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ABSTRACT

IMPACT OF MERGERS AND ACQUISITION ON INDIA’S ECONOMY


Growth is the substance for which everyone runs behind either an entrepreneur or
someone’s ordinary life. ForANKUR KUMAR
achieving PANDEY
this substance the existing organization go for the
FACULTY OF LAW,ICFAI UNIVERISTY,DEHRADUN
restructuring by exploiting the advantages and overcoming the disadvantages. In today’s
corporate world Merger and Acquisition is spreading all over the industries which have
totally restructured the whole market place. Mergers and Acquisitions are normal way of
life within the business world. In today’s Global competitive environment, M&A’s are the
only key for long time survival. They are a big part of corporate finance world. On an
average last 4 years company’s earning in India have been increasing by 20-25%
because of company’s effective strategy of M&A’s. This paper presents the impact of it
on GDP, Profitability, Employment and overall growth of the economy. What are the
various types M&A’s present in INDIAN Economy companies can choose for their
restructuring? This paper also shows the recent M&A’s cases and the reasons why the
companies choose this option. We also discuss the problems facing in the process of
M&A’s by companies and how we can overcome by these problems.

Keywords: Corporate Restructuring, Expansion, Merger & acquisition,


Restructuring

LITERATURE REVIEW:-

Angelika Kedzierska-Szczepaniak, Gdansk University, Poland” Risk Factor of Merger and


Acquisition”, the paper presents the risk factor of mergers and acquisition, the research is
based on world data.

Goyal K.A. & Joshi Vijay (2011),in this paper, an overview on Indian banking industry.The
changes occurred in the banking sector after post liberalization and defined the Merger and
Acquisitions are mentioned. The need of Merger and Acquisition in India has been examined.

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RESEARCH METHODOLOGY:-

All data is secondary in nature.The data is collected from CMIE M&A, CMIE Business
Beacon Database and Kar, R (2006).

I. INTRODUCTION
In today’s corporate world possibility of business expansion has only two options to gain
substantial profits i.e.,

 Internal expansion (Organic)

 External expansion (Inorganic)

Internal expansion is possible by enhancing the internal sources of operation i.e., by updating
technology, improving work efficiency of human resource, alteration in the course of
operation, and by introducing the new line of products or services that can be through capital
restructuring or business restructuring. It is also termed as organic growth. By this business
grows gradually over time but the new strategy of external expansion supports the
globalization of business. The external expansion is possible in the form of mergers,
acquisitions, takeovers and amalgamations. It is also termed as inorganic growth. This
expansion is done through absorption or consolidation. Here absorption states the condition
in which two or more companies come together to perform operations in an existing company
whereas, consolidation states when the companies come together and create entirely a new
entity for their combined operations. These are the essential components of business
restructuring.
Here, restructuring as per Oxford dictionary means, “to give a new structure to,rebuild or
rearrange.”
1.1 Corporate restructuring
Corporate restructuring is defined as the process involved in changing the organization of
a business. Corporatere structuring can involve making dramatic changes to a business by
cutting out or merging departments. It implies rearranging the business for increased
efficiency and profitability. “Corporate restructuring is the process of significantly
changing a company's business model, management team or financial structure to address
challenges and increase shareholder value corporate restructuring is an inorganic growth
strategy.”
Restructuring may involve the company's sale or a merger with another company.
Companies use business strategy in the form of restructuring to ensure their long-term
existence. The parties who owned or invest their funds in the company’s i.e. Shareholders
or creditors might go for a restructuring if they observe the company's present business
position as insufficient to cure a loss on their investments. The nature of these dangers
can vary, but common causes for restructuring involve a loss of market share, the fall of
profit margins or declines in the strength of their corporate brand. Other motivators of

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restructuring include the inability to retain talented professionals and major changes to the
marketplace that directly impact the corporation's business model.
a) Merger & Acquisition
b) Corporate Merger & Acquisition
Corporate M&A follows the process of buying, selling and to become the part of different
corporations with the thought of expansion and to take the advantage of growth
opportunity. In today’s competitive world, it becomes necessary to associate in this form,
as it implies an important part of business restructuring which plays a vital role for
business as well as for economy.
Corporate M&A is the only solution to deal with the market consequences. This can be
takes place in any form i.e., horizontal merger, vertical merger or conglomerate merger.
All these forms of M&A contribute towards a common goal but with different features
suited to get the best results in term of growth, expansion and financial performance.
In each and every manner this kind of restructuring a business proves to be beneficial to
the corporate world. As it provide with the facility of sharing all type of resources
between the different concerns. It also facilitate with the ability to use your experience
and take the advantage of others knowledge to make sensible decisions or judgment that
eventually enhances the wisdom bar within the company. This can further help to battle
with the competitive challenges existing in the market. In addition to that, it becomes
easier to reduce the unnecessary cost such as elimination of duplicate departments and
then by investing this blocked finance to the profit generating area to get the most of it.
This absorption or consolidation also results in possibility of cross selling, exchange of
resources and reduction of tax liability are the other advantages which serves with
corporate merger and acquisition. This form of business restructuring not only contributes
towards the reduction of cost but also supports the globalization of business which
increases the goodwill and market share of the operation.
c) Types of Merger &Acquisitions
Merger & Acquisition takes place in many forms, which may have different
characteristics but contribute towards nurturing the corporate world with its benefits.
These forms contribute in improving corporate philosophies with new strategic alliances.
In the sense of business structure, some of the most common and significant types of
M&A are listed below:
 Horizontal merger takes place in those two companies who compete in the same
industrial segment, which automatically reduces the number of competitors in the
segment and gives a competitive edge to others. It facilitates with the improved
performance which helps in dealing with internal & external environment.
Example of Horizontal merger would be if a health care system buys another
health care system. Combination of strength of two companies is like the icing on
the cake to deal with the weaknesses & contribute towards the competitive
advantage by grabbing the external opportunities.

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 Vertical merger is that form in which the combination of two or more companies
from the same industry but from different field takes place. In this form the
decision to combine all the operations and productions under one shelter is with
merged companies. Example of Vertical merger is if a health care system buys the
ambulance services from their service suppliers. It’s like including all the
requirements and products of a single industry segment. Its main aim is to reduce
overhead cost of operations & economy of scale.
 Co-Generic merger is that form in which the relation of two or more companies
in association is on the basis of production processes, business markets or basic
technology that required. In this, the business operation is extended by introducing
new product line or acquiring components that are required in daily operations.
This form offers new opportunities to businesses.
 Conglomerate merger is that form of merger in which two or more companies
being associated which are basically from different industrial segment. This
merger is basically between the two irrelevant companies. The example of
conglomerate M&A would be if health care system buys a restaurant chain. This
form of merger serves with the objective of diversification of capital investment.
All the merged companies in this form are related neither in business nor in
product line rather their operations overlap that of each other.

II. REASON AND PROBLEMS TO ADOPT MERGER BY COMPANY

WHY PROBLEMS
Become bigger Resistance of change
Pre-empt competition Increased business complexity
Economies and synergies Clash of corporate culture
Achieve modern technology
Tax benefits

2.1 REASONS AND PROBLEMS TO ADOPT ACQUISITION BY COMPANY

WHY PROBLEMS
Increased market share Inadequate valuation of targets
Increased speed to market Inability to achieve synergy
Lower risk comparing to develop Finance by taking high debt
new products
Increased diversification

2.2 Explanations

 ECONOMIES OF SCALE: -when one company amalgamating with one another both
combine their resources that will larger than earlier and the his will helps in increasing the
scale of operations and the economies of large scale production is got. The benefit of this
economies cannot long it will get up to a certain level and beyond this point the cost
starting increasing. this shows in diagram :-

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 Operating economies:- By facilities merging companies can avoid duplicating of their
activities such as accounting, purchasing, marketing, productions etc. Small companies
inefficient can be absorbed by big companies that adopting superior level of management.

 SYNERGY: - It refers to the value of merged firms that is more than value of an
individual unit.

 GROWTH: - It becomes easy, cheaper and less risky because jointly the benefit
becomes more.

 Diversification:- companies operating in different lines can diversify their activities by


amalgamating. The problems are reducing like production, marketing etc.

 Tax shields: - losses of one firm can be set off by other profit making companies and
get reduced burden of tax.

 Eliminations of competitors:-when two competing firm combine with each other they
eliminate wastage their resources by less in advertising.

III. IMPACT OF MERGERS ANDACQUISITION


Employees: - they scarce because it is generally that lay off takes place so they have fear
to losing their jobs.

 Management:- there is a possibility of difference in opinion between the two


companies management. So it creates a problem on clash of ego.

 Shareholders of acquiring firm:- the benefits of shareholder of acquired firm causes


the harms on the shareholders of acquiring firm.

 Shareholders of acquired firm:- they get benefit because they are major in numbers
and they already know the benefits and drawbacks of firms.

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IV. WHY INDIA
India is a developing country and mergers and acquisition is a regular feature of
everyday. It becomes a corporate game today the reasons are mentions under:-

 Dynamic government policies: -India adopts dynamic polices to attract the investors.

 Corporate investment in industry.

 Economic stability

 Ready to experiment investment in new industry

TABLE 1. Details of Merger and Acquisition from 2005 – 2015:-

Year M&A
2005 1254
2006 1449
2007 1510
20082 1402
2009 1294
2010 1329
2011 1045
2012 1070
2013 956
2014 1085
2015 1250

FIGURE 1. Graph showing value and number of M&A from 2005-2015:-

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The table. 1 and figure. 1 shows total number of mergers and acquisition happened in
India and value of total mergers and acquisition. From the table it is clear that a total of
13,644, M&A transaction have occurred during the entire period from 2005 to 2015. The
maximum number of M&A took place during the year 2007 (1510) while the lowest are
observed during 2013 (956). The number of M&A happened during 2011 to 2015 is low
as compared to a period from 2005 to 2010. The total number of M&A reported during
the period of 2011 to 2015 is 5,406 which is 39.62% of the total M&A recorded during
the entire period of study. The growth rate of M&A is steady till 2010 and after 2010 it
started to decline in a slow rate and only 956 M&A has occurred during the year 2013.
Compared to first five years the M&A growth rate has been declined by 20% during 2010
to 2015.From the data available it is clear that the purpose for which they are going for
mergers and acquisition is varying from company to company. Mergers and acquisition
process involves various challenges such as cultural difference, lack of experience in all
business verticals of the companies to whom they are merged and some companies are
also forced to reduce their workforce to an optimum level. From the above table it was
understood that many of the companies are going for mergers and acquisition to expand
their business in a particular country. Mergers and acquisition also helps to increase the
market power of the country. The purpose of M&A has explained by considering two
examples. First, Ultratech cement has acquired Samruddhi cement with the purpose of
consolidating cement business into single entity, thereby creating a platform that will help
in pursuing aggressive growth going forward. Reliance industry has acquired reliance
petroleum. The purpose of the transaction was to allow Reliance Industries Ltd to emerge
as one of the largest manufacturer of polypropylene as well as to enhance shareholder
value and reduce operating costs. Tube investment of India has acquired Shanthi gear
limited. The purpose of the transaction was for Murugappa Group to enter new sector of
business by providing its customers more products and services. From the above three
examples it is clear that the purpose of mergers and acquisition depends upon the need of
the company.

V. FINDING

Purpose for which companies are going for mergers and acquisition

 To consolidate the operating structure and to increase the operating synergies of


business

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 To transfer the debt of one company to another.

 To consolidate the entire business into a single entity which will allow to create a
platform that will help the company for their aggressive growth.

 To take advantage of sound investment opportunity.

 To strengthen a company’s core business and enhance market position to create


synergies

 To strengthen their existing operations and to expand their business in a particular area
where they are not established yet.

 To provide a speed, high quality, comprehensive and cost effective solution to its
domestic customers.

 To create synergies and enhance shareholders value.

 To strengthen their business in terms of market strategy, brand image and financial
strength.

 To offer a new product to the market by acquiring another company

VI. PROCEDURE OF MERGER


It involves a legal prospect so followed strictly by all firms and companies. The
procedure:-

 Analysis of proposal by the companies:- whenever the proposal for amalgamation


comes the managements of concerned companies look into negative and positive aspect
of this scheme. It includes the analysis of its shareholders, creditors and others reactions.
The taxations benefits are also analyzed. After all analysis, it is checked whether the
scheme is benefitted or not. if it benefit then it is selected.

 Determining exchange ratios: - The scheme includes the exchange of shares. The
shareholders of amalgamating companies get the shares of amalgamated company. for
deciding the exchange ratio various factors should be considered such as book value of
shares, market value of shares, potential earnings, value of assets etc.

 Approval of board of directors: -After above mentioned steps it is put forward to


board
of directors for approval of schemes. If BOD approved it, then passes to further.

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 Approval of shareholders: - the schemes now put towards shareholders for approval.
According to section 391 of Indian Companies Act, the amalgamation scheme should be
approved at a meeting of the members or class of the members, as the case may be, of the
respective companies representing three-fourth in value and majority in number, whether
present in person or by proxies. if the schemes involves the exchange of shares, the
approval is not less than 90% of the shareholders of the transferor Company.

 Consideration of interest of the creditors: -only the view of shareholders is not


enough the approval of creditor is also needed. According to section 391, majority of the
creditors in numbers and three-fourth in value.

 Approval of the court:- after getting approval from shareholders and creditors an
application should be filed in court for its sanction. The court will consider the parties
interest are protected or not. The court may modify, accept or reject the schemes
according to their judgments.
Note: - No scheme of amalgamation can go through unless the registrar of companies
sends a report to the court that all parties’ interest is protected.

 Approval of RBI: - section 19(1) (d) of the Foreign Exchange Regulation Act 1973,
permission of RBI is required for the issue of any security to a person resident outside
India.

VII. FAILURE OF M&A


 Cultural difference: - when the culture of two companies are not the same then it can
deterring to the work environment of the company formed and the result gone to bad

.  Flawed intention: - sometimes organizations go for amalgamation only to imitate to


others.

 Ego difference: -executives’ ego also causes the detrition of the benefits, Such as
bankers, lenders etc.

 Resistance by employees: -management has to analysis all the matters so they have to
divert lots of time and employees gets confused because of new environment. So they can
oppose a lot and sometimes talented employees leave the company.

VIII. HOW TO PREVENT THIS FAILURE


 Continuous communication: - management has to make continuous communication
with stakeholders, creditors, employees and governments’ legalization.t

 Transparency: - managers should follow transparency so that parties make trust on it.

 Accept new culture: - higher management professionals must be ready to handle new
culture patiently.

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 Retain Talents: - management should retain the best talent of both companies.

IX. CONCLUSION
The rationale behind M&A is that 2 companies together becomes more valuable than
individual. Despite all negative effects, M&A continue to be an important tool of
economic and company’s growth. The reason behind are above mentioned such as
attractive taxation policy etc. The FDI policies are now more released so that more
investment for mergers is come from foreign countries. But before adapting to any deal
companies have to analysis the deal carefully. Some of the points are mention, here: -
1 Defines your objectives clearly.
2 Complete strategy to achieve goal
3 SWOT analysis necessary.
4 Pick loopholes in strategy.
5 Will the decision leads to growth
6 Expert help should be taken
7 Learn from the mistakes of others.
8 Use the help of experts for valuation of shares.

X. REFERENCES

[1.] http://business.mapsofindia.com/finance/mergers-acquisitions/failure.html

[2.] http://data.conferenceworld.in/ICSTM3/P878-885.pdf

[3.] https://acadpubl.eu/hub/2018-118-21/articles/21e/84.pdf

[4.] Satish Kumar, lalit k.Bansal (2008), “The impact of merger and acquisition on corporate
performance in India”Management decision,vol 46 ISS: 10, pp.1531 – 1543

[5.] KUMAR, A. (2015). Merger and Acquisitions in India: Economics of Overseas Deals by Indian
Companies. Studies in Humanities and Social Sciences, 13(2).

[6.] Hayn, C. (1989). Tax attributes as determinants of shareholder gains in corporate acquisitions.
Journal of Financial Economics, 23(1), 121-153.

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