Professional Documents
Culture Documents
ACQUISITIONS
A PROJECT REPORT
Submitted to:
Mrs. Nikki Rani Prasad
Subject: MERGERS AND ACQUISITIONS.
Submitted By:
ANIRUDH VERMA
Enrollment no. A3221615015
B.Com LLB (Hons.)
8th Semester
Batch- 2015-2020
Amity Law School
Amity University Campus Sector-125, Noida, Uttar
Pradesh
1
NATURE AND TYPES OF
MERGERS AND ACQUISITIONS
Company must be willing to take risk, and make investment early-on to benefit fully from the
merger, competitors and the industry takes heed and start to merger or acquirer themselves.
In order to reduce and diversify risk, multiple bets must be made, since some of the
initiatives will fail, while some will prove fruitful.
The management of the acquiring firm must learn to be resilient, patient and able to emulate
change owing to ever-changing business dynamics in the industry.
Horizontal Mergers
Horizontal mergers happen when a company merges or takes over another company
that offers the same or similar product lines and services to the final consumers,
which means that it is in the same industry and at the same stage of production.
Companies, in this case, are usually direct competitors. For example, if a company
producing cell phones merges with another company in the industry that produces
cell phones, this would be termed as horizontal merger. The benefit of this kind of
merger is that it eliminates competition, which helps the company to increase its
market share, revenues and profits. Moreover, it also offers economies of scale due
to increase in size as average cost decline due to higher production volume. These
kinds of merger also encourage cost efficiency, since redundant and wasteful
activities are removed from the operations i.e. various administrative departments or
departments suchs as advertising, purchasing and marketing.
2
Vertical Mergers
A vertical merger is done with an aim to combine two companies that are in the
same value chain of producing the same good and service, but the only difference is
the stage of production at which they are operating. For example, if a clothing store
takes over a textile factory, this would be termed as vertical merger, since the
industry is same, i.e. clothing, but the stage of production is different: one firm is
works in territory sector, while the other works in secondary sector. These kinds of
merger are usually undertaken to secure supply of essential goods, and avoid
disruption in supply, since in the case of our example, the clothing store would be
rest assured that clothes will be provided by the textile factory. It is also done to
restrict supply to competitors, hence a greater market share, revenues and profits.
Vertical mergers also offer cost saving and a higher margin of profit, since
manufacturer’s share is eliminated.
Concentric Mergers
Concentric mergers take place between firms that serve the same customers in a
particular industry, but they don’t offer the same products and services. Their
products may be complements, product which go together, but technically not the
same products. For example, if a company that produces DVDs mergers with a
company that produces DVD players, this would be termed as concentric merger,
since DVD players and DVDs are complements products, which are usually
purchased together. These are usually undertaken to facilitate consumers, since it
would be easier to sell these products together. Also, this would help the company
diversify, hence higher profits. Selling one of the products will also encourage the
sale of the other, hence more revenues for the company if it manages to increase
the sale of one of its product. This would enable business to offer one-stop shopping,
and therefore, convenience for consumers. The two companies in this case are
associated in some way or the other. Usually they have the production process,
business markets or the basic technology in common. It also includes extension of
certain product lines. These kinds of mergers offer opportunities for businesses to
venture into other areas of the industry reduce risk and provide access to resources
and markets unavailable previously.
Conglomerate Merger
When two companies that operates in completely different industry, regardless of the
stage of production, a merger between both companies is known as conglomerate
merger. This is usually done to diversify into other industries, which helps reduce
risks.
3
REASONS BEHIND EACH TYPE
OF M&A
There are various reasons as to why a company might to decide to merge or acquire
another company, although there has to be a strategic reasoning or logic behind the
merger. All the successful mergers and acquisitions have a specific, well thought-out
logic behind the strategic move. Mergers and acquisitions usually create value for
the company in different ways, some of which are listed below:
4
Accelerate growth
Mergers and acquisitions are often undertaken to increase the market share. If
competitor company is taken over, its share of sales is also absorbed. As the result,
the acquirer gets higher sales, revenues and consequently higher profits. Some
industries have a mix of very loyal customers, which means that it is very difficult to
attract customers from competition by other means, as the industry is highly
competitive and consumers are disinclined to make the switch. In such
circumstances, merger or acquisition are highly beneficial, since they provide an
opportunity to drastically increase market share. It also allows economies of scale,
as per unit cost decrease due to higher volume. Smaller players in the market are
sometimes taken over to penetrate the market further, where big companies fail to
make an impact. Controlling smaller firms in the industry can greatly accelerate sales
of those smaller companies’ products and services, since a big name is now
attached to them. The acquirer also brings in its expertise and experience to bring
efficiency to the operations of the target company. The combined company also
benefit from exposure to various segments of the industry, which were previously
unknown to the acquirer. The new combined company could help introduce new
products tailored for the unchartered markets, hence finding new consumers for the
same products and services.
Roll-up strategies
Some firms are too small in the market and are highly fragmented, which means they
experience higher costs, and it is not feasible for them to keep up operations
because there are no economies of scale due to a very small volume. An acquisition
is such case is more common and can be hugely beneficial to the target company,
as it could keep on operating only with an element of economies of scale. It would
also help an acquirer, since it would be able to penetrate smaller fractions of the
market, as smaller companies have access to these markets. Hence this kind of
5
merger creates value for both companies, and promises greater efficiency in the
operational activities. Advertising campaigns can be coordinated together in order to
increase revenues and save on costs.
LEGAL TERMINOLOGY
Mergers and acquisitions are highly complex, and they most often require
authorization from central government organization like competition commissions.
There are various legal terminologies used when companies decide to merge as
listed below:
6
on to the acquirer company, while all other liabilities are retained by the target
company unless acquirer volunteers to take them on as well. Shareholders after the
merger are likely to receive a higher dividend.
Merger/Consolidation
This kind of transaction requires the presence of two companies. One company
purchased the other, or alternatively both dissolve and become a new company. In
this case, both companies require approval from majority of shareholders. The
company or the acquirer takes up all rights and all liabilities, some of which are
unknown to both corporations. Shareholders retain the right to receive dividends, in
addition to retaining dissenter’s appraisal rights. This is the most common sort of
merger, which basically means that one company is absorbed into the other one.
Assets are taken over, while liabilities are cleared at the time of the merger or
takeover the acquirer.
Dissolution
Dissolution involves only one corporation, since the company is being dissolved. If
the company wants to dissolve voluntarily, it needs the majority vote by shareholders
in addition to filing with the state. At times, courts order involuntary dissolution in
certain cases such as a deadlock situation. The control is usually held by majority
vote by shareholders. In the case of dissolution, all liabilities must be cleared,
although any future liability is absolved. Dissolution usually means that the company
does not exist anymore, which means its operations are wrapped up during the
process dissolution.
Freeze-Out
In this case, the majority shareholders attempt to buyout the shares of the minority of
shareholder. Only one company is involved, and control is defined by the majority
through board approval. The liabilities in this case remain with the company as there
is no other party involved. This is mostly done to reaffirm control by the majority
7
shareholders over the operations of the company, since they face no obstacles once
the deal goes through.
Tender Offer
This merger is similar to stock for stock, the only difference being the shareholders
are offered money in exchange for their shares, after which the target company is
dissolved, merged or run as a subsidiary. Management approval is needed since the
acquirer usually borrows to finance the merger. While individual shareholders of
Target Company may sell at their will, although a controlling percentage of target
company’s shared is required for this mergers. After the purchase of shares, the
acquirer has limited liability in terms of target’s company financial obligations. After
the merger, shareholders can expect a higher dividend, while shareholders of target
have no right, since they are no hold shares.
Triangular Merger
As the name suggest, this merger involves three companies. The first step involves
the acquirer company forming a subsidiary, whose only assets are shares of the
parent company. The newly formed subsidiary then does a stock for assets or stock
for stock as explained above with the target company. Consequently, the target
company mergers or completely dissolves.