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Merger and acquisition Effects on firms and role in development of Indian economy

RACHNA YADAV Assistant Professor Beri Institute of Technology, Training and Research (Affiliated to GGSIPU) Dwarka, New Delhi Mb. No. - 09582089632 Email: rachna48@gmail.com

SUNMEET KAUR Assistant Professor Beri Institute of Technology, Training and Research (Affiliated to GGSIPU) Dwarka, New Delhi Mb. No. - 09999789923 Email: sunmeetkaur87@gmail.com

ABSTRACT Our study tries to look into the burning issue of mergers and acquisitions. Merger and acquisition literature suggests that managers will have various motives for mergers. In our study we summarize the concept of merger and acquisitions, the motives for mergers is classified into four broad categories, namely economic motives, synergy motives, strategic motives and managerial motives. We try to explore the effects of merger and acquisition on firms and on economic development of an economy. Finally we investigate the advantages and disadvantages of merger and acquisition in India for future prospects and I have tried to find out the hurdles which Indian companies are facing in Merger and Acquisition.

Introduction Internationally, the amount and volume of mergers and acquisitions is reaching record breaking levels, where the main role is taken up by cross-border deals, as businesses gain from low-cost funding to chase their M&A strategies. With Indian corporate houses showing sustained growth over the last decade, many have shown an interest in growing globally by choosing to acquire or merge with other companies outside India. One such example would be the acquisition of Britains Corus by Tata an Indian conglomerate by way of a leveraged buy-out. The Tatas also acquired Jaguar and Land Rover in a significant cross border transaction. Whereas both transactions involved the acquisition of assets in a foreign jurisdiction, both transactions were also governed by Indian domestic law. Whether a merger or an acquisition is that of an Indian entity or it is an Indian entity acquiring a foreign entity, such a transaction would be governed by Indian domestic law. In the sections which follow, we touch up on different laws with a view to educate the reader of the broader areas of law which would be of significance. A. Mergers The term merger is not defined under the Companies Act, 1956 (the Companies Act), the Income Tax Act, 1961 (the ITA) or any other Indian law. Simply put, a merger is a combination of two or more distinct entities into one; the desired effect being not just the accumulation of assets and liabilities of the distinct entities, but to achieve several other benefits such as, economies of scale, acquisition of cutting edge technologies, obtaining access into sectors / markets with established players etc. Generally, in a merger, the merging entities would cease to be in existence and would merge into a single surviving entity. Mergers and acquisitions are methods by which distinct businesses may combine. Joint ventures are another way for two businesses to work together to achieve growth as partners in progress, though a joint venture is more of a contractual arrangement between two or more businesses. Mergers may be of several types, depending on the requirements of the merging entities: Horizontal Mergers :Also referred to as a horizontal integration, this kind of merger takes place between entities engaged in competing businesses which are at the same stage of the industrial

process. A horizontal merger takes a company a step closer towards monopoly by eliminating a competitor and establishing a stronger presence in the market. The other benefits of this form of merger are the advantages of economies of scale and economies of scope. Vertical Mergers: Vertical mergers refer to the combination of two entities at different stages of the industrial or production process. For example, the merger of a company engaged in the construction business with a company engaged in production of brick or steel would lead to vertical integration. Companies stand to gain on account of lower transaction costs and synchronization of demand and supply. Moreover, vertical integration helps a company move towards greater independence and self-sufficiency. The downside of a vertical merger involves large investments in technology in order to compete effectively. Congeneric Mergers: These are mergers between entities engaged in the same general industry and somewhat interrelated, but having no common customer-supplier relationship. A company uses this type of merger in order to use the resulting ability to use the same sales and distribution channels to reach the customers of both businesses. Conglomerate Mergers. A conglomerate merger is a merger between two entities in unrelated industries. The principal reason for a conglomerate merger is utilization of financial resources, enlargement of debt capacity, and increase in the value of outstanding shares by increased leverage and earnings per share, and by lowering the average cost of capital. A merger with a diverse business also helps the company to foray into varied businesses without having to incur large startup costs normally associated with a new business. Triangular Merger: A triangular merger is often resorted for regulatory and tax reasons. As the name suggests, it is a tripartite arrangement in which the target merges with a subsidiary of the acquirer. Based on which entity is the survivor after such merger, a triangular merger may be forward (when the target merges into the subsidiary and the subsidiary survives), or reverse (when the subsidiary merges into the target and the target survives). B. ACQUISITIONS. An acquisition or takeover is the purchase by one company of controlling interest in the share capital, or all or substantially all of the assets and/or liabilities, of another company. A takeover may be friendly or hostile, depending on the offer or companys approach, and may be effected through agreements between the offer and the majority shareholders, purchase of shares from the

open market, or by making an offer for acquisition of the offerees shares to the entire body of shareholders. Friendly takeover: Also commonly referred to as negotiated takeover, a friendly takeover involves an acquisition of the target company through negotiations between the existing promoters and prospective investors. This kind of takeover is resorted to further some common objectives of both the parties. Hostile Takeover: A hostile takeover can happen by way of any of the following actions: if the board rejects the offer, but the bidder continues to pursue it or the bidder makes the offer without informing the board beforehand. Leveraged Buyouts: These are a form of takeovers where the acquisition is funded by borrowed money. Often the assets of the target company are used as collateral for the loan. This is a common structure when acquirers wish to make large acquisitions without having to commit too much capital, and hope to make the acquired business service the debt so raised. Bailout Takeovers: Another form of takeover is a bail out takeover in which a profit making company acquires a sick company. This kind of takeover is usually pursuant to a scheme of reconstruction/rehabilitation with the approval of lender banks/financial institutions. One of the primary motives for a profit making company to acquire a sick/loss making company would be to set off of the losses of the sick company against the profits of the acquirer, thereby reducing the tax payable by the acquirer. This would be true in the case of a merger between such companies as well. Acquisitions may be by way of acquisition of shares of the target, or acquisition of assets and liabilities of the target. Advantages and Disadvantages of Mergers and Acquisitions Others reasons for mergers include reduced competition and/or product diversification. These goals are closely related to the possible advantages of mergers and acquisitions, and of course, in the case of all risks, there are possible disadvantages as well. Many of the advantages have to do with forming unique research and development skills. One major advantage is that a merger would give a company the opportunity to expand by establishing their presence in a host country. This invites the company to compete in other markets. Another possible goal or advantage is being able to adopt technology from the other business rather than spending the time and money to develop it themselves. In the long run, this would cut costs and improve productivity.

Economies of scale and scope can be gained with a larger base and with this increased size come many competitive advantages. A successful merger or acquisition may very well allow a business to reduce its foreign exchange operating exposure by servicing a market with local manufacturing rather than through imports Some businesses merge to help alleviate some or all of their debts (debts that will be taken over by the merging company) in hopes of getting the chance to start over. Later in my report I will be discussing a cross-cultural merger, therefore, the disadvantages I am about to discuss relate to cross-border mergers. One major problem that may be incurred is cultural differences between the two businesses. This may lead to tension, conflict, and stresses between the organizations, namely its employees, lessening the chances of a smooth merger. Many times teams are designed to deal with any possible conflicts that may arise as a result of the differences in customs, values, and norms. In a few cases, there are negative political reactions from the unfavorable host countries. Failures could be a result of bad planning, lack of leadership, unrealistic expectations, and/or inadequate due diligence.

Conclusion There are many specific goals that companies may be looking to achieve by merging with other companies or by acquiring them, but the main underlying reason is to guarantee the longterm sustained achievement of fast profitable growth for their business. They have to keep up with a rapidly increasing diversified global market and increased competition. India in the recent years has showed tremendous growth in the M&A deal. It has been actively playing in all industrial sectors. It is widely spreading far across the stretches of all industrial verticals and on all business platforms. The increasing volume is witnessed in various sectors like that of finance, pharmaceuticals, telecom, FMCG, industrial development, automotives and metals. The volume of M&A transactions in India has apparently increased to about 67.2 billion USD in 2010 from 21.3 billion USD in 2009. At present the industry is witnessing a whopping 270% increase in M&A deal in the first quarter of the financial year. This increasing percentage is mainly attributed to the increasing cross-border M&A transactions. Over that increasing interest of foreign companies in Indian companies has given a tremendous push to such transactions. Large Indian companies are going through a phase of growth as all are exploring growth potential in foreign markets and on the other end even international companies is targeting Indian companies for growth and expansion. Some of the major factors resulting in this sudden growth of merger and acquisition deal in India are favorable government policies, excess of capital flow, economic stability, corporate investments, and dynamic attitude of Indian companies. The recent merger and acquisition 2011 made by Indian companies worldwide are those of Tata Steel acquiring Corus Group plc, UK based company with a deal of US $12,000 million and Hindalco acquiring Novelis from Canada for US $6,000 million. With these major mergers and many more on the annual chart, M&A services India is taking a revolutionary form. Creating a niche on all platforms of corporate businesses, merger and acquisition in India is constantly rising with edge over competition. At present Sections 391-394 of the Companies Act, 1956, allow only foreign companies to merge with Indian ones. Mergers and acquisitions are powerful indicators of a robust and growing economy. The legal framework for such corporate restructuring must be easy and facilitative and not restrictive and mired in bureaucratic and regulatory hurdles. The biggest obstacle in the way of completing a merger or an amalgamation remains the often long drawn out court procedure required for the sanction of a scheme of arrangement.

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