MECHANICS OF MERGERS & ACQUISITIONS

Vedant Shukla* & Kriti Sharma**

Change is ubiquitous in contemporary society, and nowhere more so than in the operations of the large-scale, public corporation. Dramatic changes are underway, not only in the structure of corporate activity in areas such as the nature of work and the nature of organizational form, but also in the product and financial markets and the regulatory environment within which corporations operate.

The depth and rapidity of these changes compel a reassessment of the ability of various governance structures to cope and adapt. Understanding this process will require not only an understanding of the nature of the changes that are underway, but also a reassessment of the paradigms of corporate governance and their ability to inform, respond to, and even shape such change.

As we all know that a business flourishes over time as the utility of its products and services is recognized in the market. For the buyer, with the market changing so rapidly, product development has become a luxury that is not always a viable option. M&A has essentially become an efficient means to enter a new market. Buyers are more than willing to pay premium prices to gain market entry for a product that extends or diversifies their product line. Acquisitions can also expand customer bases, providing a more solid overall corporate business base.

At times the growth process is dominated by certain inorganic processes, symbolized by an instantaneous expansion of work force, customers, and infrastructure resources, which thereby leads to an overall increase in the revenues, and profits of an entity. The concept of Mergers and Acquisitions is a manifestation of this similar inorganic growth process.

In simple words, a ‘merger' is a marriage between two companies, usually of roughly equal size, although it is quite common to use the word ‘merger' to include takeover as well. But in market terms ‘Merger' refers to finding an acceptable partner, determining upon how to pay each other and ultimately creating a new company, which is a combination of both the companies unlike an ‘Acquisition' which refers to buying out another company and taking it into the fold of the acquiring company. This is done by paying the acquired company, the value of its capital and depending upon the circumstances, a premium over the capital amount. Since the differences are only technical, we refer to all such business restructuring measures as M&A activities.

These are taken to be instruments of momentous growth and are increasingly getting accepted by the Indian business community as a 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, expanding 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. It is therefore said to be an arrangement whereby the assets of two (or more) companies become vested in, or under the control of, one company (which may or may not be one of the original two companies), which has as its shareholders all, or substantially all, the shareholders of the two companies.

There has been a steady increase in cross-border mergers with the increase in global trade by undertaking increased or combined activities, which help in the availability of floating capital, which is not permanently invested in fixed assets, along with the availability of stock in trade or cash/credit limits to enhance the operational efficiency. Through abiding the basic vital steps involved in the process of merger like: Internal Self-evaluation, Inter-managerial appraisal, Discussion of Forms of Partnership, Negotiation and Communication, and Implementation. By the help of such proper enforcement of the Mergers and Acquisitions procedure one can pursue long-term benefits, accompanied by policies like efficient management which can help take control over a well-established business with all its technology and skilled man-power, saving time, energy and eliminates the need for high capital investment which would otherwise be required to facilitate competition and improved corporate governance.

But things are not always as simple as they seem. The Companies Act, 1956 consolidates provisions relating to mergers and acquisitions and other related issues of compromises, arrangements and reconstructions (provisions of sections 391 to 394 of the Companies Act, 1956), however other provisions of the Companies Act get attracted at different times such as section 372 which provides for purchase by company of shares, etc., of other companies and in each case of merger and acquisition and the procedure remains far from straightforward. The process of mergers and acquisitions in India is court driven, long drawn and hence problematic. This process may be initiated through common agreements between the two parties, which in itself does not have an automatic legal cover to it. The sanction of the High Court is required for bringing it into effect. Even the regulatory regime i.e. the laws and Acts other than Companies Act, 1956, governing M&A in the Indian corporate scenario is, unfortunately, complex and straddles several areas of law and accounting, not to mention business concerns. The Acts having an impact on merger and acquisition transactions are as follows:­

Competition Act, 2000: An essential feature of the Competition Act , 2002 is regulation of combinations, which include acquisitions, mergers and amalgamations. Sections 5 and 6 of Competition Act, 2002 provides for combination and section 18 of the aforesaid Act empowers the Competition Commission of India to regulate combinations i.e. mergers, acquisition of shares or acquiring of control, etc., above the threshold given in the Act.

Foreign Exchange Management Act, 1999: FEMA is the primary Indian law which regulates dealings in foreign exchange. Although there are no provisions in the Act which deal directly with transactions relating to amalgamations, certain provisions of the Act become relevant when shares in Indian companies are allotted to non-residents, where the undertaking sought to be acquired is a company which is not incorporated under any law in India . Various regulations passed from time to time under FEMA regulate the transfer of shares and investment to and by foreign nationals.

The Indian Income Tax Act (ITA), 1961: This Act contains elaborate provisions for corporate restructuring so that companies can focus better on core commercial activities. The comprehensive set of amendments to the Act aim at making such commercial re-organizations ‘fully tax neutral'. The ITA refers to two types of mergers. Merger has not been defined under the ITA but has been covered under the term ‘amalgamation' as defined in section 2(1B) of the Act. It states that all the property and liabilities of the amalgamating company or companies immediately before the amalgamation must become part of the amalgamated company by virtue of the amalgamation. Shareholders holding not less than three-fourths in value of the shares in the amalgamating company or companies must become shareholders of the amalgamated company by virtue of the amalgamation procedure.

SEBI Take over Code 1994: The SEBI regulations on Substantial Acquisition of Shares and Takeover Regulation govern matters like, hostile take-overs, competitive bids, revision of open offer, withdrawal of open offer under certain circumstances, and restraining a second offer on the same company within six months by the same acquirer. These regulations also require the acquirers to disclose the holding if exceeding a certain limit and also provides a condition of an open offer in case of acquisition of shares of a company beyond a certain percentage.

The procedures as prescribed in abovementioned legislations sometimes result in indefinite delay of the main objective behind a merger i.e. to widen the scale of production and enhance its economic viability. Therefore to avoid such traumatic situations and for availing a better merger it is always important to take care of certain basic issues regarding (i) Preplanning and (ii) Outlining the Ideal merger candidate. One also needs to make sure if there are human resources, procedures or systems that the acquiring firm wants to modify, consider making those changes as part of the merger process. Because merger is a tool used by companies for the purpose of expanding their operations and any doubt of uncertainty in a pre-merger process can ruin the whole aim of the whole restructure concept in itself leading to a better contribution to a prospering ‘Industrial Concentration' in the economy. Thus before the final choice is made, it would be best to draw up a shortlist of a number of corporate candidates. The identification of a partner should be based on the detailed information of the merger partners, collected from published and private sources. Such information should reveal aspects such as organizational history of business and capital structure, organizational setup and management pattern, assets profile movable and immovable assets, land and building, accounting policies, financial management and control, profitability projections and creditors' profile, company's credit performance and record with its bankers in particular.

Mergers are not without their downsides. They can consume an incredible amount of time and money, legal and tax complications, and problems with mixing corporate cultures. For the corporate leadership, the whole process can be so overwhelming that the business deteriorates. Stories abound about founders being dismissed and employees let go after the completion of the deal, corporate cultures failing to mix, and markets not responding as expected. The stress of putting this together in a viable manner can take its toll on everyone from the founder to employees. A merger or acquisition is a very strategic decision with far reaching consequences and thus the option of M&A must be exercised capriciously and with utmost care and caution.

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*Hindyatullah Law University, Raipur

**National Law Institute University, Bhopal