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Merger and Acquisition

Merger is defined as a combination where two or more than two companies combine into
one company. In the process of merger, only one company survives and other companies lose
their corporate existence.

There are two forms of Merger:
1. Merger through absorption
2. Merger through consolidation

1- Merger through absorption: In merger through absorption, all the company except one
lose their existence. The survivor acquires assets as well as liabilities of the merged company.
Merger of Tata Chemical Ltd and Tata Fertilisers Ltd is an example of this type of merger.
Tata Chemical Ltd survived after the merger while Tata Fertilisers Ltd was close down and
its share, assets and liabilities were transferred to Tata Chemical Ltd

2- Merger through consolidation: In this type of merger, two or more than two companies
are legally dissolved and a new company is created by its new name. The shareholders of the
dissolving company become the shareholders of the new company.
Merger of Hindustan Computers Ltd, Hindustan Instruments Ltd, Indian Software Ltd and
Indian Reprographics Ltd form the new company named HCL. This is an example of
Consolidation.

Acquisition is known as the Takeover. When one company buy the other the another
company and acquires the assets of that company, then it is called Acquisition. In this case
the target company still exists as an independent legal entity controlled by the acquirer.
Acquisitions are divided into "private" and "public" acquisitions, depending on whether the
acquiring or merging company (also termed a target) is listed or is not listed on a public stock
market. Acquisition can be friendly as well as hostile. Friendly acquisition consists of a
merger between two corporations or the acquisition of the shares or assets of one corporation
by an entity or an individual, with the approval of the directors and the shareholders of both
corporations.
A hostile takeover of a corporation results from a takeover that is opposed by the target
corporation's directors. In this case, the target company has no prior knowledge of offer and
unwillingly to be brought for takeover.
In acquisition usually a smaller company is purchased by the larger company but sometimes a
smaller firm will acquire the management control of the larger firm. This is known as a
reverse takeover.









Types of Merger and Acquisition
There are mainly five types of Merger and Acquisition:-

1-Horizontal Merger- It is a merger of the two firms, engaged in the production of similar
products or services. The motive behind this type of merger is to obtain economies of scale in
the production, widening the product line and increase the market share through the
elimination of competition in product market.

2-Concentric Merger- It is a merger of the two firms that are not in the same industry but
operate in related industrial segments. The merger of Videocon Narmada Electronics and
Videocon International Ltd are the example of concentric Merger.

3-Vertical Merger- Vertical merger is a kind in which two or more companies in the same
industry but in different fields combine together in business. The acquiring company tries to
reduce the inventories of raw material and finished goods.

There are two types of vertical Merger:

Forward Integration- Forward vertical integration is whereby an organisation gains
ownership and power over its distributors and retailers. For example TV Manufacture
Company combines with TV marketing company.

Backward Integration- Backward vertical integration is whereby an organisations gains
ownership and power over its suppliers. For example a car manufacturing company
combines with a piston manufacturing firm.

4-Circular Merger- When the companies engaged in the production of different products
wants to merge to share common marketing, distribution and research facilities in order to
obtain economies, then it is called circular combination.

5-Conglomerate Merger- This is a merger of the companies engaged in unrelated business.
The main purpose of this combination is to lower the cost of capital and optimum utilisation
of financial resources. A merger of a cement company and an electronics company is the
example of this type of merger.

Motives behind Merger and Acquisition

It is believed that two or more companies which are merging will be greater together than
sum of its parts. Motives behind mergers and acquisition include the following:

1-Economies of scale- A merger or acquisition are able to create economies of scale which in
turn generates cost efficiency. When the output production increases, the cost of production
per unit of output gets reduced.

2-Synergy- Synergy refers to a situation where the combined value of a merger is more than
the sum of the values of merging firms. When two or more companies get together and are
supported by each other, the resulting business is sure to gain enormous profit in terms of
financial gains and work performance.

3-Tax shield- Utilising tax shields in a better way is possible when the loss incurring firm
merges with a better performing company. The loss incurring firm’s accumulated losses can
be set off against the profits of the good performing company and tax benefits can be realised
faster.

4-Manegerial effectiveness- When the poor performing team is replaced with the better
performing team, it increases the managerial efficiency.

5-Diversification- Risk deduction by diversification is a common reason behind merger and
acquisition.

6-Enhance the market for their business- A combination of two companies certainly
enhances and strengthens the business network by improving market research. This offers
new sales opportunities and new areas to explore for their business.

Advantages of Merger and Acquisition-

For Shareholders- Through merger, companies are able to create economies of scale which
helps to generate the cost efficiency, these results in increased profits and better investment
opportunity and finally the increased value of the shares.

For Promoters- Promoters get the advantage of the increased size and the restructuring of
the firm.

For Managers- Managerial efficiency can also be increased through merger. Managers are
also concerned about the overall growth of the company that why they often look forward to
mergers as an opportunity for the better growth of the company as well as for enhancing their
status financially.

For Consumers- Consumers are able to get better products and services at lower prices.

Disadvantages of Merger and Acquisition-

Diseconomies of scale- If the business becomes too large to manage, it turns to diseconomies
of scale.

Clashes of culture- Clashes of culture could happen between different type of businesses and
it can reduce the effectiveness of the integration.

Conflict of objectives- If the objectives of the merging companies are different, it becomes
difficult to take meaningful decision for the company and it can cause commotion in the
running of the business.

Employees Dissatisfaction- In view of sharing of services, staff position can come down and
this will lead to employee dissatisfaction.





Conclusion:

Merger and Acquisition can be extremely beneficial to the merging companies but if handled
in a wrong way, can cause serious disruption all around. This is an iterative process; so it
needs careful planning to achieve financial goals and for profit-making.