This article has been written by Ms. Aarsha Prem, a 5th year LL.B. student from CLS GIBS college.

What is a Merger?

Companies utilise mergers as a strategy to grow their operations, frequently with the goal of improving long-term profitability. Mergers typically take place in a consensual setting (with consent of both parties). Mergers can imply “to unite commercial or industrial organisations” or “to lose individuality by being absorbed into something else,” according to the dictionary. 

Companies gain from merged company activities and ventures in a merger. Together, they can better meet the needs of the company’s shareholders and increase shareholder value. The typically monitored goals are: 

1. To fulfil tax requirements 
2. To develop efficient policies for diversification to lower financial risks 
3. Getting Materials 
4. Managerial incentives to increase their motivation 
5. To raise and improve the shareholders’ wealth 

Hence, mergers are carried out to take care of the financial perspective in order to develop businesses that are capable and useful, both for shareholders and for customers. The primary goal of a merger or company combination is to accelerate corporate business growth. With improved products and a stronger competitive position, growth can happen more quickly. 

Types of Mergers:

Combinations could be vertical, horizontal, circular, or conglomeratic depending on the objectives profile of the offerors, as specifically defined below with relation to the purpose in view of the offeror company. 

(A) Vertical combination: A business would like to acquire another business or merge with it in order to grow, promoting backward integration to ingest supply-side resources and forward integration to reach market outlets. The acquiring firm makes an effort to reduce its raw material and finished goods inventories through the merger with another unit. It also implements its production plans in accordance with its goals and makes working capital investment savings. 

(B) Horizontal combination: This is the union of two rival businesses that are in the same stage of the production process. The target company and the purchasing company are both in the same industry. The main goal of these mergers is to increase market segments, exert better control over the market, reduce working capital investment, eliminate competition concentration in the product, eliminate duplication of facilities and operations, and broaden the product line in order to achieve economies of scale in production. 

(C) Circular combination: Businesses that produce different goods look to join forces in order to combine research and distribution resources in order to cut costs by doing away with duplication and expanding the market. Benefits in the form of economies of resource pooling and diversification are obtained by the purchasing company. 

(D) Conglomerate combination: This is the union of two businesses operating in unconnected markets. The main goal of these mergers is to maximise the use of financial resources, increase debt capacity, and reorganise their financial systems in order to better serve their shareholders through increased leveraging and EPS, a lower average cost of capital, and an increase in the present value of the outstanding shares. A merger improves the acquirer company’s overall stability and establishes balance throughout its whole product and production process portfolio.

Boon for Mergers

1) Purchasing supplies: To protect the source of raw material or intermediary product supplies 

2) Renovating production facilities: To obtain economies of scale by combining production facilities and utilising equipment and resources more effectively; 

3) Market expansion and strategy: To stifle rivalry and safeguard the current market; 

4) Strong financial position: to increase liquidity and have easy access to funds; 

5) Strategic goal: Depending on business plans, achieve strategic goals through alternative types of combinations that may be horizontal, vertical, product growth, market extensional, or other specified unrelated goals. 

6) Desired degree of integration: Mergers are sought to achieve the two joining corporate houses’ desired degree of integration. Operational or financial integration may be involved.

Benefit for shareholders

Shareholders’ investments in the companies involved in the merger should increase in value. Shares purchased from one company’s stockholders and held by another should increase in value over time, creating opportunities for gains in other investments. Shareholders may benefit from mergers in a variety of ways, including: 

(a) realising monopoly profits; 

(b) scale economies; 

(c) diversifying the product line; 

(d) acquiring human resources and other resources not otherwise available; and 

(e) greater investment opportunities in combinations.

Benefit for managers

Managers are focused on enhancing business operations, successfully running the company’s affairs for overall gains, and growing the business to get better terms on status advancement, perks, and fringe benefits. Managers are in favour of mergers where all of these outcomes are certain. Support from managers becomes challenging when they are worried about being replaced by new management in the merged firm and the subsequent depreciation that follows the merger.

Bane of Mergers 

Synergy may not always be beneficial because M&A transactions may result in negative synergy, which means that the combined value of the two businesses is less than the combined value of the two businesses operating independently. 

If the M&A agreements fail, brand value may suffer, which will ultimately have an impact on how successfully the firm or companies operate as a whole because a company only builds a reputation in the market after many years of operation and cannot rely on one successful deal to maintain that reputation. For the very basic reason that there might be cultural conflicts between the two entities, their objectives might not be the same, and bringing in a new entity might end up making things worse for the company that underwent such a deal, it is not necessary that productivity goes through the roof by undergoing M&A transactions. 

If the wrong company is not combined with, it may very likely reduce the productivity of the business that was succeeding in its particular industry. There have been M&A transactions that backfired, producing significant losses, job losses, diminished brand value, and other negative effects on the organisations involved and the industry as a whole.

Effect on workers or employees:

Every time there is a merger, it is a well-known reality that there will inevitably be layoffs. 

If the newly formed company is productive from a business standpoint, fewer personnel would be needed to do the same activity. In such a situation, the corporation would want to reduce its workforce. If the laid-off workers have the necessary abilities, they may actually gain from the layoff and move on to better opportunities. Yet, it is typically observed that the fired individuals would not have had a considerable impact on the new organisational structure. This explains why they were kicked out of the newly formed group.

Effect on Management:

There might be a “clash of the egos” involved. The two organisations’ cultures could differ from one another. The manager may be asked to implement such policies or tactics under the new system, even if he may not fully agree with them. When such an issue emerges, the organization’s major focus is diverted, and executives are either busy resolving the issue among themselves or moving on. Nonetheless, if the manager has the necessary credentials or is well-equipped with a degree, moving to another organisation may not be too difficult.

Conclusion

Since the beginning of time, mergers and acquisitions (M&A) have occurred all over the world. Many historic M&A have revolutionised not only a sector but occasionally a whole continent. Globalization, economic expansion, liberalisation, etc. were all indirectly brought about via M&A. This technique made it possible for many countries to develop, contributing to the GDP of their own countries and creating several opportunities for their economies to expand broadly rather than simply in a single area or industry. 

Merging frequently serves as the renowned English proverbial “beacon of hope,” which refers to something that offers hope to businesses who are on the verge of going out of business. 

The goal of mergers is to increase a company’s production and earnings. Also, the goal is to lower the company’s expenses. Mergers and acquisitions, however, don’t always work out. The primary objective of the procedure can occasionally become blurry. Many variables affect whether mergers, acquisitions, or takeovers are successful. In addition to having an impact on the entire workforce in that organisation, mergers and acquisitions that are opposed also damage the reputation of the business. Throughout the process, there are other psychological effects in addition to the real purpose being diverted. According to studies, mergers and acquisitions have an impact on senior executives, the workforce, and shareholders.

References:

https://www.successcds.net/learn-english/essays/the-merger-of-banks-in-india.html

https://www.legalservicesindia.com/article/1019/Mergers-&-Acquisitions-for-firms.html

https://www.brainboosterarticles.com/post/mergers-and-acquisitions-boon-or-bane

https://www.legalserviceindia.com/legal/article-10387-merger-a-boon-or-bane-for-companies-.html

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