Merger & Acquisition

What are mergers and acquisitions?

Mergers and acquisitions (M&A) refer to the unification of two companies or

assets through various financial transactions. Mergers occur when two or more
business entities are combined to create a new, joint entity. Acquisitions occur
when one entity is taken over by another.
Before undergoing a merger or acquisition, companies should first consider an
M&A strategy.

What is M&A strategy?

One of the best ways to grow and gain market share is through a merger or
acquisition. However, M&As are also some of the most daunting deals a firm can
undertake. Deals of this size and nature can quickly become a bureaucratic
nightmare and are often rife with legal hurdles.  Establishing an M&A strategy that
focuses on numerous elements, including a fact-based assessment of the
current state, analysis and prioritization of potential opportunities, design of the
future-state strategy, and an execution roadmap will help your firm through the
M&A process.

Why do companies participate in M&A?

● To eliminate competitors through an acquisition

● To synergise (companies operating in the same space can leverage each
other’s strengths)
● To gain competitive advantage or a larger market share,
● To diversify offerings or services
● To cut costs, etc.
What is the M&A process?

The mergers and acquisitions (M&A) process has many steps and can take
anywhere from several weeks to several months to complete. Burnie Group has
supported multiple M&As from the initial due diligence phase straight through the
post-day 1 phase.
Every merger or acquisition involves 5 key phases:
1. Due diligence and purchase
2. Transition and preparation for Day 1
3. Close and Day 1
4. Post Day 1 integration
5. Business-as-usual

The process of mergers and acquisitions in India is court driven, long drawn and
hence problematic. The process may be initiated through common
agreements between the two parties, but that is not sufficient to provide a legal
cover to it. The sanction of the High Court is required for bringing it into effect.
The Companies Act, 1956 consolidates provisions relating to mergers and
acquisitions and other related issues of compromises, arrangements and
reconstructions, however other provisions of the Companies Act get attracted
at different times and in each case of merger and acquisition and the
procedure remains far from simple. The Central Government has a role to play
in this process and it acts through an Official Liquidator (OL) or the Regional
Director of the Ministry of Company Affairs. The entire process has to be to the
satisfaction of the Court. This sometimes results in delays.
Benefits of M&A

1. Economies of Scale

Often, the end goal of a merger and acquisition is to realize economic gains
and economies of scale. This becomes possible when the two firms involved
in the merger and acquisition are stronger, more productive, and more
efficient together than apart. Businesses consolidate to reap benefits like
increased access to capital, better bargaining power in the market, lower
costs resulting from high volume production, and more.

2. Economies of Scope

Mergers and acquisitions benefits include economy of scope, which refers to

the reduction in production cost of one product due to the production of
another related product. In other words, one product supports another to
reduce the overall costs. Economies of scope typically occur when producing
more products is more feasible and economical than making a single or
fewer products. Mergers and acquisitions can sometimes lead to economies
of scope that may be impossible to achieve through organic growth.

3. Competitive Edge in the Market

Mergers and acquisitions mean greater financial strength for both companies
involved in the transaction. Having greater economic power can lead to
higher market share, more influence over customers, and reduced
competitive threat. In most cases, bigger companies are harder to compete
against.

4. Access to the Best Talent

Talent acquisition is one of the biggest concerns for companies that wish to
excel in the market. The recruitment industry knows that talented employees
are attracted to big names. Consequently, the bigger the company, the better
access it enjoys to the best available talent. This trend is evident across
industries from manufacturing to technology and services.

5. Access to Resources

Businesses in the same sector can sometimes improve access to materials,

suppliers, and tangible resources through acquisition. For example, one
business may acquire or merge with one of its suppliers to improve
production cycles and guarantee access to critical materials.

6. Diversification of Risk through Portfolio Divergence

Mergers and acquisitions allow companies to spread risk across different

revenue streams by the diversification of the products, services, and
prospects for the business. If one revenue stream falls short, the business will
still have several other income streams to fall back on and continue
operation. By diversification of risk, the company can ensure sustainability for
the long run.

7. Cost-Effective Alternatives for Facilities

Mergers and acquisitions present a cost-effective alternative to starting from

scratch. Setting up production centers, buying machinery and equipment,
building storage places, and initiating distribution channels are costly. It is
more cost-effective to merge with another company already equipped with
the facilities you require. Furthermore, the transaction will also bring all the
other merger and acquisition benefits that will contribute to business success.

8. Access to New Markets

Breaking into a new market can be challenging, even for established

businesses. While setting up a subsidiary or branch is always an option, a
merger or acquisition can save companies a significant amount of time,
effort, and money compared to starting from scratch.
This is especially true for businesses ready to move into a foreign
geographical market. International markets can be exceedingly difficult to
penetrate. Therefore, it is more feasible for most companies to merge with or
acquire an established local business that already has a loyal customer base.

9. Opportunist Value Generation

Larger organizations are often on the lookout for acquisition opportunities

where the purchase price is valued at less than the fair market value of the
target’s net assets. Such financial positioning indicates that the target
company is experiencing financial distress. In such cases, a merger or
acquisition can allow the acquired company to stay afloat, and the acquiring
company to reap benefits such as proprietary rights to products, increased
market growth, penetration in new geographic regions, and more.

10. Enterprise Continuation

Some small businesses are family or privately owned. Once the founder
retires, there is a risk of business failure because there may not be a clear
succession plan for the business. This can put employees out of work and
impact suppliers to the business. A merger or acquisition is one strategy to
help ensure business continuity, reduce interruptions in the operation, and
provide job security for employees.
Examples of M&A

1. Facebook & Instagram

It’s been ten years since 'Facebook' announced one of the best business
acquisitions in the history of Silicon Valley: The controversial $1 billion
purchase of a photo-sharing app called Instagram.
Facebook saw this new platform as a threat that could siphon the
business away.
Rather than competing, it bought Instagram for $1 billion in 2012, a
shocking sum at that time for a company with 13 employees.
At the time of the acquisition, Instagram had just 30 million users with
zero revenue. Today, it has over 1.21 billion monthly active users, making
up 28 percent of the world's internet users and contributing over $20
billion to Facebook's annual revenue.
This acquisition turned out to create a giant social media conglomerate
that is now arguably the most popular platform for all the people
across the globe to be in touch with their loved ones and make new
connections.

2. Ebay & Flipkart

Primary objective of this merger was to facilitate 'cross border' online

trade and its aim was also to make available more unique products to
Flipkart's Indian consumers and eBay's international buyers.
Immediately after the merger, Flipkart relaunched eBay India as Mint-
kart which was designed as a platform for used products. But faced
with stiff competition from Quikr and Olx, along with Amazon and other
ecommerce players, this didn’t take off.