This article is written by Navya Chopra, BA LLB (H), Vivekananda Institute of Professional Studies, during her internship at Le Droit India.
ABSTRACT
Keywords: types of mergers and acquisitions, types of M&A, horizontal merger, vertical merger, co-generic merger, conglomerate merger, friendly acquisition, hostile acquisition
Mergers and acquisitions have emerged as one of the most successful methods of reorganising organisations in order to gain a competitive advantage. They have shown to be one of the most effective strategies for businesses to get a competitive advantage in a highly competitive global economy. Each merger has its own set of circumstances and logic, which affect how the deal is handled, addressed, managed, and implemented. Mergers and acquisitions can be horizontal, vertical, co-generic, or conglomerate, and friendly or hostile, and the choice to pursue one kind of M&A over another should be made after careful study and analysis in order to maximise the opportunity available.
INTRODUCTION
Globalization of the economy, liberation and subsequent spectacular rise in international commerce of products and services, as well as free movement of money, have resulted in strong rivalry in every area of the global commercial arena. As a result, in order to secure their survival and success, businesses must always try to grow their size and market share, upgrade their expertise, enhance their efficacy and performance, and maximise the use of all available resources.
When it comes to seeking expansion, businesses have three major options to consider. The first is about internal growth, in which the corporation invests cash in developing new goods, markets, skills, and expertise. The second option is “strategic partnerships,” which include joint ventures, franchising, and network collaboration. The third option, and in reality a popular course of action, is mergers and acquisitions (hereinafter referred to as ‘M&A’) of firms operating in similar (horizontal integration) or separate economic sectors (vertical integration).
The phrase M&A refers to corporate strategy, corporate finance, and business management activities involving the buying, selling, dividing, and combining of different or similar entities in order to assist an enterprise in rapidly growing and strengthening its position in its sector or location of origin. M&A enables businesses to enter a new area, location, or nation without the necessity for a subsidiary firm or joint venture. M&A are of various types- horizontal, vertical, co-generic or conglomerate and friendly or hostile. The various types of M&A are described in this paper.
TYPES OF MERGERS
In a merger, one firm combines with another and loses ownership, while another dominating corporation obtains higher value and can absorb or merge with another. A merger is desired for a number of reasons, including the opportunity it provides to join a new industry or market and the chance to combine the surplus capacity of the acquiring firm with the assets of the target company when both businesses are controlled by the same group. The various types of mergers- horizontal, vertical, co-generic and conglomerate- are explained as follows.
- HORIZONTAL MERGER
The combining of two or more firms that sell the same sort of products is referred to as a horizontal merger. While a vertical merger occurs between two firms that may or may not be rivals, a horizontal merger occurs between two or more competitors. These firms will often operate in the same space and provide the same goods or services. As a result of the increasing competition, they are more frequent in industries with fewer competitors supplying the same product. A successful merger or acquisition in this market offers the potential for significant advantages.
Some mergers and acquisitions in India are for horizontal integration, taking advantage of scale economies, and/or limiting competition.
The Rs 355 crore acquisition of CEAT’s nylon tyre cord segment by Shri Ram Fibres (SRF) is the biggest takeover in Indian corporate history, exceeding the Khaitan group’s acquisition of Union Carbide. As a result of the acquisition, SRF will control 38% of the 55,000 tonne per year nylon tyre cord market. Voltas Limited, a refrigerator manufacturer, purchased Hyderabad Allwyn’s refrigerator manufacturing plant three years ago. The Saraogis founded Balarampur Chini Mills Limited in 1975. Babhanan Sugar Mills, a loss-making private enterprise at the time, was acquired by BCML in 1991. Following the merging of Babhanan, BCML’s free sale entitlement climbed to 77%. Sugar sold for free yields a higher profit for the corporation.
When Brooke Bond acquired a share in Kothari General Foods in 1992, it exploited the increased capacity to counter Nestle’s low-cost coffee gamble. Nestle’s aggressive forays into the sauce business were laid to rest once more with the acquisition of Kissan and Dipy’s. Brooke Bond India Limited combined with Lipton India Limited to form Brooke Bond Lipton India Limited (BBLIL). BBLIL was a virtual non-entity in ice-creams till the middle of 1993. It purchased Dollops from Cadbury’s in July 1993. It formed an association with Kwality, in December 1994 and a marketing agreement with Milkfood in April 1995. As a result, it has a commanding 53% dominance of the ice cream market.
The acquisition of Instagram by Facebook was a horizontal acquisition. Both were social networks where individuals could interact, share, and advertise themselves.
- VERTICAL MERGER
Vertical mergers are straightforward and rather common. It is done to bring together diverse supply chain activities that either firm may operate with by combining two companies that provide comparable or common goods or services. The hope is that the combination will result in ‘synergies.’ This essentially implies that the two organisations will operate more efficiently as one, with the larger company benefiting from increased assets and supply chain activities.
In certain circumstances, they will be two firms that aren’t technically rivals, but their collaboration makes logical sense. Arvind Mills, a renowned denim fabric maker, acquired Quest Apparels, a denim jeans manufacturer. This is a forward vertical integration.
Consider the merger of Time Warner, Inc., which produces HBO and other video programmes, and Turner Corp., which produces CNN, TBS, and other programming. The FTC was worried that Time Warner would refuse to sell popular video programming to competitors of cable TV providers owned or linked with Time Warner or Turner, or that Time Warner might offer the programming at a discriminatory price. This would allow Time Warner-Turner cable providers to preserve monopolies over competitors such as Direct Broadcast Satellite and new wireless cable technologies. Furthermore, the Time Warner-Turner affiliates may harm competition in the development of video content by refusing to run programming created by Time Warner and Turner rivals. To prevent anticompetitive behaviour, the FTC approved the merger but barred discriminatory access conditions at both levels.
- CO-GENERIC MERGER
A congeneric merger occurs when two firms from the same industry but with separate product lines unite. Both of these firms will have something in common, whether it is the market, the technology, or the manufacturing method. By combining, these two organisations will be able to expand their product offerings by using both of their markets.
A congeneric merger occurs when one firm with an existing product line acquires another to expand that line. Mergers often occur when a weaker firm is bought by a stronger company.
The acquisition of Flipkart by Walmart signalled its debut into the Indian market. Walmart defeated Amazon in a bidding war and paid $16 billion for a 77 percent interest in Flipkart. Following the transaction, eBay and Softbank divested their holdings in Flipkart. Flipkart’s logistics and supply chain network was expanded as a result of the transaction. Flipkart had already bought other eCommerce startups, including Myntra, Jabong, PhonePe, and eBay.
- CONGLOMERATE MERGER
A conglomerate merger, in contrast to the others, is a merger or purchase that occurs between businesses with completely unrelated commercial operations. Although it may appear contradictory, mergers like this are favourable. A merger of this type can improve market share, diversify a service, asset, and stock portfolio, and provide opportunities for cross-selling items.
Companies typically take measures to become conglomerates in order to safeguard themselves from market swings. If you own numerous firms, it’s rare that they’ll all go bankrupt at the same time. In terms of the smaller enterprises, the purchase provides them with stability. They are no longer required to function as a small firm and may benefit from the resources and skills of their new parent company.
Conglomerates have a difficult time becoming monopolies since they would have to hold nearly every important firm within an industry rather than multiple enterprises in a number of sectors. For example, Procter & Gamble manufactures Oral-B dental hygiene products while also offering Tide laundry detergent. Mars, Inc. is well known for its candy bars such as Snickers and Twix, but it also owns Pedigree dog food.
L&T and Voltas Ltd. is a good of conglomerate mergers. Larsen & Turbo (L&T) is India’s largest engineering firm, specialising in infrastructure, oil and gas, power, and process. Voltas, another Tata group firm, is a key participant in electro-mechanical engineering.
TYPES OF ACQUISITIONS
Another dimension of categorisation is whether the acquisition is friendly or hostile. Such classification of an acquisition is determined by whether or not the target business agrees to the transaction. If the target entity does not accept the acquisition proposal, the transaction is considered a hostile takeover, in which the buyer “forcibly” gains complete control of the purchasing business.
- FRIENDLY ACQUISITION
In a friendly (favourable) acquisition, management and the board of directors endorse the transaction and encourage shareholders to vote in favour of it. In a favourable acquisition, the acquiring corporation might use techniques, such as,
The acquirer firm can make a cash offer ($x per share of the target company) or a share conversion offer (x shares of the acquirer company for each share of the target company). It is also possible to utilise a mix of acquiring firm shares and cash, or
The acquirer firm might offer a percentage premium over the target business’s most recent closing share price (x percent premium to the closing share price).
- HOSTILE ACQUISITION
A hostile acquisition occurs when an acquiring business acquires a target company without the consent of the board of directors. Through aggressive takeovers, certain mergers and acquisitions have occurred in the Indian sector. Notable examples include Chhabria’s acquisition of the controlling interest in the liquor firm Shaw Wallace & Co. Limited (SWC) from Sine Derby.
Following a triangle split among the Nadar entrepreneurs from Tuticorin, Sivakasi, and Virudhunagar, the Ruia brothers of the Essar group amassed a sizable share in TamilNad Mercantile Bank. The transfer of shares was opposed by the Nadar-dominated board. This was contested at the Company Law Board by the Ruias, who ordered the transfer of shares. A notable example of a hostile takeover effort that failed is that of London-based Swaraj Paul, who bid for Delhi-based DCM and Escorts. Both managements fought the initiative, which culminated in a lengthy legal battle involving the Reserve Bank of India and the national government. Out-of-court deals eventually resolved the impasse in which managements acquired their firms’ shares at better prices.
The Khemka group made a public offer to buy a minimum of 30 million shares of ModiLuft Limited for Rs 29, representing 47.32 percent of the company’s ownership. The offer was rejected by SEBI because it was conditional. The Khemkas were successful in their effort to acquire Damania Airways, but only after significantly raising the offer price in response to SEBI guidelines. Another contentious takeover attempt was made by Torrent for the shares of Ahmedabad Electricity Co. Limited. Torrent offered Rs 65 as opposed to the current market price of Rs 45. Bombay Dyeing Mills then made an offer of Rs 90. As a result, Torrent was forced to adjust their offer to Rs 132, a bit more than double its previous offer. The Bombay Dyeing Mills buyout proposal was rejected by SEBI because it was conditional.
The way a proposed acquisition is conveyed to and perceived by the target company’s board of directors, workers, and shareholders has a substantial impact on whether it is regarded friendly or not. In the case of a friendly transaction, the two companies discuss the desired deal’s conditions. On the contrary, in the case of a hostile takeover, the target’s management is hesitant to be bought while the target’s Board of Directors is unaware of the offer. A hostile acquisition, on the other hand, might eventually become friendly if the buyer guarantees that the deal is finally sanctioned by the BOD of the acquired firm after improvements in the terms of the offer or appropriate talks.
CONCLUSION
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.