Mergers And Acquisitions In India – A Brief Overview

Shardul Amarchand Mangaldas & Co


Shardul Amarchand Mangaldas & Co founded on a century of legal achievements, is one of India’s leading full-service law firms. The Firm’s mission is to enable business by providing solutions as trusted advisers through excellence, responsiveness, innovation and collaboration. SAM & Co is known globally for its exceptional practices in mergers & acquisitions, private equity, competition law, insolvency & bankruptcy, dispute resolution, capital markets, banking & finance and projects & infrastructure.
Mergers and Acquisitions ("M&A") are among the most effective ways to expedite the implementation of a business plan to grow rapidly.
India Corporate/Commercial Law
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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

Two of India's largest media companies, Zee Entertainment Enterprises Limited and Sony Pictures Networks India, have agreed to a multibillion-dollar merger. The arrangement has the potential to turn the merged entity into one of the largest and most sought-after in the country. Both companies are expected to benefit from the merged entity and the synergies produced between them, which will not only accelerate business growth but will also allow shareholders to participate in its future success.

  1. Vodafone and Idea Merger

The 2G Scam and the entry of Reliance Jio pushed various established companies in the telecommunication sector to the brink of exit from the Indian market. Greatly affected by the cheap plans offered by Reliance Jio, a price war ensued in the telecommunication sector. As the telecom business became increasingly competitive, Vodafone India and Idea Cellular Limited, two of the then biggest companies, struggled. Both these companies decided to merge into one single entity. It was a beneficial agreement for both Idea and Vodafone. Vodafone and Idea launched its new corporate identity, 'Vi,' which marked the culmination of the two businesses' unification. This merger is estimated to be worth $23,000,000,000/- (United States Dollar twenty-three billion only).

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

Hindustan Unilever Limited ("HUL") is the country's leading fast-moving consumer goodscompany. HUL announced its merger with GlaxoSmithKline Consumer Healthcare Ltd in December 2018. The merger is in line with HUL's aim of exploiting the megatrend of health and wellness to establish a sustainable and successful foods and refreshment business in India. The overall business is valued at INR 3,17,00,00,00,000/- (Indian Rupees three hundred and seventeen billion only) in this transaction.

  1. Bharti Infratel and Indus Towers merger

Bharti Infratel, a telecommunications infrastructure company, merged with Indus Towers, India's largest mobile tower installation company, in 2020, to create a mega tower company by the name of Indus Tower Limited. The debt-ridden Vodafone Idea received about INR 3,760,00,00,000 (Indian Rupees three thousand seven hundred and sixty crore only) cash for its 11.15% (eleven decimal one five percent) holding in Indus Towers.

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

Vijaya Bank and Dena Bank merged with Bank of Baroda in 2019. Bank of Baroda, in December 2020 said that it had successfully integrated 3,898 (three thousand eight hinders and ninety eight) branches of Vijaya Bank and Dena Bank.

  1. Flipkart and eBay India merger

E-commerce major Flipkart merged with eBay India's operations in 2017. The purpose of the merger was to provide customers of Flipkart expanded product choices with the wide array of global inventory available on eBay while eBay customers would have access to a more unique Indian inventory from Flipkart sellers.

  1. Arcelor and Mittal Merger

Mittal Steel merged with Arcelor Steel, a Luxembourg-based steel company. 'ArcelorMittal,' the new corporation, is now the world's largest steel company. Mittal Steel chairman Lakshmi Mittal initiated a hostile offer for Arcelor in January 2006. After a long battle, the two businesses united to form the world's largest steel company, controlling 10% (ten percent) of the global steel market. The transaction was worth $38,300,000,000/- (United States Dollar thirty-eight billion three hundred million only).

  1. Tata group's acquisition of Air India

Tata group acquired Air India in January 2022 through its subsidiary Talace after making a successful bid of INR 18000,00,00,000/- (Indian Rupees eighteen thousand crore only) for 100% stake in Air India. This acquisition could be a part of Tata group's strategy for aviation business as the group also holds a majority interest in AirAsia India and Vistara, a joint venture with Singapore Airlines.

  1. Wipro's acquisition of Capco

In March 2021, Wipro acquired UK-based Information Technology consulting company Capco for $1.500,000,000/- (United States Dollar one billion five hundred million only). This acquisition provides Wipro an opportunity to become a stronger player in the banking, financial services and insurance segment, which remains the most important/largest vertical for Indian Information Technology services companies. Capco provides Wipro access to its strong clientele and opportunity to provide Capco offerings, integrated with current Wiprorange of services to their combined clientele. There is now a better chance to win larger deals from new and existing clients while competing with peers.

  1. HDFC Life's acquisition of Exide Life Insurance

The life insurance subsidiary of mortgage player HDFC, HDFC Life, acquired 100% (one hundred percent) shareholding of the Bengaluru-headquartered Exide Life Insurance company from Exide Industries in an INR 6,687,00,00,000/- (Indian Rupees six thousand six hundred and eighty seven crore only). With this acquisition, HDFC Life aims to grow its business in tier II and tier III cities, primarily in south and east India.

  1. Tata Steel's acquisition of Corus

Tata Steel is the largest steel firm in India, and Corus is Europe's second-largest steel company. Since 2007, Tata Steel has become the world's fifth-largest steel producer after acquiring European steel giant Corus for $12,020,000,000/- (United States Dollar twelve billion twenty million only). The acquisition of Corus, a high-value product manufacturer in a region of the world where value products are in great demand provided Tata Steel with possible synergies in manufacturing, procurement, research and development, logistics, and back-office operations.

  1. Walmart's acquisition of Flipkart

Walmart's purchase of Flipkart marked its entry into the Indian market.Walmart defeated Amazon in a bidding war and paid $16,000,000,000/- (United States Dollar sixteen billion only) for a 77% (seventy seven percent) stake in Flipkart. This helped Walmart compete with Amazon in one of its key markets. Flipkart's logistics and supply chain network grew as a result.

  1. Zomato's acquisition of UberEats

Zomato, an online food delivery and restaurant discovery platform, has purchased the Indian operations of Uber Eats, Uber's food delivery service, for roughly $350,000,000/- (United States Dollar three hundred and fifty million only). The decision was intended to reduce losses in the Uber's food delivery service in India.

  1. Zomato's acquisition of Blinkit

With an aim to enter the quick market space to deliver groceries online, Zomato is set to acquire quick commerce setup, Blinkit, formerly Grofers in an all-stock deal worth INR 4,448,00,00,000/- (Indian Rupees four thousand four hundred and forty-eight crore only). With this acquisition, Zomato will get access to the 400 dark stores of Blinkit. Moreover, the acquisition of dark stores aligns with the online food aggregators' newly launched app 'Zomato Instant' which promises food delivery within 10 minutes.

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

Tata Motors Ltd., located in India, announced in June 2008 that it had completed the acquisition of the two historic British brands Jaguar and Land Rover from Ford Motors, based in the United States, for US$ 2,300,000,000/- (United States Dollar two billion three hundred million only). It allowed a struggling Ford to get rid of two loss-making vehicle divisions. This acquisition provided the company with access to high-end vehicles, as well as the opportunity to add two legendary luxury brands to its roster and a global presence.

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.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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