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Mergers and Acquisitions: Meaning and Its Process

Mergers and Acquisitions: Meaning and Its Process

A growth-driven business always looks for expansion opportunities in the form of the products or services it offers, the market in which it operates or to diversify its business into a new market. The organic method of growing is internally, through input of finance, larger workforce, new ideas and innovations etc. A second way to expand and grow is through Merger and Acquisition (M&A). This the inorganic growth method. The expansion process requires the company to identify its strategic position in the industry, understand the economic, political and social factors that affect the business before getting into the core of strategic decision-making.

In this segment, the expansion theory explained is Merger and Acquisition. Simple terms suggest merger is something when two things (companies A and B) come together to create a new thing (company C), while acquisition is when one thing (company A) buy another thing (company B).

According to the Ministry of Corporate Affairs (MCA), India:

“Merger is defined as unification of two players into a single entity, whereas Acquisition is a situation wherein one player buys another player with intention to combine itself.”

Mergers and acquisitions are used as instruments of momentous growth and are increasingly getting accepted by Indian businesses as critical tool of business strategy. They are widely used in a wide array of fields such as information technology, telecommunications, and business process outsourcing as well as in traditional business to gain strength, expand the customer base, cut competition or enter into a new market or product segment. Mergers and acquisitions may be undertaken to access the market through an established brand, to get a market share, to eliminate competition, to reduce tax liabilities or to acquire competence or to set off accumulated losses of one entity against the profits of other entity.

Mergers and Acquisitions can be national and international. National mergers and acquisitions include recent take over of Future Group by Reliance Industries. ITC looking to expand its FMCG segment, acquired the business of Sunrise Foods. International deals include Jio merging with Facebook and Google to form a new entity to manufacture phones and technology.

Below is the process laid down process to follow when the M&A decision has been made:

  1. Strategy Development:

Expansion and growth are classified as strategic decisions as it involves the turnup of the whole business. M&A process should start with the development of this strategy. The acquirer (buyer) identifies the objective of merger and acquisition. They analyze the business, understand its environment, its financials and other due diligence. This strategy can be said to be the planning stage where things like capital requirement, contract/agreement terms, and other factors should be considered while developing the strategy.

  1. Information Exchange:

Once the acquirer has researched about the target business, the initial conversation should begin between the two parties. This usually involves a few meetings to get to know the management, their history with the company and reasons behind merger and acquisition. This process needs to be done before the documentation of the deal is started. There should be an expression of interest from both the parties. Here, the assessment of the benefits to the stakeholders should be made.

  1. Valuation and Synergies:

This step is completely financial in nature. Valuation is the process of determining the economic value of the business. This is required to determine the consideration (amount of payment) that the acquirer has to make in order to merge or acquire the business. In simple terms, synergy is the combined benefit that the two parties will earn after the merger and acquisition. This should be higher than the sum of the benefits if the parties were separate.

  1. Offer and Negotiation:

Once true and fair valuation is done and the acquirer has evaluated the expected synergies on merger and acquisition, both the parties can offer and negotiate the deals. The offer can be in form of cash, or other securities such as equity. Here, the acquirer has to be cautious to not lose the acquiree as other potential competitors can bid for it. Hence, continuous communication and follow-up is required until the deal is finalized.

  1. Due Diligence:

Due diligence is a process of verification, investigation, or audit of a potential deal or investment opportunity to confirm all relevant facts and financial information.The objective is to ensure that there are no discrepancies in the information which was provided earlier to the acquirer and based on which the offer was made.

  1. Agreement:

A Purchase Agreement is prepared as a legal document that records the terms and conditions between two companies that enter into an agreement for a merger and acquisition. It also outlines the rights and obligations of both the parties.

  1. Final Integration:

After the purchase agreement has been finalized, both parties close the deal by signing the documents, and the buyer gains control of the target. Post the closure of the deal, the management teams of both the entities work together to integrate them into the merged entity.

M&A deals happen regularly as the economy is every growing and expanding with new products and services emerging in the markets. This helps the company to grow and expand as well. The process can be lengthy or short, depending on the relationship between the two parties, but the compliances cannot be ignored.

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