We have been observing many “Mergers & Acquisition” in-between the corporate houses in the past few years. Are these all about acquiring one another’s capital interest or is it much more? What are the legal procedures & tax implications of Mergers and Acquisition in India? Let’s find out.
What does Merger Mean?
A merger is a predefined agreement between two body corporates to unite into one new legal entity. In other words, It is a fusion of two businesses registered as different legal entities previously, whether or not of competitive business, under a single legal entity name.
How is Merger different from acquisitions?
Acquisitions are a part of merger. The acquisition is a sub-classification of Merger. In an acquisition, one entity acquires the other company actively, discrete, as in case of mergers where two entities voluntarily opt to merge into one single unit.
Why do companies opt for mergers?
In this competitive world, large entities have to work collectively to gain market share, economies of scale, consumer attraction, investors’ attraction, expand the geographical scale of their businesses, lower down operational costs, etc.
To gain such benefits, entities decide to work with each other. This results into increased stakeholders profits, better revenue results, growing revenues, etc.
The government in India also provides tax benefits to attract more companies to invest & establish itself in India.
Types of Mergers
Mergers can be classified into several types:
In this type, two companies along the same supply chain merge for a common product. This leads to better quality and also leads to shorten the gap between the supply departments.
Let us take an example to understand, If a company A is into a business of buying raw paper pulps from different company B, process them into large sheets and further supplying in the form of paper rolls, of different sizes and shape, to large companies. If company A & B decides to merge into a one new entity carrying the same business in the name of company XYZ. Then such merger in the same business supply chain for the same finished product is called as vertical merger.
A vertical merger took place when “Affordable” luxury retailer Michael Kors agreed to buy footwear brand Jimmy Choo, a popular name in the fashion world known for its towering stilettos, for about $1.2 billion in July, 2017. Kors being a fashion retailer merged with Jimmy Choo in the form of acquisition in the same business supply chain.
This is a merger between two competing companies to increase market share and profitability by avoiding fights between each other. This leads to better quality products, higher geographical scale and cost efficiencies to the merged company.
To set an example to explain this, If a car maker company A merges with a car maker company B to form a new company XYZ then this is a horizontal merger.
In recent time banks are being merged under a single name this is a robust and real-time example of this type of mergers.
Market Extension Mergers
In this type of merger two companies selling similar or complementary products or services in different markets merge into one company. This is done to diversify the business in geographies and penetrate into new markets with more ease and less competition. There is a very thin line of difference between Horizontal and Market Extension Mergers, where the latter, deals with companies in different markets. These type of mergers are not common in India.
For example, Company A and Company B both selling low budget motorbikes in two different markets decide to merge into a new company AB to diversify their business and penetrate more markets.
Product Extension Mergers
Where two companies, in the same market, selling products or services that are related to each other, merge to form a new company it is known as Product Extension Merger. These have been less seen in India.
If a car making company A merges or acquires a oil company B then this is an example of product extension merger.
This is a type of merger between completely two unrelated business. These are of two types: Pure & Mixed.
Pure conglomerates are between two completely unrelated companies having nothing in common. For example: A Tyre making company merges with a Pharmaceutical company.
Mixed conglomerates are between companies that want to increase their product base.
For example, A Pizza making company merges with a soft drink making company.
Merger and Amalgamation Differentiated
Well, a lot of people will claim it is the same thing and often synonyms of each other but they have a very unique distinguishable feature.
In a merger, one unit acquires the other unit. The acquiring unit retains its entity while the acquired loses its entity.
In Amalgamation, two or more companies combine to make a brand new company. All the combining companies lose their separate existence and or entity.
The new company takes over all existing assets and liabilities of the companies amalgamated. The new company allots its shares to the shareholders of the amalgamating companies.