Merger and Acquisition

Merger

According to section 2(1A) of Income Tax Act, 1961 amalgamation is the merger of one or more companies with another company, or, is the merger of two or more companies (amalgamating companies) to form a new company (amalgamated company) in such a way that all the assets and liabilities of amalgamating companies becomes assets and liabilities of the amalgamated company and shareholders holding not less than 9/10th in value of the amalgamating companies becomes shareholding of amalgamated company. 

Acquisition

Acquisition or takeover refers to the process in which a person or firm acquires controlling interest in another firm. Acquisition can be friendly or hostile. A friendly acquisition is one in which management or controlling group of the target company sells its controlling shares to another group at its accord. The acquisition is referred as hostile, if management of the target company is unwilling to negotiate a contract with prospective acquirer and the acquirer directly approach to the shareholders of the target company by making an open offer. 

Sections 391 to 394 of the Companies Act, 1956, govern the process of mergers or amalgamations and acquisition are governed by "SEBI Regulation for Substantial Acquisition of Shares and Takeover" 

Forms of Mergers

1. Horizontal Mergers is the merger of two firms doing same kind of business. 
2. Vertical Mergers is the merger of firms operating in different stages of the value chain. Supply security (backward integration), risk reduction (forward integration) and capture high profitability (creating value) are the prime motivation for the vertical mergers.  
3. Conglomerate Mergers is the merger of firms engaged in unrelated types of business activity. There are three types of Conglomerate Mergers viz. 
• Product extension mergers
• Geographical market expansion mergers, and
• Pure conglomerate mergers. 

Motivation for Mergers & Acquisitions

• Strategic realignment 
• Technological change 
• Regulatory and political change
• Operating Synergy 
• Economies of scale
• Economies of scope 
• Cross-selling
• Financial Synergy
• Lower cost of capital
• Diversification (Related/Unrelated)
• Financial considerations
• Acquirer believes target is undervalued (q-ratio): If the target's share market price is lower than that acquirer's price, this under-valuation will make the target attractive and would lead to M & A.
• Booming stock market 
• Falling interest rates 
• Managerialism: Building an empire so that management would become more powerful..
• Market power 
• Ego/Hubris:  There are many company who follow the path of inorganic growth. The company who have made lot of acquisition in past, the management may start believing that they will not go wrong. They think they are paying right price for buying the target. This (over)self-confidence of management may lead to wrong decision making. However, the overwhelming pride caused by hubris is often considered a flaw in character leads to M & A.
• Tax considerations

Asset and Stock Deals

Asset acquisition
The acquirer buys some or all of the target's assets/liabilities directly from the seller. If all assets are acquired, the target is liquidated. Acquirer can "cherry pick" wanted assets/liabilities, avoiding unwanted liabilities. However, some assets cannot be transferred easily without third party consents. The buyer's basis in the acquired assets is stepped up to the purchase price (FV).

Stock acquisition
The acquirer buys the target's stock of from the selling shareholders. All liabilities transfer to the buyer by operation of law, wanted or not. However, the buyer can contractually allocate liabilities to the seller by selling them back. The buyer's basis in the acquired stock is stepped up to the purchase price (FV). The buyer assumes a carryover basis in the acquired assets.