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(By Mr. Nazir Ahmed Shaheen, Registrar of Companies & Executive Director (CLD), Securities & Exchange Commission of Pakistan)
The merger and acquisition is a strategic tool available in the hands of the management of the company to gain competitive advantage by exploiting synergies. In a merger, two companies combine to form a new company. In an acquisition, one company takes over the other in terms of management or ownership. Both Mergers and Acquisitions are attempts from companies to combine their strengths in order to achieve synergistic benefits. The reasons behind a merger or acquisition are varied, e.g. increasing market share, entering new markets, developing new products through R&D, or achieving administrative benefits. Mergers can create economies of scale, in which costs of similar functions can be reduced. The Great Merger Movement was a predominantly U.S. business phenomenon that happened from 1895 to 1905. During this time, small firms with little market share consolidated with similar firms to form large, powerful institutions that dominated their markets. The phenomenon has evolved with the passage of time and today, in most developed economies, corporate mergers and acquisitions has become a regular feature. In this era of globalization, merger and acquisition has become a buzzword in the corporate world today. In mathematics 1 + 1 is always equal to 2 but in corporate world it has always been an endeavor to make 1+1 =3. This is exactly what we define as synergy effect. It is the very reason why merger and acquisition have become so popular today. Other reason behind this transition is that the merged companies can acquire more power, with which they can operate freely across the borders and influence policies of governments where they operate. Country’s Perspective Mergers in Pakistan are a recent phenomenon, and the activity is still in its infancy stage. It has been observed that the total deals done in the country are quite negligible as compared to the developed countries. The activity is suffering in Pakistan due to various deterrents, including inflation, cost of debt, lack of synergistic operating economies, lack of motivation of shareholders, small industrial base, insider trading and unfair trade practices. Since today's global business environment is becoming more complex, one of the best ways for the companies to seek growth and survival, is through merging with another company or acquiring other companies. Mergers and Acquisitions In Business or Economics, a merger happens when two companies, often of about the same size, agree to go forward as a single new company rather than remaining separately owned and operated. It can be termed as a transaction whereby two companies agree to integrate their operations on a relatively equal basis, because
Conglomerate mergers take place when the two companies operate in different industries. etc. indeed many result in a net loss of value due to certain inherent problems. and termed as a “Takeover” where the target company did not solicit the bid of the acquiring firm/ company. by the government in the interest of the country. Mergers are commonly voluntary. Following are the common types of mergers: i. There might also be a resistance by workers. Vertical mergers occur when two companies. duplication of activities. with the intent of more effectively using a core competence by making the acquired company. Following motives are generally considered before Mergers. There can be a number of motives for a company to pursue a strategy of Merger. Diversification to reduce the risk of business. incompatibility of systems. This activity may be friendly or hostile. Increased efficiencies. combine. An Acquisition occurs through buying of one company (the ‘target’) by another. but they have no mutual buyer/customer or supplier relationship. Merger can resemble a takeover but result in a new company name (often combining the names of the original companies) and in new branding. Congeneric mergers occur where two merging companies are in the same general industry. and even in some cases. Eliminating competition and to achieve monopoly benefits. ii. often in the same line of business. Creating opportunities for cross-selling. Large enough size to realize economies of scale. Desired synergies. companies are now increasingly using their surplus funds for acquiring other companies. directors and shareholders of the target company. to widen product range and to increase market share. Efficient access to capital markets Odds in the Mergers and Acquisitions Game: Corporate Mergers and Acquisitions do not always result in the success. a subsidiary in its portfolio of businesses. . Benefits of Mergers and Acquisitions: Corporate Mergers and Acquisitions represent part of a corporate/ business strategy used by many companies to achieve various objectives. iv. each working at different stages in the production of the same good.they have resources and capabilities that together may create a stronger competitive advantage. Reduction in administrative cost and overcoming critical lacks. Horizontal mergers take place where the two merging companies produce similar product in the same industry. Displacing an existing management. These problems in achieving success of mergers interalia includes high social and financial costs. Taxation advantage not available without merging. Acquisitions: However. people and culture. such as a merger between a bank and a leasing company. Risk spreading. iii. Increased revenue and utilize unutilized market power/ share.
The preparation of a scheme of amalgamation/merger by the companies. 55 to 68. . is the most critical step towards undertaking the activity. etc Another focus area for the companies. which have arrived at a consensus to merge. One has to mitigate the risk involved and get the right decision for success of Mergers and Acquisitions. Sections 284 to 289 of the Companies Ordinance. The purpose of valuation of shares of companies is to ascertain the swap ratio to be used for the exchange of shares of the merging company or companies with the surviving company. valuations of shares and involved determinations. 1984 (the “Ordinance”) and rules. There is no specific form but it generally contains rationale for activity.In addition. any pending litigation. contained in the Companies (Courts) Rules. might overcome or mitigate these odds by exercising due diligence. fiscal and human. the companies entering into such arrangements. tactical. market of the target company might resent a sudden take over and consider going to other suppliers for their goods or services. However. 1997. An application is required to be made under Section 284 of the Ordinance to the High Court by all the merging companies for the purpose. the parameters that need to be considered while evaluating mergers are strategic. Basically. is the valuation and pricing of shares that must be fair and reasonable. deals with the requirements for Mergers and Acquisitions of companies. financial information. Legal Procedure in Pakistan In Pakistan.