In general the term Mergers and acquisitions (M&A) is used to describe the consolidation of assets or companies through various types of financial transactions, involving acquisitions, mergers, consolidations, purchase of assets, tender offers, and management acquisitions. The term Mergers and acquisitions (M&A) also refers to the desks at financial institutions that deal with such activity. Mergers, acquisitions, and takeovers have been a part of the business world for centuries. In today’s economic environment, companies are often faced with decisions concerning these actions – after all, the job of management is to maximize shareholder value. Through mergers and acquisitions, a company can develop a competitive lead and eventually increase shareholder value.
A merger is a combination of two companies where one company is entirely absorbed by another company. The less important corporation loses its identity and becomes part of the more important corporation, which retains its identity. It may include consolidation or absorption.
A merger takes place when a company finds profit in combining business operations with another company in a way that will contribute to increasing shareholder value. It is similar in various ways to an acquisition, which is why the two actions are so often grouped together as mergers and acquisitions (M&A).
Motives Behind Mergers of The Company
The reasons behind mergers the company are as follows:
- Cross-selling: For instance, a bank buying a stockbroker could then sell its banking products to the stockbroker's customers, while the broker can sign up the bank’s customers for a brokerage account.
- Taxes: A profitable can buy a loss maker to use the target’s tax right off i.e. wherein a sick company is bought by giant ones.
- Economies of Scale: This usually refers to a process in which the average cost per unit is decreased through increased production.
- Corporate Synergy: Better use of complementary resources. It may take the form of revenue enhancement and cost savings.
Types of Corporate Mergers
Corporate Mergers are classified into various categories which are as follows:
- Horizontal merger - Two companies that share the same product markets and lines and are in direct competition i.e. it results in the consolidation of firms that are direct opponents. E.g. Ford and Volvo Exxon and Mobil, Volkswagen and Rolls Royce and Lamborghini
- Vertical merger - A company and a supplier or a company and a customer i.e. merger of firms that have real or potential buyer-seller relationship eg. Time Warner-TBS, Ford- Bendix.
- Conglomerate merger - Normally, a merger between companies that do not have any common relationship of any kind or no common business areas. Consolidated firms may share marketing and distribution channels or sell related products or production processes.
- Product-extension merger - Conglomerate mergers which include companies selling different but related products in the same market or sell non-competing products and use the same marketing channels of the production process. E.g. Phillip Morris-Kraft, Pepsico- Pizza Hut, Proctor and Gamble, and Clorox.
- Market-extension merger - Conglomerate mergers wherein companies that sell the same products in different markets or geographic markets. E.g. Morrison supermarkets and Safeway, Time Warner-TCI.
- Pure Conglomerate merger - Two companies that merge have no obvious relationship of any kind. E.g. BankCorp of America- Hughes Electronics.
Legal Procedure Of Corporate Mergers
The Ministry of Corporate Affairs, Government of India, vide notification dated 14th December 2016 has issued rules i.e. the Companies (Compromises, Arrangements, and Amalgamations) Rules, 2016 under Chapter XV of the act which came into effect from 15th December 2016 after which all arrangements, compromises, and mergers shall have to be carried out according to the Companies Act 2013 (particularly Sections 230, 231 and 232) and the Companies (Compromises, Arrangements, and Amalgamations) Rules, 2016.
The legal procedure to merge two corporate entities is as follows:
- Examination of object clauses: The Memorandum Of Association of both the companies should be examined to check the power of amalgamation is available. Further, the object clause of the merging company should allow it to carry on the business of the merged company. If such clauses do not exist, required approvals of the board of directors, shareholders, and company law board are required.
- Intimation to stock exchanges: The stock exchanges where merging and merged companies are listed should be informed about the merger proposal. From time to time, copies of all orders, notices, and resolutions, should be mailed to the concerned stock exchanges
- Approval of the draft merger proposal by the respective boards: The draft merger proposal should be approved by the respective Board Of Directors. The board of each company should pass a resolution officially permitting its executives or directors to pursue the matter further.
- Application to the High Courts: Once the drafts of the merger proposal is accepted by the respective boards, each corporation should make an application to the high court of the state where its registered office is located. It can call the meetings of shareholders and creditors for passing the merger proposal.
- Dispatch of notice to shareholders and creditors: In order to assemble the meetings of creditors and shareholders, notice and an explanatory statement of the meeting, as sanctioned by the high court, should be dispatched by each company to its creditors and shareholders so that they get twenty-one days advance intimation. The notice of the meetings should also be published in two newspapers.
- Holding of meetings of creditors and shareholders: A meeting of shareholders should be held by each company for passing the scheme of mergers at least 75% of shareholders who vote either in person or by proxy must sanction the scheme of merger. The same process applies to all creditors for approval.
- Petition to High Court for confirmation and passing of High Court orders: Once the mergers scheme is passed by the shareholders and creditors, the companies involved in the merger should present a petition to the High Court for confirming the scheme of merger. A notice about the same has to be published in Two newspapers.
- Filing the order with the registrar: Registrar of companies is the centralized body for all the companies registered. Certified true copies of the high court order must be filed with the registrar of companies within the time limit specified by the court.
- Transfer of assets and liabilities: After the final orders have been passed by both the High Court’s, all the liabilities and assets of the merged company will have to be transferred to the merging company. Target company's liabilities and assets will be transferred to acquiring companies.
- Issue of shares and debentures: The merging company, after fulfilling the provisions of the law, should issue shares and debentures of the merging company. The new shares and debentures so issued will then be listed on the stock exchange.
The procedure under the Companies Act:
- Filing the application: Any company or creditors of the company or class of them, members or the class of members can file an application under section 391 of the companies act seeking authorization of any scheme of arrangement or compromise. But, by its very feature it can be understood that the scheme of amalgamation is usually presented by the company. While filing an application either under section 391 or section 394, the applicant is assumed to disclose all material particulars according to the provisions of the Act.
- Tribunal order for members meeting: After satisfying that the scheme is prima facie fair and workable, the Tribunal orders for the meeting of the members, class of members, creditors or the class of creditors. Rather, passing an order calling for a meeting, if the requirements of holding meetings with the members or class of shareholders are particularly dealt with in the order calling a meeting, then, there won’t be any subsequent litigation. The extent of conduct of meeting with such class of shareholders or the members is wider in case of amalgamation than where a scheme of arrangement or compromise is sought for under section 391 of the act.
- Approval of the stakeholder: The scheme must get sanctioned by the majority of the stakeholders i.e. through the creditors or class of creditors or the members or class of members. The extent of conduct of meetings with the members or class of members, creditors, or class of creditors will be restrictive somewhat in an application seeking arrangement or compromise.
- Disclosure: There should be due notice of disclosing all material particulars and annexing the copy of the scheme as the case may be while calling the meeting.
- Registrar report in case of amalgamation: In a case where amalgamation of two companies is sought for, before sanctioning the scheme of amalgamation, a report is to be received from the registrar of companies that the approval of the scheme will not prejudice the interests of the shareholders. The Central Government is also required to file its report in an application seeking approval of compromise, arrangement, or the amalgamation as the case may be under section 394A of the act.
- Filing certified copy: After complying with all the requirements, if the scheme is sanctioned, then, the certified copy of the order is to be filed with the concerned authorities.
In actual terms, the reason and motive behind mergers are that the two corporations become more profitable, valuable, better equipped in its operations rather than standing solely in the market and that the shareholder value is also over and above that of the sum of the two companies.