Mergers And Acquisitions In India – A Brief Overview - Corporate and Company Law

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1. Introduction

Mergers and Acquisitions ("M&A")are among the most effective ways to expedite the implementation ofa business plan to grow rapidly. Companies in all sectors such astelecommunication, pharmaceutical, automobile, food and beveragesand others have grown at lightning speed, due to their M&Astrategy, apart from other factors. M&A refers to transactionsbetween two companies combining in some form. Although the terms'merger' and 'acquisition' are used interchangeablyand in same breath, they connote different legal meanings.

An acquisition is when a larger company acquires a smallercompany, thereby absorbing the business of the smaller company. Onthe other hand, a merger describes two firms, of approximately thesame 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 financialinstitutions that arranged M&A within the framework of aregulated regime during the initial period of M&A transactions.However, since the onset of the last decade of the twentiethcentury, Indian industries have been increasingly exposed to bothdomestic and international competition and competitiveness hasbecome an imperative for survival. Due to increased competitionamong domestic companies in both the domestic and internationalmarkets, majority of corporations in India have opted for M&Atransactions to grow in today's market. The main goal of mostcorporations is to produce worldwide consumer interference andbenefit from it and this global consumer influence can be achievedby partnering with other existing or establishing enterprises bothdomestically and abroad. M&A has shown to be anall-encompassing means for expanding creation portfolios, enteringnew markets, gaining knowledge, expanding access to research anddevelopment, and gaining access to the assets that allow a firm tooperate on a worldwide scale.

2. Merger and its classification

Merger is a tool used by companies for the purpose of expandingtheir operations. Usually, mergers occur in a consensual setting.Merger means integration of two entities into one. The variouspurposes of a merger are to increase the long-term profitability ofthe merging entities, increase its market share, lower operatingcosts, expand into new locations and connect commonplace items.

Mergers are classified into following types:

Horizontal merger
Horizontal mergers take place where the two mergingcompanies produce similar product in the same industry. Ahorizontal merger is when two companies competing in the samemarket merge or join together. This type of merger can either havea 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 localrestaurant were to horizontally merge with another localrestaurant, the impact of this merger on the food and beveragesmarket would be insignificant. In a large horizontal merger,however, the resulting ripple effects can be felt throughout themarket sector and sometimes throughout the whole economy.
Example: Merger of Vodafone India and Idea Cellular Limited, twotelecommunication companies, is a classic example of a horizontalmerger. Another example of horizontal merger is the merger betweenZee Entertainment Enterprises Limited and Sony Pictures NetworksIndia, two of the biggest media companies in India, competing inthe same market.
Vertical merger
Vertical mergers occur when two companies, each working atdifferent stages in the production of the same good, combine. Avertical merger can harm competition by making it difficult forcompetitors to gain access to an important component product or toan important channel of distribution. For example, if amanufacturer were to merge with a distributor of its products, suchmerger would have a huge impact on the other manufacturers anddistributors belonging to the same sector.
Example: Merger between Zee Entertainment Enterprises Limited Ltd.(ZEEL), a broadcaster, and Dish TV India Limited, a distributionplatform operator is an example of vertical merger as both theentities are at different stages of the production/supplychain.
Congeneric merger
Congeneric mergers occur where two merging firms are inthe same general industry, but they have no mutual buyer/customeror supplier relationship. It is the merger of two companies thathave no related products or markets. In short, they have no commonbusiness ties. The rationale behind such merger is usuallydiversification of risk.
There are two types of a conglomerate merger:
1. A pure conglomerate merger involves companiesthat are totally unrelated and that operate in distinctmarkets.
2. A mixed conglomerate merger involves companiesthat are looking to expand product lines or target markets.
Example: Merger between Thomas Cook India Limited and SterlingHoliday Resorts (India) Limited is an example of a congenericmerger as both the companies were involved in the tourism industrybut their customer-bases and process chains were unrelated.
Market-extension merger
A market-extension merger is a merger between companiesthat sell the same products or services but that operate indifferent markets. The goal of a market-extension merger is to gainaccess to a larger market and thus ensure a bigger customerbase.
Example: Merger between Mittal Steel and Arcelor Steel, aLuxembourg-based steel company, is an example of market-extensionmerger.
Product-extension merger
A product-extension merger is a merger between companiesthat sell related products or services and that operate in the samemarket. It is important to note that the products and services ofboth companies are not the same, but they are related. Example:India hasn't seen this kind of merger. However, from across theglobe, a classic example of such merger is PepsiCo's mergerwith Pizza Hut. Both companies worked in the same sector i.e., foodand beverages industry, and sold related but not the sameproducts.

3. Acquisition and its classification

Acquisition usually refers to a larger commercial entityacquiring a smaller company. In a broad sense, acquisition refersto acquiring company ownership wherein, one company purchasesanother outright. It is the acquisition of a controlling interestin the share capital of another existing company by onecorporation.

There are two basic forms of acquisitions:

Stock purchase
In a stock purchase, the acquirer pays the targetfirm's shareholders cash and/or shares in exchange for sharesof the target company. Here, the target's shareholders receivecompensation and not the target.
Asset purchase
In an asset purchase, the acquirer purchases thetarget's assets and pays the target directly.

4. Advantages of M&A

Some of the advantages of M&A are:

Unlocking synergies
The common rationale for M&A is to create synergies in whichthe combined company is worth more than the two companiesindividually. Synergies can be due to cost reduction or higherrevenues. Cost synergies are created due to economies of scale, while revenue synergiesare typically created by cross-selling, increasing market share, orhigher prices. Of the two, cost synergies can be easily quantifiedand calculated.
Higher growth
M&A enables a company to achieve higher revenues andattain faster growth, though inorganically, as compared to growingorganically. A company can make use of an aggressive M&Astrategy by merging with or acquiring another company with thelatest capabilities, thus saving itself from the cost and risk ofdeveloping the same internally.
Stronger market power
In horizontal and vertical mergers, the resultingentities attain a stronger market power, resulting in power toinfluence prices and be more in control of its supplychain.
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 streamfalls, an alternative stream of revenue may hold, or even pick up,diversifying the company's risk in theprocess.
Tax benefits
M&A can sometimes lead to tax benefits if the targetcompany is in a strategic industry or a country with a favourabletax regime. Further, acquiring a company with net tax lossesenables the acquiring company to use the tax losses to lower itstax liability.
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, providingconservative investors more confidence in the company. This in turnoffers the company new sales opportunities and new areas to explorethe possibility of their business.

5. Biggest M&A in India, in recent times:

M&A has manifoldly increased in India over the last fewyears. Following are the some of the biggest M&A in India:

Zee Entertainment – Sony IndiaMerger

Two of India's largest media companies, Zee EntertainmentEnterprises Limited and Sony Pictures Networks India, have agreedto a multibillion-dollar merger. The arrangement has the potentialto turn the merged entity into one of the largest and mostsought-after in the country. Both companies are expected to benefitfrom the merged entity and the synergies produced between them,which will not only accelerate business growth but will also allowshareholders to participate in its futuresuccess.

Vodafone and Idea Merger

The 2G Scam and the entry of Reliance Jio pushed variousestablished companies in the telecommunication sector to the brinkof exit from the Indian market. Greatly affected by the cheap plansoffered by Reliance Jio, a price war ensued in thetelecommunication sector. As the telecom business becameincreasingly competitive, Vodafone India and Idea Cellular Limited,two of the then biggest companies, struggled. Both these companiesdecided to merge into one single entity. It was a beneficialagreement for both Idea and Vodafone. Vodafone and Idea launchedits new corporate identity, 'Vi,' which marked theculmination of the two businesses' unification. This merger isestimated to be worth $23,000,000,000/- (United States Dollartwenty-three billion only).

Hindustan Unilever Limited's andGlaxoSmithKline Consumer Healthcare LtdMerger

Hindustan Unilever Limited ("HUL") isthe country's leading fast-moving consumer goodscompany. HULannounced its merger with GlaxoSmithKline Consumer Healthcare Ltdin December 2018. The merger is in line with HUL's aim ofexploiting the megatrend of health and wellness to establish asustainable and successful foods and refreshment business in India.The overall business is valued at INR 3,17,00,00,00,000/- (IndianRupees three hundred and seventeen billion only) in thistransaction.

Bharti Infratel and Indus Towers merger

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

Bank of Baroda and Vijaya Bank and Dena Bankmerger

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

Flipkart and eBay India merger

E-commerce major Flipkart merged with eBay India'soperations in 2017. The purpose of the merger was to providecustomers of Flipkart expanded product choices with the wide arrayof global inventory available on eBay while eBay customers wouldhave access to a more unique Indian inventory from Flipkartsellers.

Arcelor and Mittal Merger

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

Tata group's acquisition of Air India

Tata group acquired Air India in January 2022 through itssubsidiary Talace after making a successful bid of INR18000,00,00,000/- (Indian Rupees eighteen thousand crore only) for100% stake in Air India. This acquisition could be a part of Tatagroup's strategy for aviation business as the group also holdsa majority interest in AirAsia India and Vistara, a joint venturewith Singapore Airlines.

Wipro's acquisition of Capco

In March 2021, Wipro acquired UK-based InformationTechnology consulting company Capco for $1.500,000,000/- (UnitedStates Dollar one billion five hundred million only). Thisacquisition provides Wipro an opportunity to become a strongerplayer in the banking, financial services and insurance segment,which remains the most important/largest vertical for IndianInformation Technology services companies. Capco provides Wiproaccess to its strong clientele and opportunity to provide Capcoofferings, integrated with current Wiprorange of services to theircombined clientele. There is now a better chance to win largerdeals from new and existing clients while competing with peers.

HDFC Life's acquisition of Exide LifeInsurance

The life insurance subsidiary of mortgage player HDFC, HDFCLife, acquired 100% (one hundred percent) shareholding of theBengaluru-headquartered Exide Life Insurance company from ExideIndustries in an INR 6,687,00,00,000/- (Indian Rupees six thousandsix 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.

Tata Steel's acquisition of Corus

Tata Steel is the largest steel firm in India, and Corus isEurope's second-largest steel company. Since 2007, Tata Steelhas become the world's fifth-largest steel producer afteracquiring European steel giant Corus for $12,020,000,000/- (UnitedStates Dollar twelve billion twenty million only). The acquisitionof Corus, a high-value product manufacturer in a region of theworld where value products are in great demand provided Tata Steelwith possible synergies in manufacturing, procurement, research anddevelopment, logistics, and back-office operations.

Walmart's acquisition of Flipkart

Walmart's purchase of Flipkart marked its entry into theIndian market.Walmart defeated Amazon in a bidding war and paid$16,000,000,000/- (United States Dollar sixteen billion only) for a77% (seventy seven percent) stake in Flipkart. This helped Walmartcompete with Amazon in one of its key markets. Flipkart'slogistics and supply chain network grew as a result.

Zomato's acquisition of UberEats

Zomato, an online food delivery and restaurant discoveryplatform, 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). Thedecision was intended to reduce losses in the Uber's fooddelivery service in India.

Zomato's acquisition of Blinkit

With an aim to enter the quick market space to deliver groceriesonline, 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 croreonly). With this acquisition, Zomato will get access to the 400dark stores of Blinkit. Moreover, the acquisition of dark storesaligns with the online food aggregators' newly launched app'Zomato Instant' which promises food delivery within 10minutes.

Tata Motor's acquisition of Jaguar's LandRover

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

6. Conclusion

M&A is really confirmed to be one of the most useful methodsto overcome current difficulties and improve the development ofcompanies. Restructuring of business largely through M&A,operation at a greater scale, and other synergy effects seem tohave helped the domestic companies to enhance their efficiency andcompetitiveness in international market. On the other hand, entryof the foreign companies through M&A seems to have raisedcompetitive pressure in the domestic market forcing the firms toboost their competitiveness.

Mergers And Acquisitions In India – A Brief Overview - Corporate and Company Law - India (2024)