JAGANNATH INSTITUTE OF MANAGEMENT
STUDIES, SCHOOL OF LAW
(Affiliated to Guru Gobind Singh Indraprastha University)
PROJECT ON
“MERGERS AND ACQUISITIONS”
SUBMITTED TO: -
Mr. MUDIT ROHILLA
(Assistant Professor)
SUBMITTED BY: -
HARSHPREET KAUR
SEMESTER: BA LLB- V (B)
ROLL NO.: 35125503819
Introduction
Indian enterprises were subjected to strict control regime before 1990s. This has led to
haphazard growth of Indian corporate enterprises during that period. The reforms process
initiated by the Government since 1991, has influenced the functioning and governance of
Indian enterprises which has resulted in adoption of different growth and expansion
strategies by the corporate enterprises. In that process, mergers and acquisitions (M&As)
have become a common phenomenon. M&A’s are not new in the Indian economy. In the
past also, companies have used M&As to grow and now, Indian corporate enterprises are
refocusing in the lines of core competence, market share, global competitiveness and
consolidation. This process of refocusing has further been hastened by the arrival of foreign
competitors. In this backdrop, Indian corporate enterprises have undertaken restructuring
exercises primarily through M&As to create a formidable presence and expand in their core
areas of interest.
Mergers and Acquisitions in India
M&A’s have played an important role in the transformation of the industrial sector of India
since the Second World War period. The economic and political conditions during the
Second World War and post–war periods (including several years after independence) gave
rise to a spate of M&As. The inflationary situation during the wartime enabled many Indian
businessmen to amass income by way of high profits and dividends and black money
(Kothari 1967). This led to “wholesale infiltration of businessmen in industry during war
period giving rise to hectic activity in stock exchanges. There was a craze to acquire control
over industrial units in spite of swollen prices of shares. The practice of cornering shares in
the open market and trafficking of managing agency rights with a view to acquiring control
over the management of established and reputed companies had come prominently to light.
The net effect of these two practices, viz of acquiring control over ownership of companies
and of acquiring control over managing agencies, was that large number of concerns passed
into the hands of prominent industrial houses of the country (Kothari, 1967).
As it became clear that India would be gaining independence, British managing agency
houses gradually liquidated their holdings at fabulous prices offered by Indian Business
community. Besides, the transfer of managing agencies, there were a large number of cases
of transfer of interests in individual industrial units from British to Indian hands. Further at
that time, it used to be the fashion to obtain control of insurance companies for the purpose
of utilising their funds to acquire substantial holdings in other companies. The big
industrialists also floated banks and investment companies for furtherance of the objective of
acquiring control over established concerns.
The post-war period is regarded as an era of M&As. Large number of M&As occurred in
industries like jute, cotton textiles, sugar, insurance, banking, electricity and tea plantation. It
has been found that, although there were a large number of M&As in the early post-
independence period, the anti-big government policies and regulations of the 1960s and
1970s seriously deterred M&As. This does not, of course, mean that M&As were
uncommon during the controlled regime. The deterrent was mostly to horizontal
combinations which, result in concentration of economic power to the common detriment.
However, there were many conglomerate combinations. In some cases, even the
Government encouraged M&As; especially for sick units. Further, the formation of the Life
Insurance Corporation and nationalization of the life insurance business in 1956 resulted in
the takeover of 243 insurance companies. There was a similar development in the general
insurance business. The National Textiles Corporation (NTC) took over a large number of
sick textiles units (Kar 2004).
Recent Development in Mergers and Acquisitions
The functional importance of M&As is undergoing a sea change since liberalization in
India. The MRTP Act and other legislations have been amended paving way for large
business groups and foreign companies to resort to the M&A route for growth. Further The
SEBI (Substantial Acquisition of Shares and Take over) Regulations, 1994 and 1997, have
been notified. The decision of the Government to allow companies to buy back their shares
through the promulgation of buy back ordinance, all these developments, have influenced
the market for corporate control in India.
M&As as a strategy employed by several corporate groups like R.P. Goenka, Vijay Mallya
and Manu Chhabria for growth and expansion of the empire in India in the eighties.
Some of the companies taken over by RPG group included Dunlop, Ceat, Philips Carbon
Black, Gramaphone India. Mallya‟s United Breweries (UB) group was straddled mostly by
M&As. Further, in the post liberalization period, the giant Hindustan Lever Limited has
employed M&A as an important growth strategy. The Ajay Piramal group has almost
entirely been built up by M&As. The south based, Murugappa group built an empire by
employing M&A as a strategy. Some of the companies acquired by Murugappa group
includes, EID Parry, Coromondol Fertilizers, Bharat Pulverising Mills, Sterling Abrasives,
Cut Fast Abrasives etc. Other companies and groups whose growth has been contributed by
M&As include Ranbaxy Laboratories Limited and Sun Pharmaceuticals Industries
particularly during the latter half of the 1990s. During this decade, there has been plethora of
M&As happening in every sector of Indian industry. Even, the known and big industrial
houses of India, like Reliance Group, Tata Group and Birla group have engaged in several
big deals.
Advantages of M&A
The advantages of Merger and Acquisition are as follows:
Increased Size
The process of M&A assists companies in increasing their net worth and operations,
which may take years otherwise. Moreover, these strategic tools help in boosting the
company’s share price.
Reduced Competition
The combined capitals and reserves of the newly formed company help it in reducing
competition and gaining a competitive edge.
Increased Power
The synergy formed by the combination of two or more companies is powerful
enough to dominate other market players, guarantee better performance, ensure
financial gains, etc. Additionally, it simplifies the task of attracting a larger customer
base.
Tax Benefits
A also provides various tax benefits to the involved companies. The losses incurred
by one entity are set off against the profits generated by another entity, in that way
minimising the tax liability.
Creates a New Market
Since M&A makes two companies work together, it provides better sales prospects.
Besides this, M&A also assists in increasing the market reach of the business.
Benefits of Mergers and Acquisitions
The process of Mergers and Acquisitions in India is considered by the companies to
augment their business at a global level and ensure sustainable development of their
business. The following are the reasons why companies choose M&A:
For reducing competition;
For establishing a larger share in the market;
For developing a powerful brand name;
For minimising tax liabilities;
For diversifying risk;
For setting off losses of one entity with the profit of another entity.
Types of Mergers and Acquisition in India
The different types of mergers and acquisition in India are as follows:
Horizontal Merger
The term horizontal merger means the combination of two or more companies dealing in the
same type of products. The main aim behind this merger is to expand the market reach,
acquire a dominant position, and reduce competition. For example: Mergers of Hindustan
Unilever and Patanjali; Brooke Bond and Lipton India.
Vertical Merger
The purpose of a vertical merger is to combine two companies dealing with similar products.
However, the stages of production at which they are functioning are different. For
example: Reliance and FLAG Telecom group.
Co-Centric Mergers
A co-centric merger takes place between the companies serving the same type of customers.
In this case, the products of both companies complement each other even if the products are
completely different. For Example: Citi Group acquiring Salomon Smith Barney; Axis Bank
acquiring Freecharge; Flipkart acquiring Walmart.
Conglomerate Mergers
When two unrelated industries/ companies combine with each other, it is known as
conglomerate mergers. The goals and purposes of both companies are entirely different from
each other. However, the main objective of this merger is to increase business in terms of
size and operations. For example: L&T and Voltas Ltd.
Cash Mergers
In cash mergers, shareholders are offered cash instead of the shares of the merger company.
Forward Mergers
In forward mergers, a company decides to merge with its customer. For example: ICICI
Bank acquired Bank of Mathura.
Reverse Mergers
When a business establishment decides to merge with its raw material suppliers. For
example: merger of the Godrej soap with the Gujarat Godrej Innovative Chemicals.
Governing Laws for Merger and Acquisition
In India, the concept of Merger and Acquisition is primarily governed by the provisions
of the Companies (Compromises, Arrangements and Amalgamations) Rules, 2016, and
section 230 read with section 232 of the Companies Act, 2013. However, the following key
legislation also regulate the activities of Merger and Acquisition in India:
Securities Regulations:
1. Securities Exchange Board of India, 1992;
2. The SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011;
3. The SEBI (Delisting of Equity Shares) Regulations, 2009.
Foreign Exchange Management Act, 1999;
Competition Act, 2002;
Income Tax Act, 1961;
Insolvency and Bankruptcy Code, 2016.
Biggest Mergers and Acquisitions in India
1. Vodafone Idea Merger
Reuters reported the Vodafone Idea merger to be valued at $23 billion. Although the deal
resulted in a telecom giant it is safe to say that the 2 companies were pushed to do so due to
the entry of Reliance Jio and the price war that followed. Both companies struggled amidst
the growing competition in the telecom industry.
The deal worked both for Idea and Vodafone as Vodaphone went on to hold a 45.1%
stake in the combined entity with the Aditya Birla group holding a 26% stake and the
remaining by Idea. On the 7th of September, Vodafone Idea unveiled its brand-new identity
‘Vi’ which marked the completion of the integration of the 2 companies.
2. Tata and Corus Steel
Tata’s takeover of Corus Steel in 2006 was valued at over $10 billion. The initial offers from
Tata were at £4.55 per share but following a bidding war with CSN, Tata raised its bid
to £6.08 per share. Following Corus Steel had its name changed to Corus Steel and the
combination resulted in the fifth-largest steel making company.
The following years were unfortunately harsh on Tata’s European operations due to the
recession in 2008 followed by reduced demand for steel. This eventually resulted in a
number of lay-offs and sales of some of its operations.
3. Walmart Acquisition of Flipkart
Walmart’s acquisition of Flipkart marked its entry into the Indian Markets. Walmart won
the bidding war against Amazon and went onto acquire a 77% stake in Flipkart for $16
billion. Following the deal, eBay and Softbank sold their stake in Flipkart. The deal resulted
in the expansion of Flipkart’s logistics and supply chain network.
4. Zee Entertainment – Sony India Merger
Zee Entertainment Enterprises Limited (ZEEL) and Sony Pictures Networks India (SPNI),
two of India’s biggest media conglomerates, have taken the first steps towards a
multibillion-dollar merger. The Zee board of directors approved the merger between the two
companies. The agreement has the potential to make the newly created company one of the
country’s largest and most sought after.
Sony Pictures Entertainment would invest $1.575 billion in the newly consolidated firm as
part of the acquisition. On September 22nd, Zee’s board of directors gave in-principle
permission for the execution of a non-binding term sheet with SPNI. In addition, the two
parties will sign a non-compete agreement.
According to R Gopalan, chairman of Zee Entertainment, “ZEEL continues to chart a strong
growth trajectory and the board firmly believes that this merger will further benefit ZEEL,”,
“The value of the merged entity and the immense synergies drawn between both the
conglomerates will not only boost business growth but will also enable shareholders to
benefit from its future successes.”
Conclusions
M&A’s have become very popular over the years especially during the last two decades
owing to rapid changes that have taken place in the business environment. Business firms
now have to face increased competition not only from firms within the country but also from
international business giants thanks to globalization, liberalization, technological changes,
etc.
Generally, the objective of M&As is wealth maximization of shareholders by seeking gains
in terms of synergy, economies of scale, better financial and marketing advantages,
diversification and reduced earnings volatility, improved inventory management, increase in
domestic market share and also to capture fast growing international markets abroad. But
astonishingly, though the number and value of M&As are growing rapidly, the results of the
studies on the impact of mergers on the performance from the acquirers' shareholders
perspective have been highly disappointing. In this paper an attempt has been made to draw
the results of only some of the earlier studies while analyzing the causes of failure of
majority of the mergers. Making the mergers work successfully is not that easy as here we
are not only just putting the two organizations together but also integrating people of two
organizations with different cultures, attitudes and mindsets.
