India: Mergers And Acquisitions In India – A Brief Overview

1. Introduction

Mergers and Acquisitions ("M&A") are among the most effective ways to expedite the implementation of a business plan to grow rapidly. Companies in all sectors such as telecommunication, pharmaceutical, automobile, food and beverages and others have grown at lightning speed, due to their M&A strategy, apart from other factors. M&A refers to transactions between two companies combining in some form. Although the terms 'merger' and 'acquisition' are used interchangeably and in same breath, they connote different legal meanings.

An acquisition is when a larger company acquires a smaller company, thereby absorbing the business of the smaller company. On the other hand, a merger describes two firms, of approximately the same size, that join forces to move forward as a single new entity, rather than remain separately owned and operated.

In India, it was the government agencies and the financial institutions that arranged M&A within the framework of a regulated regime during the initial period of M&A transactions. However, since the onset of the last decade of the twentieth century, Indian industries have been increasingly exposed to both domestic and international competition and competitiveness has become an imperative for survival. Due to increased competition among domestic companies in both the domestic and international markets, majority of corporations in India have opted for M&A transactions to grow in today's market. The main goal of most corporations is to produce worldwide consumer interference and benefit from it and this global consumer influence can be achieved by partnering with other existing or establishing enterprises both domestically and abroad. M&A has shown to be an all-encompassing means for expanding creation portfolios, entering new markets, gaining knowledge, expanding access to research and development, and gaining access to the assets that allow a firm to operate on a worldwide scale.

2. Merger and its classification

Merger is a tool used by companies for the purpose of expanding their operations. Usually, mergers occur in a consensual setting. Merger means integration of two entities into one. The various purposes of a merger are to increase the long-term profitability of the merging entities, increase its market share, lower operating costs, expand into new locations and connect commonplace items.

Mergers are classified into following types:

1. Horizontal merger
   Horizontal mergers take place where the two merging companies produce similar product in the same industry. A horizontal merger is when two companies competing in the same market merge or join together. This type of merger can either have a very large effect or little to no effect on the market.
   
   When two extremely small companies combine, or horizontally merge, the results of the merger are less noticeable. If a small local restaurant were to horizontally merge with another local restaurant, the impact of this merger on the food and beverages market would be insignificant. In a large horizontal merger, however, the resulting ripple effects can be felt throughout the market sector and sometimes throughout the whole economy.
   
   Example: Merger of Vodafone India and Idea Cellular Limited, two telecommunication companies, is a classic example of a horizontal merger. Another example of horizontal merger is the merger between Zee Entertainment Enterprises Limited and Sony Pictures Networks India, two of the biggest media companies in India, competing in the same market.
   
   
2. Vertical merger
   Vertical mergers occur when two companies, each working at different stages in the production of the same good, combine. A vertical merger can harm competition by making it difficult for competitors to gain access to an important component product or to an important channel of distribution. For example, if a manufacturer were to merge with a distributor of its products, such merger would have a huge impact on the other manufacturers and distributors belonging to the same sector.
   
   Example: Merger between Zee Entertainment Enterprises Limited Ltd. (ZEEL), a broadcaster, and Dish TV India Limited, a distribution platform operator is an example of vertical merger as both the entities are at different stages of the production/supply chain.
   
   
3. Congeneric merger
   Congeneric mergers occur where two merging firms are in the same general industry, but they have no mutual buyer/customer or supplier relationship. It is the merger of two companies that have no related products or markets. In short, they have no common business ties. The rationale behind such merger is usually diversification of risk.
   
   There are two types of a conglomerate merger:
   1. A pure conglomerate merger involves companies that are totally unrelated and that operate in distinct markets.
   2. A mixed conglomerate merger involves companies that are looking to expand product lines or target markets.
   
   Example: Merger between Thomas Cook India Limited and Sterling Holiday Resorts (India) Limited is an example of a congeneric merger as both the companies were involved in the tourism industry but their customer-bases and process chains were unrelated.
4. Market-extension merger
   A market-extension merger is a merger between companies that sell the same products or services but that operate in different markets. The goal of a market-extension merger is to gain access to a larger market and thus ensure a bigger customer base.
   
   Example: Merger between Mittal Steel and Arcelor Steel, a Luxembourg-based steel company, is an example of market-extension merger.
5. Product-extension merger
   A product-extension merger is a merger between companies that sell related products or services and that operate in the same market. It is important to note that the products and services of both companies are not the same, but they are related. Example: India hasn't seen this kind of merger. However, from across the globe, a classic example of such merger is PepsiCo's merger with Pizza Hut. Both companies worked in the same sector i.e., food and beverages industry, and sold related but not the same products.

3. Acquisition and its classification

Acquisition usually refers to a larger commercial entity acquiring a smaller company. In a broad sense, acquisition refers to acquiring company ownership wherein, one company purchases another outright. It is the acquisition of a controlling interest in the share capital of another existing company by one corporation.

There are two basic forms of acquisitions:

1. Stock purchase
   In a stock purchase, the acquirer pays the target firm's shareholders cash and/or shares in exchange for shares of the target company. Here, the target's shareholders receive compensation and not the target.
   
2. Asset purchase
   In an asset purchase, the acquirer purchases the target's assets and pays the target directly.
   

4. Advantages of M&A

Some of the advantages of M&A are:

1. Unlocking synergies
   The common rationale for M&A is to create synergies in which the combined company is worth more than the two companies individually. Synergies can be due to cost reduction or higher revenues. Cost synergies are created due to economies of scale, while revenue synergies are typically created by cross-selling, increasing market share, or higher prices. Of the two, cost synergies can be easily quantified and calculated.
2. Higher growth
   M&A enables a company to achieve higher revenues and attain faster growth, though inorganically, as compared to growing organically. A company can make use of an aggressive M&A strategy by merging with or acquiring another company with the latest capabilities, thus saving itself from the cost and risk of developing the same internally.
   
3. Stronger market power
   In horizontal and vertical mergers, the resulting entities attain a stronger market power, resulting in power to influence prices and be more in control of its supply chain.
   
4. Diversification
   M&A help companies to have more revenue streams, thereby enabling them to spread risk across those revenue streams, rather than having it focus on just one. When one revenue stream falls, an alternative stream of revenue may hold, or even pick up, diversifying the company's risk in the process.
5. Tax benefits
   M&A can sometimes lead to tax benefits if the target company is in a strategic industry or a country with a favourable tax regime. Further, acquiring a company with net tax losses enables the acquiring company to use the tax losses to lower its tax liability.
   
6. Geographical or other capital investment
   M&A is aimed to smooth a firm's earnings outcomes, which in turn smooths the stock price over time, providing conservative investors more confidence in the company. This in turn offers the company new sales opportunities and new areas to explore the possibility of their business.
   

5. Biggest M&A in India, in recent times:

M&A has manifoldly increased in India over the last few years. Following are the some of the biggest M&A in India:

1. Zee Entertainment – Sony India Merger

2. Vodafone and Idea Merger

3. Hindustan Unilever Limited's and GlaxoSmithKline Consumer Healthcare Ltd Merger

4. Bharti Infratel and Indus Towers merger

5. Bank of Baroda and Vijaya Bank and Dena Bank merger

6. Flipkart and eBay India merger

7. Arcelor and Mittal Merger

8. Tata group's acquisition of Air India

9. Wipro's acquisition of Capco

10. HDFC Life's acquisition of Exide Life Insurance

11. Tata Steel's acquisition of Corus

12. Walmart's acquisition of Flipkart

13. Zomato's acquisition of UberEats

14. Zomato's acquisition of Blinkit

15. Tata Motor's acquisition of Jaguar's Land Rover

6. Conclusion

M&A is really confirmed to be one of the most useful methods to overcome current difficulties and improve the development of companies. Restructuring of business largely through M&A, operation at a greater scale, and other synergy effects seem to have helped the domestic companies to enhance their efficiency and competitiveness in international market. On the other hand, entry of the foreign companies through M&A seems to have raised competitive pressure in the domestic market forcing the firms to boost their competitiveness.

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