This article has been written by Ritika Goel, a 2nd year LLB student from Faculty of Law- Delhi University.

INTRODUCTION

The Companies Act,2013 has significantly replaced the 1956 act. It has brought some major and efficient changes or evolution in the corporate world. Among these changes, the evolution in the procedures of merger and acquisition of companies is a significant change. By doing this the amendment act tries to make the process of merger and acquisition smoother and easier.

DEFINITION OF MERGER-

The term ‘merger’ has not been defined anywhere in the act however, it implies amalgamation of two or more companies to form a new company which automatically receives all the resources/ assets of the companies merged. For example: Vodafone and Idea merged together to form ‘Vi’.

 Mergers have been taking place globally for centuries now and there have been many such landmark that changed not just an industry but at times a whole continent. It was Merger that in a way caused globalization, economic growth, liberalization etc. It was due to this process that a lot of nations were able to prosper, contributing to the country’s GDP as well, opening up a lot of economies thereby leading to several opportunities for them to grow as a whole and not just in a sector or industry. India was one such country as well which benefited from this process. By the late 1980s, the process gained some popularity in our country with then famous and renowned Swaraj Paul acquiring DCM Ltd. and Escorts Ltd to overpower them. But that was just a start point after then there has been no looking back and with changing times the economy changed as well. The companies or organisations are readily available these days to merge or business giants are on the lookout to acquire new and emerging talent in a bid to give them an upper hand in the market or business.

WHY DO MERGERS OCCUR?

 There are a number of reasons that mergers and acquisitions occur. These issues generally relate to business concerns such as competition, efficiency, marketing, product, resource, and tax issues. They can also occur because of some very personal reasons such as retirement and family concerns. However, let’s begin our exploration of why corporate combinations occur by discussing an often-cited reason − corporate greed.

CORPORATE GREED?

 Some people say that mergers occur because the greedy corporations want to acquire everything. As far as economic theory is concerned, the primary objective of a firm is to maximize profits, and thereby maximize shareholder wealth. We can argue about the firm’s approach to maximizing profits (e.g., whether being a good corporate citizen increases profits long term, etc.) but any firm, corporation or not, should make decisions designed to increase its profits.

SPECIFIC REASONS WHY MERGER OCCURS (WITHOUT GREED)-

1. Eliminate Competition–

 One important reason that companies combine is to eliminate competition. Acquiring a competitor is an excellent way to improve a firm’s position in the marketplace. It reduces competition, and allows the acquiring firm to use the target’s resources and expertise. Unfortunately, combining for this purpose is per se illegal under the antitrust acts as a predatory practice in restraint of trade. Consequently, whenever a merger is proposed, a major part of the resulting press release often deals with how this combination of firms is not anti-competitive, and is done to better serve the consumer.

1. Cost Efficiency and the Long-Range Average-

 Cost Curve Due to technology and market conditions, firms may benefit on a cost basis from being a certain size. Clearly, one way to grow is to combine with other small firms until the firm is optimally sized. Generally, the assumption is that larger firms are more cost-effective than are smaller firms (i.e., that larger firms exhibit economies of scale when compared to smaller firms). This is often the stated motive for mergers in the financial services industry.

1. How to Avoid Being a Takeover Target by Investing Existing Funds–

 This is a two-part reason that companies merge. If firm A has a great deal of liquid assets, it becomes a tempting takeover target because the acquiring firm can use the liquid assets to expand the business, pay off shareholders, etc. If A invests existing funds in a takeover, it has the effect of discouraging other firms from targeting firm A because A has increased in size, and will require a larger tender offer. Thus, the company has found a use for its excess liquid assets, and made itself more difficult to acquire. Often firms will state that acquiring a company is the best investment the company can find for its excess cash. This is the reason given for many conglomerate mergers.

1. Improve Earnings and Sales Stability–

 Improving earnings and sales stability are concerned with reducing corporate risk. If company A has some sort of earnings or sales instability, merging with company B may reduce or eliminate the instability provided company B’s instability is negatively correlated with company A’s instability. Suppose company A manufactures lawnmowers. Suppose further that company B manufactures snow blowers. Thus, company A makes money in the summer while company B makes money in the winter. If the companies are approximately the same size and have approximately the same sales, then by merging, they can eliminate the seasonal instability. Unfortunately, this is an economically inefficient way of eliminating instability.

PROS OF MERGER-

There are numerous ways in which the companies, industry or in a way even the nation is even benefitted from Merger transactions, few of the important ones are discussed below:

1. Economies of Scale – This is one of the most important reasons why companies go for Merger transactions as through them there is increased access to capital, reduced costs, enhanced production volume, increased profits. Companies with similar products opt for this as it helps them to reduce their operational cost, expand their customer base while enjoying maximum profits at minimum costs.
2. Unlocking Synergies – If we talk in terms of Merger, synergy can be described as the total sum of two companies put together being greater in terms of value and performance than the sum of two companies added together individually. In layman language synergy can be understood by the phrase ‘one plus one equals to three’.
3. Economies of Scope – In the case of organic growth in companies one cannot for sure guarantee attaining economies of scope but Merger has made that possible as well. Economies of Scope can be described as a situation wherein the production of a product reduces the production cost of a related item. It can be achieved by companies if they widen their product range but in a cost-effective manner.
4. Access to Talent – Merger deals help the companies to not only acquire skilled talent from other companies but also ensure that it helps the already existing talent in the company. This is done to retain as well as enhance the highly skilled talent. It helps to revive companies as with a new set of people come new ideas as well a broad skill set.

CONS OF MERGER–

• In cases of the merger, it is mostly a bigger company that acquires a small or emerging company to add to the value and talent of the acquiring company due to which the acquired company tends to lose its originality and individuality.

• Synergy may not always be positive as there are times when Merger deals lead to negative synergy i.e., the value of the two companies put together is comparatively less than the two companies if operated individually. ‘One plus one equals three’ sounds good but in reality, that isn’t the case always and as per historical trends, roughly 2 thirds of such mergers tend to let down on their terms.
• Brand value might take a hit if the Merger deals do not pan out well which ultimately will affect the overall functioning of the company/companies as it is after years of being in the market that a company creates a name for itself that cannot sustain itself by just one good deal.

• Not necessary that productivity goes through the roof by undergoing Merger transactions 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.

CONCLUSION-

We found that corporate combinations are similar to the kinds of combinations and merger that individuals often undertake in their everyday lives. Further, mergers are often made for solid business reasons. Although the merger may be made for sound and understandable reasons, the merging company typically pays too much. This is due to asymmetric information and the mechanics of a tender offer. We also reviewed the economic impacts of mergers on the employees, management, shareholders, and the competitive economic environment. We found that the impact of mergers are mixed − generally positive for the target firm’s shareholders, but negative for the merging firm’s shareholders as well as the resulting company’s employees and management. One final caveat is that each merger is complex with its own unique set of costs and benefits.

REFERENCE-

1. Air India case
   After independence, India was served by two aviation companies: Air India and Indian Airlines. Air India used to serve international market whereas the domestic aviation was Indian Airline’s department. After the opening of Indian aviation sector for private players the competition became really tough. In 2007, the Govt of India decided to merge Air India with Indian Airlines to reduce the business operation cost. Since then, Air India is globally recognized brand name of the company merged together. The merger had created a mega company with combined revenue of 15000 crore rupees.

1. Kingfisher Airlines and Air Deccan Case

In 2007, kingfisher airlines acquired a 26% equity stake in air deccan and became the single largest stakeholder in the company. Kingfisher later increased its stake to 46% and they renamed it as “Simply Deccan”.

1. Air India and Tata Sons

Air India had a debt of 426 billion rupees, it was going through losses. The govt decided to offer Air India to Talace Pvt Ltd. which is a subsidiary of TATA group. Talace pvt ltd bought it at 18000 crore rupees. Talace Pvt Ltd acquired 100% stake in the company on 27 January 2022.

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