in the United Kingdom. The management of the company has seemed complicated due to cultural differences between the two countries, due to which operational efficiency was affected after the acquisition.

Tata Motors acquisition of Jaguar and Land Rover

Tata Motors is one of the largest automobile companies in India. During the year 2008, Tata Motors was the second largest bus producer in the world and had a revenue of USD 8.8 billion.

The launch of Tata Nano and the acquisition of Jaguar Land Rover were significant events that impacted companies’ operations and reputations among people around the world.

In 1989, Ford acquired two British based brands called Jaguar and Land Rover. In 2007, Ford reported the largest annual loss in its history. The company reported a loss of 12.8 billion USD. Due to this reason and the weak economy, Ford announced the launch of the Jaguar Land Rover.

On March 26, 2008, Tata Motors entered into the process of acquiring Jaguar Land Rover for 2.3 billion USD and on June 2, 2008, Tata Motors completed its acquisition of Jaguar Land Rover. Jaguar Land Rover was acquired on a cash free and debt free basis.

After the acquisition, shareholders’ wealth and the operational efficiency of companies were affected to a great extent.

In 2010, Jaguar Land Rover reported profit for the first time after the acquisition by Tata Motors. JLR’s debt to equity ratio went down to 1.6 times from 4.5 in 2009.

In pre- merger years, the sales revenue of Tata Motors was a million USD (during 2005), which increased to 7.468 USD in 2007. Nowadays, Jaguar Land Rover has expanded its manufacturing in various countries like the UK, India, China, and Brazil, which has reduced the risk of supply chain and currency risks, due to which Jaguar Land Rover’s is leading towards very high profits. During the financial year 2008-2009, JLR had a revenue of 4950 million pounds, which increased to 24339 million pounds in the financial year 2016-2017. Due to these reasons and strategies, shareholder’s wealth was impacted to a great extent. Moreover, during the financial year 2008-2009, the total employees in the entity was 17,529, which increased to 43,781 during the financial year 2016-2017.

Flipkart’s acquisition of Myntra

Flipkart is an Indian based e-commerce start-up, founded by Binny Bansal and Sachin Bansal in 2007, with a total investment of Rs 4 lakh. By achieving small-scale strategies, by March 2011, Flipkart had a gross merchandise value of USD 10 million.

Myntra is an Indian based start-up that was founded by Mukesh Bansal, Ashutosh Lawana and Vineet Saxena in 2007. Between 2007 and 2010, Myntra was dealing with personalised products for its consumers, such as t-shirts etc. By 2012, Myntra was dealing with 350 Indian and International brands.

By 2014, Flipkart had acquired Myntra in an all-stock deal valued at USD 250 million. Acquiring entities operating in the same sector can be very risky and challenging. It can be said that it is too much to put all the eggs in the same basket, i.e., investing totally in the same sector, which can be very risky. But this type of acquisition can be strategic if the target company (the company to be acquired) is a market leader for a specific type of product and by acquiring this type of company in the same market, it will substantially increase the market share of the acquiring company. This is the biggest reason behind the Flipkart acquisition of Myntra. Myntra, by getting acquired by Flipkart, was targeting the possible benefits, which could be easily possible through Flipkart’s logistic network. Therefore, it can be said that it was a win-win situation for both entities, as both were getting the benefits in the same way they wanted through the acquisition.

Like all other acquisitions, this one also had an impact on shareholder wealth as well as operational efficiencies.

After the merger, the number of users increased by 30.7%, the total number of sellers increased by 3.2%, the daily visits increased by 32.6% and team strength increased by 16.6%. Because of this increased number of users, revenue increased to 1.5 billion USD.

As both entities were happy with the deal, the operational efficiency of the entities is always affected in a positive manner if the employees of the target company support the acquisition. Though this deal was structured in a different way for the employees of both companies. It was agreed that Myntra’s management would be retained without any changes. Further, both companies agreed that none of the employee’s designations would be affected due to this acquisition. This deal was made with the intention that it does not hamper the functioning of both companies and helps to preserve the unique working culture of both entities.

Impact of M&A activity on the Indian economy

Mergers and acquisitions (M&As) have had a significant impact on the Indian economy, leading to both positive and negative outcomes.

Increased market concentration:

• M&As have resulted in increased market concentration in specific sectors, such as telecommunications, banking, and manufacturing.
• This consolidation has led to concerns about reduced competition, which can potentially result in higher prices for consumers and a decline in innovation.
• Regulatory authorities have taken steps to address these concerns, such as imposing stricter merger control regulations and reviewing proposed deals more closely.

Economic efficiency:

• Well-executed M&As can enhance economic efficiency by optimising resource allocation and reducing duplication.
• For example, mergers between companies in the same industry can eliminate overlapping operations and streamline production processes, leading to cost savings and improved productivity.
• However, the success of M&As in achieving economic efficiency depends on various factors, including proper integration planning and effective management of post-merger challenges.

Job creation and economic growth:

• M&As can lead to job creation and stimulate economic growth by expanding business operations and creating new opportunities.
• When companies merge or acquire others, they often invest in new products, markets, and technologies, which can lead to increased employment and economic activity.
• However, it’s important to note that M&As can also result in job losses, particularly in the short term, as companies restructure their operations to achieve cost savings.

Innovation and technological advancement:

• M&As can foster innovation and technological advancement by combining the resources and expertise of multiple companies.
• When companies with complementary strengths and capabilities merge, they can create new products, services, and technologies that would not have been possible individually.
• For example, mergers between technology companies have led to significant advancements in areas such as artificial intelligence, cloud computing, and e-commerce.

Mergers and acquisitions in India’s various sectors

Mergers and acquisitions (M&A) have emerged as a prominent force shaping the business landscape in India across various sectors. These strategic transactions have significantly contributed to the growth, consolidation, and restructuring of industries, impacting the economy, market dynamics, and competitive ecosystem.

Healthcare sector

The healthcare sector in India has witnessed a notable surge in M&A activity. Major hospital chains and pharmaceutical companies have engaged in mergers and acquisitions to expand their reach, enhance operational efficiency, and gain access to new technologies and markets. This consolidation has led to the creation of larger healthcare entities with improved patient care services and access to quality healthcare infrastructure.

Financial services

In the financial services sector, M&A has been used as a means to consolidate the fragmented market and create larger, more diversified financial institutions. Banks, insurance companies, and asset management firms have undertaken mergers and acquisitions to gain scale, reduce competition, and expand their product offerings. This consolidation has resulted in a more robust and stable financial system in India.

Information Technology (IT)

The IT sector in India has been a hotbed for M&A activity, driven by rapid technological advancements and the need for innovation. Leading IT companies have pursued mergers and acquisitions to strengthen their portfolios, gain access to new markets, and acquire specialised skills. This consolidation has facilitated the emergence of global IT giants with enhanced capabilities and a wider customer base.

Manufacturing industry

In the manufacturing sector, M&A has been utilised to achieve economies of scale, optimise operations, and gain access to new technologies. Large conglomerates have acquired smaller companies to expand their product lines, improve efficiency, and enhance their market position. This consolidation has contributed to the growth and competitiveness of the manufacturing industry in India.

Consumer goods

The consumer goods sector has experienced significant M&A activity, driven by rising disposable incomes and changing consumer preferences. Leading consumer goods companies have engaged in mergers and acquisitions to strengthen their brand portfolios, expand their distribution networks, and cater to the evolving demands of consumers. This consolidation has resulted in the emergence of larger, more diversified consumer goods companies with a wider reach.

Factors contributing to M&A activity in India

1. Economic growth:
   1. India’s robust economic growth has led to a significant increase in the number of mergers and acquisitions (M&A) transactions in recent years.
   2. The country’s GDP has grown at an average rate of 7% in the last decade, creating a favourable environment for companies to invest in M&A activity.
   3. The availability of capital and resources has enabled Indian companies to pursue strategic acquisitions to expand their market share, diversify their portfolios, and gain access to new technologies.
2. Government policies:
   1. The Indian government has played a crucial role in promoting M&A activity through supportive policies and regulations.
   2. The government has implemented measures such as simplified approval processes, tax incentives, and foreign direct investment (FDI) reforms to create a conducive environment for M&A transactions.
   3. These policies have facilitated cross-border M&A activity and encouraged foreign companies to invest in India.
3. Globalisation:
   1. India’s increasing integration with the global economy has led to a rise in cross-border M&A transactions.
   2. Indian companies are looking to expand their international presence by acquiring companies in developed markets.
   3. Cross-border M&A transactions have also facilitated the transfer of technology and knowledge from developed countries to India.
4. Technological advancements:
   1. Rapid technological advancements have necessitated M&A activity as companies seek to acquire new technologies and skills to remain competitive.
   2. The rise of digital technologies, such as artificial intelligence, machine learning, and blockchain, has created a demand for specialised expertise.
   3. M&A transactions have enabled companies to acquire startups and technology companies to gain access to cutting-edge technologies and talent.

Conclusion

Mergers and acquisitions are a strategy in the corporate world to achieve various targets, such as financial synergy and many more. Through the above case studies, it could be understood how this corporate strategy creates a good impact on shareholder wealth and operational efficiencies.

References

• https://blog.ipleaders.in/flipkarts-acquisition-of-myntra-a-win-win-for-both/
• https://blog.ipleaders.in/mergers-and-acquisitions-in-india-and-its-effect-on-the-operating-efficiency-of-an-acquiring-company/#:~:text=Benefits%20of%20Mergers%20and%20Acquisitions,-M%26A%20are%20two&text=While%20purchasing%20the%20company%2C%20shareholders,their%20market%20influence%20and%20control.
• https://www.autocarpro.in/news-international/tata-jlr-journey-billion-pounds-billion-pounds-29749
• https://blog.ipleaders.in/tata-acquired-corus-steel/