An Insight Into Corporate M&A

A buoyant Indian economy has seen a lot of M&A activities in the last decade. While the western world was deeply hurt by the recession and was in slumber, Indian corporate took advantage of the same and started acquiring companies abroad. Therefore, during the last few years, India became hub of such M&A activities.

This is also evidenced by the fact that large corporate law firms, who are specializing in M&A activities, was making frequent visits to India and were also tying up with many Indian legal firms as best friend basis to ensure that they refer M&A related work to them. This fathoms the M&A interest in the activities carried out in India. To begin with the popular meaning of Merger and Acquisition as defined in the legal lexicon is as under:

Merger is the destruction or drowning by operation of Law of the less in the greater of two estates coming together and vesting without any intervening estate in one and the same person in the same right. Whenever a greater estate and a less coincide and meet in one and the same person without any intermediate estate, the less is immediately annihilated, or in law phrase is said to be merged that is, sunk or drowned in the greater.

Acquisition is the act by which person acquires the property in a thing. It is the procuring of property or the taking of it permanently or temporarily. It does not necessarily imply the acquisition of legal title by the in the property taken in possession of.

Corporate Restructuring

Restructuring is the corporate management term for the act of partially dismantling or otherwise reorganizing a company for the purpose of making it more efficient and therefore more profitable. While management, finance and legal experts have been innovative in coming out with need based various complex modes of restructuring, mergers and acquisitions have always been the preferred ones over the others. One may also, if closely examine, find that the Indian corporate have followed the herd mentality wherein each of the big corporate vibe with each other in acquiring business abroad. Rightly or wrongly, mergers and acquisition arises out of the following categories.

A horizontal merger is the merger of two companies which are in produce of same products. This can be again classified into large horizontal merger and small horizontal merger. Horizontal merger helps to come over from the competition between two companies merging together strengthens the company to compete with other companies. Horizontal merger between the small companies would not effect the industry in large. But between the larger companies will make an impact on the economy and gives them the monopoly over the market.

A vertical merger is a merger between two companies producing different goods or services for one specific finished product. Vertical merger takes between the customer and company or a company and a supplier. In this a manufacturer may merge with the distributor or supplier of its products. This makes other competitors difficult to access to an important component of product or to an important channel of distribution which are called as "vertical foreclosure" or "bottleneck" problem. Vertical merger helps to avoid sales taxes and other marketing expenditures.

A market-extension merger is a merger of two companies that deal in same products in different markets. Market extension merger helps the companies to have access to the bigger market and bigger client base.

A product-extension merger takes place between the two or more companies which sells different products but related to the same category. This type of merger enables the new company to go in for a pooling in of their products so as to serve a common market, which was earlier fragmented among them. This merger is between two companies that sell different, but somewhat related products, in a common market A conglomeration is the merger of two companies that have no related products or markets.

In short, they have no common business ties. Conglomerate merger is on ein which merging firms are not competitors, but use common or related production processes and/or marketing and distribution channels. A congeneric merger happens between firms in the same general industry but having no mutual buyer-seller relationship, such as a merger between a bank and a leasing company. A merger in which one firm acquires another firm that is in the same general industry but neither in the same line of business nor a supplier or customer.

A purchase merger occurs when one company purchases another. The purchase is made with cash or through the issue of some kind of debt instrument; the sale is taxable. Acquiring companies often prefer this type of merger because it can provide them with a tax benefit. Acquired assets can be writtenup to the actual purchase price, and the difference between the book value and the purchase price of the assets can depreciate annually, reducing taxes payable by the acquiring company.

A consolidation merger creates a brand new company and both companies are bought and combined under the new entity. The tax terms are the same as those of a purchase merger. A unique type of merger called a reverse merger is used as a way of going public without the expense and time required by an IPO.

An accretive merger is one in which an acquiring company's earnings per share (EPS) increase. An alternative way of calculating this is if a company with a high price to earnings ratio (P/E) acquires one with a low P/E. A dilutive merger is the opposite of above, whereby a company's EPS decreases. The company will be one with a low P/E acquiring one with a high P/E.

Mergers and acquisitions (M&A) refers to the aspect of corporate strategy, corporate finance and management dealing with the buying, selling and combining of different companies that can aid, finance, or help a growing company in a given industry grow rapidly without having to create another business entity. Given below is the impact which M&A produces on the employees, management, shareholders and on competition.

Impacts on Employees Mergers and acquisitions may have great economic impact on the employees of the organization. In fact, mergers and acquisitions could be pretty difficult for the employees as there could always be the possibility of layoffs after any merger or acquisition. If the merged company is pretty sufficient in terms of business capabilities, it doesn't need the same amount of employees that it previously had to do the same amount of business.

As a result, layoffs are quite inevitable. Besides, those who are working, would also see some changes in the corporate culture. Due to the changes in the operating environment and business procedures, employees may also suffer from emotional and physical problems.

Impact on Management

The percentage of job loss may be higher in the management level than the general employees. The reason behind this is the corporate culture clash. Due to change in corporate culture of the organization, many managerial level professionals, on behalf of their superiors, need to implement the corporate policies that they might not agree with. It involves high level of stress.

Impact on Shareholders

Impact of mergers and acquisitions also include some economic impact on the shareholders. If it is a purchase, the shareholders of the acquired company get highly benefited from the acquisition as the acquiring company pays a hefty amount for the acquisition. On the other hand, the shareholders of the acquiring company suffer some losses after the acquisition due to the acquisition premium and augmented debt load.

Impact on Competition

Mergers and acquisitions have different impact as far as market competitions are concerned. Different industry has different level of competitions after the mergers and acquisitions. For example, the competition in the financial services industry is relatively constant. On the other hand, change of powers can also be observed among the market players.

Competition Commission of India to oversee M&A deals

One of the principal aims of a competition law is to promote economic democracy by regulating anti-competitive practices and concentration, to ensure consumer and business welfare. The Government of India (GOI) has issued notifications on March 4, 2011 to bring into force, from June 1, 2011, the provisions of sections 5, 6, 20, 29, 30 and 31 of the Competition Act 2002 (the Act). Section 5 of the Act contains provisions relating to "Combination" and Section 6 of the Act contains provisions relating to "Regulations of Combinations".

Sections 20, 29, 30 and 31 of the Act contain procedural provisions relating regulations of the Combination. GOI has, in consultation with the Competition Commission of India (CCI) - the regulator appointed under the Act - enhanced by 50% the threshold of monetary limit of "assets" and "turnover" under Section 5 of the Act for reckoning 'Combination'.

Overview of Regulation of Combination:

Section 6 of the Act inter alia provides that no person or enterprise shall enter into a Combination which causes or is likely to cause an appreciable adverse effect on competition within the relevant market in India and such a combination shall be void. If any proposed Combination exceeds the threshold of assets and / or turnover specified in Section 5 of the Act (as aforesaid), the person / enterprise need to intimate the same to the CCI within 30 days of board approval /entering into of the agreement for Combination for approval.

A Combination cannot come into effect until a period of 210 days has passed from the day on which the notice was given to CCI or CCI has passed an order under Section 31 of the Act, whichever is earlier. Above mentioned requirement of obtaining approval of CCI for the combination is not applicable to share subscription/ financing facility or any acquisition by public financial institution, Foreign Institutional Investor (FII), Venture Capital Fund, Bank pursuant to any covenant of a loan / investment agreement.

Under section 31 of the Act, broadly if the CCI opines that the combination:

• Does not or is not likely to have an appreciable adverse effect on competition, it would order approval of the combination.
• Is or is likely to have an appreciable adverse effect on competition, it would order that the combination shall not take effect.
• Is or is likely to have an appreciable adverse effect on competition but such an adverse effect can be eliminated by suitable modification of such combination, the CCI may suggest appropriate modification to the combination for approval by the parties. CCI, in such case would pass appropriate order based on response received from the parties to the Combination.

It is often said that M&A can be akin to an Indian marriage where before the actual wedding takes place, there exists a lot of euphoria. In some cases, the euphoria lasts long, in some cases it dies down very soon. What is to be looked into is the compatibility between the two companies. This should not be limited to the financials; it has to be transcendent to the culture, the environment and the HR issues. If this aspect is not looked into and dealt in an amicable and win - win situation, the euphoria shall not last long. Notwithstanding the above, M&A activities are here to stay; even if competition commission is to play Sherlock Homes.