In India, substantial slowdown had been witnessed in the mergers and acquisitions (“M&A”) activity in last few years. In upcoming years, M&A deals can be increased as international investors are looking towards India for tremendous growth. With Mergers and acquisitions, we can combine distinct entities.
Overview of the Merger
The concept of merger is defined under Companies Act, 2013. Merger is merely a combination of two or more entities into one. Merger is done in order to achieve following objectives:
- Economies of scale;
- For technology advancement;
- Market Access.
Under this, merging entity will become single surviving entity.
There are several types of merger, and it can be done as per the requirements of the merging entities:
- Horizontal Mergers
- Vertical Mergers
- Cogeneric Mergers
- Conglomerate Mergers
- Cash Merger
- Triangular Merger
Overview of Acquisitions
An acquisition is a process to take control of interest in the share capital and assets and liabilities of the target company. A takeover may either be friendly takeover or hostile takeover.
Takeover may be done by any of the following ways:
- Through agreements between the offeror and the majority shareholders,
- Share purchase from the open market, or
- Offer to acquire shares or assets/ liabilities
What is the process of merger & amalgamation?
Following steps must be taken for M&A.
- Strategy Development for acquisition
A proper strategy should be developed for the desired outcomes.
- Criteria for M&A
Criteria should be there for value of the company, industry, revenue, growth and employees etc.
- Acquisition planning
The next step is to select that company which fulfills the set criteria and start a dialogue with the management of selected company.
- Valuation analysis
After the preliminary discussions, detailed financial information will be provided by the target company on the basis of which value the company will be determined.
The first step is to give offer and negotiations can be done thereafter.
- Due diligence
After the acceptance of an offer, due diligence will be done. Due diligence is done in order to verify the information given by the target company.
- Finalization of contracts
After completion of the process of due diligence, final purchase and sale agreement is executed and signed.
- Financing strategy
Financing strategy will take place once the deal is signed.
- Closing of the process of acquisition
The last step is the closure of acquisition and then the integration process starts here.
Deal Structuring in M&A
Deal structuring is considered as the most complicated step in the process of M&A. There are various things which must be considered in the process of deal structuring such as market condition, various laws relating to tax and corporate. In deal structuring, Term Sheet (to raise money) and a Letter of Intent (LOI) are the most important documents.
Types of Acquirers in Mergers and Acquisitions
In the process of M&A, there are mainly two types of acquirers such as strategic and financial.
Strategic acquirers are the operating companies which are operating in adjacent industries where they can enter a new market.
Financial buyers are the institutional buyers such as private equity firms. Leverage is often used by the financial buyers and performs a leveraged buyout (LBO).