Mergers and Acquisitions in India - Meaning, Examples, Difference, Types, Recent Mergers and Acquisitions

Mergers and acquisitions are instruments of growth for a company. In India, businesses consider mergers and acquisitions a critical business strategy tool. A business may consider the merger or acquisition of another business to access the market through an established brand, eliminate competition, get a market share, acquire competence, reduce tax liabilities or set off accumulated losses of one company against the profits of another company.

Mergers and Acquisitions meaning

A merger means combing two or more companies to form a new company in an expanded form. Both companies will cease to exist in a merger as they operate as another new company. A merger occurs when a company finds an advantage in joining the business with another company, such as an increased shareholder value. 

The acquisition is the process of selling one company to another, i.e. buying and selling the entire business between the entities. In an acquisition, one company takes over the other company either in a friendly or a hostile manner.

Difference between Merger and Acquisition

• Two companies of similar size combine to form a new entity in a merger. A larger company acquires a smaller company and absorbs smaller company business in an acquisition.
• A merger occurs when two companies combine forces to create one joint company. An acquisition takes place when one company takeovers the business of another company.
• In a merger, the merged companies work under a new name. In an acquisition, the acquired company works under the parent company name (acquiring company name).
• A merger leads to the issue of new shares to the shareholders of both companies. No new shares are issued to the acquired company shareholders in an acquisition.

Merger and Acquisition examples in India

Example of a merger 

Company X merges with Company Y to form a bigger company with a new name A. The merger of Glaxo Wellcome with SmithKline Beecham working under the name GlaxoSmithKline.

Example of an acquisition 

Company X acquires company Y. Company X manages and controls the business of company Y. Tata Motors acquired Jaguar cars and Land Rover from Ford Motors.

Reasons for Mergers and Acquisitions

Expand performance

The common reason for mergers and acquisitions is to perform better in the market. The worth and performance of the two combined companies are more than the two individual companies. It can be due to cost reduction or higher revenues.

Higher growth

Inorganic growth through mergers and acquisitions is usually a quick way to achieve higher revenues for a company than organic growth. A company can benefit by merging or acquiring another company by getting the latest capabilities without spending on developing the same internally.

Stronger market power

In a horizontal merger, companies can get a high market share and the power to influence prices. Vertical mergers also lead to market power since the company will control the entire supply chain without disturbances in supply.

Diversification

Companies operating in cyclical industries should diversify their cash flows to avoid significant losses during an industry slowdown. Acquiring a company in a non-cyclical industry enables the company to reduce and diversify its market risk.

Tax benefits

The tax losses of the acquired company help the acquiring company to lower its tax liability. While acquiring a company, tax benefits are considered, where one company realises significant taxable income while the other incurs tax loss carryforwards. However, mergers are usually not done just to avoid taxes.

Types of Mergers and Acquisitions

The following are the types of mergers:

• Horizontal merger - A merger between two companies which deal in the same service or product.
• Vertical merger - A merger between two companies working in different stages in producing and supplying the same product.
• Congeneric/conglomerate mergers - A merger between companies whose products or markets are unrelated or serve a different consumer base.
• Cash mergers - A merger where company shareholders get cash instead of shares of the merged company.
• Forward mergers - A merger between the supplier/vendor company and the buyer/client company.
• Reverse mergers - Merger of a company with the company that supplies raw materials.

The following are the types of acquisitions:

• Asset purchase - Acquisition is made by acquiring the target company’s assets. The acquiring company purchases the target company’s assets and pays them directly. 
• Stock purchase - Acquisition is made by buying the target company’s shares. The acquiring company pays cash to the target company’s shareholders or gives them shares in exchange for the target company’s shares. The target company’s shareholders receive compensation.

Cross-border Mergers and Acquisitions

A cross-border merger means a merger of two companies located in different countries resulting in a new company. An Indian company merges with a foreign company or vice versa in such a merger. Foreign investors are involved in cross-border mergers and acquisitions.

The assets and liabilities of the two companies from different countries are combined into a new legal company. There will be a transfer of assets and liabilities of a local company to a foreign company (foreign investor), and the local company will be affiliated with the foreign company or vice versa.

Merger and Acquisition process

The process of mergers and acquisitions in India are as follows:

Examine the Memorandum of Association (MOA)

The primary thing to do is to scrutinise the MOA of the companies and check whether the power of the merger is given or not. When there is no power of merger or acquisition in the MOA, the company must amend the MOA to include it.

Intimate the stock exchange

The merging companies must inform the stock exchange about the proposed merger and acquisition. They must send the relevant documents, such as resolutions, notices and orders to the stock exchange within the specified time.

Merger proposal draft

The board of directors of both companies should give their affirmation on the draft of the merger proposal. They must pass the resolution for approving critical administrative staff and different administrators to carry out the merger and acquisition.

File an application with the tribunal

The companies must file an application with the National Company Law Tribunal to record and approve the merger and acquisition along with the required documents.

Intimate the shareholders and creditors

After the tribunal’s approval, a notification should be sent to all the creditors and investors of the companies about the merger and acquisition. It should be sent within 21 days of the merger and acquisition event. 

Filing tribunal orders with the Registrar of Companies

The confirmed copy of the tribunal for merger and acquisition should be filed with the registrar of companies within the specified time provided by the tribunal.

Merger of assets and liabilities of companies

The assets and liabilities of both companies involved in the merger and acquisition should be combined to form a new company, or one company should take over another company by acquiring the assets of the other.

Issue for share subscription

When the merged companies form a new company, the company issues shares and debentures to the new company shareholders after listing the same on the stock exchange.

Advantages and disadvantages of Mergers and Acquisitions

The advantages of mergers and acquisitions are as follows:

• The mergers and acquisitions process helps companies increase their operations and net worth quickly. It also helps to boost the share price of the companies.
• The newly formed company’s combined assets and capital help reduce competition and gain a competitive edge.
• The new company formed by combining two companies can dominate other market players, ensure financial gains, guarantee better performance, etc. It simplifies the task of attracting a customer base.
• Mergers and acquisitions between companies provide various tax benefits. The losses incurred by one company are set off against the profits earned by another entity, thus minimising the tax liability.
• Since mergers and acquisitions require two companies to work together, it provides sales prospects and increases the business’s market reach.

The disadvantages of mergers and acquisitions are as follows:

• When two companies combine to become one company, it may result in having two employees doing the same job. This may result in job loss and retrenchments.
• A company spends a lot of energy, time and money on acquiring another business, resulting in forgoing other potential opportunities.
• Mergers and acquisitions involve high legal costs

Recent Mergers and Acquisitions in India

A few recent mergers and acquisitions in India are provided below.

Tata Group acquired Air India

Tata Group acquired Air India, the nationalised airline, in 2022. Tata announced the merger of Air India with Vistara, a joint venture between Singapore Airlines and Tata Sons. Air India had been struggling in business, and the travel restriction during the COVID-19 pandemic added more struggles. However, Tata is trying to restore Air India to its former glory.

PVR merger with INOX

India’s two leading cinema franchises, INOX and PVR, merged in 2022 to establish the largest multiplex chain with over 1500 screens nationwide. The COVID-19 pandemic was tough on the film industry and theatres. The INOX and PVR merger will result in reduced rental costs, advertising revenues and convenience fees for the merged entity, called PVR-INOX.

Zomato acquired Blinkit

Indian food aggregator platform, Zomato acquired Blinkit, the quick commerce company, for Rs.4,447 crore. Zomato operates in the food delivery and restaurant hosting businesses, but with the acquisition of Blinkit, it will also be able to enter the quick commerce field.