MERGERS AND ACQUISITIONS
Mergers and Acquisitions, these words are used so often. We read about them almost every day. Let’s learn a little more about M&A.
Mergers and Acquisitions – these terms are often used interchangeably by many of us. However, there is a vast difference between the two. A merger is a situation where two or more companies come together to form a third company and create synergies. For eg.; Company ‘A’ wants to merge with Company ‘B’, the resultant company after the merger will be Company ‘C’. An acquisition, on the other hand, is a situation where one company takes control of another company. Here, Company ‘A’ acquires Company ‘B’ to form Company ‘A’.
Here is a list of a few very renowned mergers and acquisition deals in India along with useful links for studying the merger/acquisition:
- Havells and Lloyd (Deal Size: Rs. 1600 crores)
- Vodafone – Idea Merger (Deal Size: USD 23 billion)
- Vodafone – Hutchison Essar (Deal Size: USD 10.9 billion)
- Ranbaxy – Daiichi Sankyo (Deal Size: USD 4.6 billion)
- Snapdeal and Freecharge (Deal Size: USD 400 million)
- Flipkart and Myntra (Deal Size: USD 300-330 million)
- Ola and TaxiForSure (Deal Size: USD 200 million)
- UltraTech Cement and Jaypee Group (Deal Size: Rs. 16,189 crores)
From the above case studies, we understand that a company merges, acquires or get acquired for one of the following reasons:
- Expand the scope of business, or
- Survive in the market
However, making a merger or acquisition decision is not so easy. A number of factors are to be considered;
- before the merger/acquisition,
- during the merging/acquiring process, and
- after merging/acquiring.
A company engages itself into deep research and analysis before taking a step of either merging or acquiring.
The company that aims to acquire with another company is known as the “acquirer” and the company that proposes to merge with or acquire another company is known as the “proposer”. The acquirer firstly analyses its internal environment and external environment. After proper environmental scanning, the company comes to a conclusion whether it has to survive in the market or grow/expand its business in the market. The next step that the company undertakes is to decide ways to achieve the goal/objective of survival/growth. In consultation with experts, the company comes to a conclusion whether it wants to resort to merging or acquiring. They then shortlist companies where a potential merger or acquisition can be proposed. A number of factors are included in this aspect:
- The size and scale of the target business,
- The financial performance of the target,
- The image of the target in the market,
- The employee behaviour/work conditions,
- The work culture,
- Stability in the organisation (financial as well as managerial),
- The revenue generated,
- Whether it is in the Profits/Losses/Breakeven stage,
- The value of the target is affordable or no (in case of acquisition – just a rough estimate),
- The synergies and desynergies that might be created after the merger/acquisition, etc.
At this stage, the company, with the help of its expert team or analysts, thoroughly analyses the background of the target companies. The few best companies are then shortlisted and a formal proposal is sent to the target companies.
Once the target receives the proposal, it also follows similar steps to analyse whether it wants to merge or acquire; whether the company merging or acquiring is good or no; and whether the valuation of the target by the company is correct or no.
Finally, the founders or CEOs of the two companies along with their expert team come together on a single table to discuss:
- the reason for merging/acquiring,
- the synergies that might be created through the merger or acquisition,
- the terms of merging/acquiring,
- the negotiation of the value of the company, etc.
The decision to merge or acquire or get acquired is not so easy on the part of the founder or the CEO. It is a very crucial decision that has a huge impact on the organisation. It not only affects the financials of the organisation but also the work culture, employees, etc.
It is very difficult to get a “win-win” deal and more importantly, execute and succeed in achieving the “win-win” objective or goal set in the deal. In many cases, we observe that the merger or acquisition is a failure. For example, Havells acquiring Sylvania. However, Havells has revived now by divesting and by investing in R&D.
I hope this article was useful for understanding the concept of mergers and acquisitions and I hope the case studies provided in the blog are sufficient for you to understand the practical applicability of the two concepts.
Disclaimer: These blogs are solely for the purpose of clearing the simple concepts with an aim to have a strong base for the future leaders of the world.