This article is written by Amarnath Simha who is pursuing a Diploma in M&A, Institutional Finance and Investment Laws (PE and VC transactions) from LawSikho.
Mergers and Acquisitions is a general term used to describe the consolidation of companies or assets through various types of financial transactions, including mergers, acquisitions, purchase of assets, business transfer, acquire, etc. Mergers and acquisitions are always done on the economic rationale of the involved companies in the existing business scenarios and outlooks. The economic rationale may take various hues like the product of the acquired entity, market penetration of the acquired company or the discounted cash flow of the acquired entity.
It may even be done for tax purposes if the acquired company is having losses on its balance sheet and the acquiring company can get a set off against those losses and pay less tax and in the process can increase its assets and business capacity. Even then the rationale is economic considerations. But many a times, the process has effect on other persons who are not directly involved in the decision making, except for shareholders, and which has the effect of affecting the performance of the entity after such mergers and acquisitions. The effect of different stakeholders are sought to be considered hereunder.
The employees are the most impacted psychologically and they are the most critical group for the proper functioning of the new entity. Since they are ultimately the persons who are going to execute the work in the new entity, any failure to address their concerns will have a lasting effect on the outcome of the merger and acquisition. When employees come to know of a merger and acquisition of their entity, they would become apprehensive as to their future in the new entity.
They would want clarity as to their statuses in the new entity. This is because sometimes new entity may find a particular division redundant because they already earlier employees from one of the merged entities to take over the work. On the other hand, sometimes acquisitions in the mode of Acquihire are done for the purpose of getting the talent and employees. Hence it is inevitable for the companies to consider these aspects also during mergers and acquisitions.
Usually, there would be negotiations between the acquirer and the acquired companies as to the status of the employees in the acquired company. Those employees would have employment agreements with the acquired companies and they would have to be considered in the merger documents. Depending on the nature of the new entity, the employees can be retained with new agreements or let go by the following the provisions of the Industrial Disputes Act, 1947.
But there cannot be an agreement amongst the companies without the consent of the employees that the employees shall be retained in the merged entity. The employees cannot be retained without their consent. Usually in a case of amalgamation, the scheme of amalgamation would contain clauses regarding the employees wherein the employees of both the entities would be deemed to be continued with the same pay and other conditions of service and their services would be treated as continuous.
How the new entity deals with the stock options of the acquired companies plays a major role in the retention of the employees including the top management. Sometimes in the employment agreements, the top management is given golden parachute clauses, stock operation acceleration clauses, etc.
The top management will have its own considerations as to their being able to work as earlier with the same amount of autonomy and decision making in the merged entity. If they are let go, considerations like non-compete and confidentiality would arise. Hence, all these factors will play a role in the successful working of the merged entity. In cases of promoters/founders’ exit, it might be possible that some of the employees who are closely associated with them would also seek to exit.
Competitors are not stakeholders in the mergers and acquisitions of two companies. But they would be impacted because their customers would have to be retained by them and hence they would take countermeasures to negate the success of the merged entity. Sometimes some actions of the competitors may itself lead to the mergers and acquisitions of the different companies.
For e.g, JIO telecom offers led to the merger of Idea and Vodafone and hence putting the competitor like Airtel also on the toes for its survival and growth. Hence it is inevitable that these considerations are taken into effect for the successful performance of the merged entity.
The customers are the main stay of the business organizations. Any action should be able to benefit them without which the organizations would go out of business. The retention of the customers of both entities would be the main factor to be visualized during merger and acquisitions. As long the cost and quality of the products of the merged entity are not disadvantageous to the existing customers as compared to those of the competitors, it is highly unlikely that the existing customers would exit the merged entity unless they have conflict of interests at any level.
Hence, these issues will have to be studied before taking any calls. There are chances of miscommunication amongst the merged entity and the customers which may lead to customers being unsatisfied and getting their business elsewhere. Hence, the customers will have to informed as to the processes in the merged entity to place them in a position of comfort.
Advisors may be in the form of law firms, merchant bankers, auditors etc. The role these external persons play is important in any merger and acquisition. These players are necessary for the smooth functioning with the government and regulatory bodies and for getting approvals.
They are also necessary for the actual happening of the merger and acquisitions because it is based on their advice everything would happen. Their audit reports form the basis for the green lighting the mergers and acquisitions. Hence, the advisors of the two companies will have to interact with each other for the successful merger and acquisition.
Many a time the vendors would have entered into agreements with different entities which might also contain change of control clauses. These are basically business arrangements designed to protect the vendors. If both the companies have similar clauses, it would definitely affect the competition of the vendors. If the vendors refuse to supply to the new entity, then the success thereof would be seriously hampered. Hence, the effect on the vendors will have to be considered before taking any decisions.
Usually the lenders would be the last persons to object to the merger and acquisitions unless their interests are at stake due to the ill financial health of the merging entities. They would want guarantees for the repayment of their loans. Due to the fact that the lending documents have change of control clauses, they would give their approval for the change of control as long their interests are protected.
There are many government regulators working at different levels and different aspects. All of them have to be considered before entering into any merger and acquisitions. It may be in the form of payment of mere stamp duty on the documents of merger and acquisitions. It may be in the form of taking approval from the National Company Law Tribunals. It may be in the form of consideration of tax aspects of the mergers and acquisitions. It may be in the form of compliance with takeover provisions regulated by the Securities and Exchange Board of India. All the above aspects are mandatory and inevitable. But there is one government regulator which has the power to disapprove the merger and acquisition. That is the Competition Commission of India which enforces the Competition Act, 2002.
The Competition Act, 2002 was designed to prevent concentration of economic power in the hands of a few entities. Since mergers and acquisitions happen to increase the economic power of the merged entity, it is inevitable they would be susceptible to the notice of the Competition Commission. The Competition Commission looks at the appreciable adverse effect on competition in the relevant markets in which the merger takes place.
If Flipkart and Amazon were to merge or if Swiggy and Zomato were to merge or if Ola and Uber were to merge, the chances of competition ever arising against them would be minimal. Since the competition has to be maintained at all costs to give best possible benefits to the customers, the Competition Commission has the power to reject the merger and keep the competition amongst the entities alive. Hence, this factor will have to be considered before entering into merger and acquisition.
Usually, it is the small shareholders who would be left fending for themselves in case of merger and acquisition as their control in the merged entity diminishes. But on the other hand, the shareholders of the acquired company may get a higher price during a takeover and they would stand to benefit from the same.
A successful merger and acquisition is not just numbers. It is the successful working of various factors and persons and successful satisfaction of their needs. Mere numbers will good on paper but it is the persons who are responsible for the successful performance of the merged entity. Hence, achieving this coordination is important for the successful of merger and acquisitions.
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