August 4, 2021

Mergers and Acquisitions – Its Legal Research and Analysis

Mergers and Acquisition (M & As) nowadays have become an increasingly broader phenomenon in various countries including India,Europe, United stated and various country throughout the world. Mergers and Acquisitions in a general term, we can say or to describe as a consolidation of companies or Assets through various types of financial transactions which includes Mergers, Acquisitions, tender offers, purchase of assets and management Acquisitions. India has recently been into a lot of acquisitions taking into a wider gain with a proper business perspective.

What is an Acquisition?

The terms “mergers’’ And “Acquisitions” are used in a different way as these two words totally hold different meanings. When one company takes over another entity, and establishes itself as the new owner, that purchase is called an Acquisition. To explain it in a more legal manner, the targeted company ceases to exists and the buyer dive in to absorb that business, and the buyer’s stock continues to be traded, while the targeted company’s ceases to do any kind of trade.

There are deals which are unfriendly, where target companies do not wish to be purchased, are always regarded as acquisitions. Therefore it depends on the purchasing deal, on whether the purchase is friendly or hostile. So the difference lies basically on how the deal is communicated to the target Company’s board of directors ,employees and shareholders.

For example Nestle has done a lot of Acquisitions lately.
Mergers and acquisitions are two of the most misunderstood words in the business worlds. Both of these terms are often referred as joining of two companies, but there are many types of key differences involved when to use them. A Merger occurs when two separate entities combine forces to create a new , joint Organization . Meanwhile Acquisition refers to the takeover of one entity by another. Mergers and acquisition may be completed to company’s reach or gain market share in an attempt to create shareholder value.

Mergers

If we talk in a legal sense, a merger basically requires two companies to consolidate into a new entity with a new ownership and probably a new management structure as well. The more common structure to differentiating a deal is whether the purchase is (merger) or hostile (acquisition).

Mergers generally require no cash to complete but dilute each company each company’s individual power. Where a company is not a sole entity anymore as it has been diluted with another company emerging as one power.

The Biggest mergers in history

The mergers which are of high value among the global or domestic business corporations have always attracted attentions and spawned several case studies as they have interesting implications for business development. Through M&A , companies look for more diversification in their offerings, augmented production capacity, increased market share and better utilization of operations.


Exxon and Mobil

In November 1999, oil powerhouse Exxon co and Mobil corp. got an approval from the Federal Trade commission (FTC) to complete there $81 billion merger. Exxon was the the leading industry leader who was known by everyone in the world,while Mobil was number two in this field. The Merger required extensive restructuring for the joint entity, which included a sell of more than 2,400 stations of the two companies spread across the united states. This deal was addressed as one of the successful in the M&A History ,and this joint entity continues to trade under the name EXXON MOBIL CORPORATION(XOM).

H.J Heinz and Kraft Foods
The $ 100 billion dollar merger of H.J Heinz Co. and The kraft foods group was aimed to create a U.S. food joint and the fifth largest food and drink company in the world. This deal was announced in 2015 and created a newly merged entity with the name The Kraft Heinz company .It brought leading household foods like Philadelphia, Capri sun, and Heinz Ketchup and HP sauce under one roof .

Coming back to India , Reliance Industries which is known by everyone in the world has Acquired a majority stake in NowFloats, which is basically an Indian startup that actually helps build businesses and individuals to build online presence without any kind of web developing skills.If we actually talk about the estimation ,reliance industries has acquired an 85% stake in Nowfloats for approximately 1.4 Billion Indian rupees which is around $20 Billion. But what was the acquiring strategy for reliance? According to Reliance industries this investment will further enable the groups digital and new commerce initiatives. So reliance actually targeted the new generation by acquiring this company.

When it comes about the topic about mergers and acquisitions, it is dynamic, complex and not so feasible as it seems! However not all ( M & A) Succeed. According to survey report , it is showed that only 50% of ( M & A) Succeed. It also includes various aspects of due diligence and various kinds of Integration Phases. To procced in a broader Scenario, and from the overview of various approaches , it includes two phases which is basically premergers and post mergers. The second topic basically refers of entering into a new market to make its own place, gaining new resources which is scarce and is needed by people in abundance and also achieving new kind of synergies.

Pre-mergers and Post Mergers Acquisitions

Premergers acquisitions includes a huge amount of due diligence which consists of proper planning, negotiation. The process basically starts from due diligence to Negotiation to closing to Post closing and ends with risk management. A few filings should be done when thinking about of Pre – mergers acquisitions. Offcourse the first and the foremost step consists of an agreement of merger between the companies and submit it to the shareholders of each company for approval.

The next step is qualifications which states that if before merger, the surviving entity is qualified in all states where the business of the non – surviving entity will continue to operate, this allows for a continuous presence in those jurisdictions. Premerger qualification may also facilitate or may eliminate the need for any kind of tax clearance, due to which the post merger process will become easier.

If the surviving entity is changing its name as a part of the merger,the new name must be reserved in every jusrisdiction where operations will continue after the merger.

As the process of pre mergers Acquisitions gets completed with proper due diligence and integration phases, the process of post – mergers acquisition starts.

During pre – mergers , a company can change its name, increase its authorized capital, or amend any kind of portion they want , whether its related to its articles, or certificate of incorporation in the merger documents.

Post mergers filings are made in qualified foreign jurisdictions as a result of a domestic merger . This can basically include filing evidence of mergers and formal withdrawals of non – surviving entities .

The next process is related to tax clearance which shows the written confirmation from the jurisdiction that an entity is up to date with its tax payments and not in any kind of arrears.

Many jurisdictions have tax clearance requirements that must be completed before the withdrawal of a non surviving entity that will become effective.

One of the first overseas acquisition was by an Indian company in the year 2007 which was by Mahindra and Mahindra’s whose takeover was of 90 percent stake which was in the company Schoneweiss, it was a company which was basically owned by a german company who had a 140 years of experience in forging business. And after that I ndia started acquiring many company overseas which resulted into a huge gain for Indian companies.
In simple terms, we can say a merger requires or it involves a mutual decision of two companies to become an entity. But if we see about Acquisition, it is a takeover from one company to another company, where the the surviving company gains profit by entering in that company.

The basic law related to mergers was promulgated in the Indian Companies act 1956, which explained about the law related to mergers, amalgamations and restructuring of the company. If we talk about the recent Acquisitions happening in India , Uber is in deliberate negotiations to purchase a leading food delivery Company named Grubhub in an all stock deal. However Uber and Grubhub are still haggling over the deal’s stock exchange , but there is no certainty that they will further reach any kind of Agreement. M & As are conducted for variety of reason. If we talk about mergers and Acquisition and corporate structuring are the big part of the corporate and finance world.

Varieties of mergers

When we see from the business perspective,there is a whole host of different mergers .Here are few types of mergers which are distinguished by the relationship between the two companies that are emerging

Horizontal merger – when two companies are in direct competition and share the same lines and markets , then it comes under horizontal merger.

Vertical merger- A customer and a company or a supplier and company . Think of a cone supplier merging with an icecream maker.

Market extension merger – when two companies that sell the same products in different markets.

Product – Extension Merger – Two companies selling different but related products in the same market.

Conglomeration- Two companies that have no common business areas. Valuation –
Now investors in a company that is aiming to over another must determine whether the purchase will be beneficial to them. In order to proceed with the process they further investigate as to how much it will be beneficial to them.

Naturally, both sides of an M & A deal will have different ideas about the worth of a target company: its seller will tend to value the company at as high of a price as possible; while the buyer will to get the lowest price that he can.

However the most common method is to look at comparable companies in an industry, but deal makers employ a variety of other method and tools while assessing a target company . Here it is as follows:

Comparative ratios – The following are the two examples of the many comparative metrics on which acquiring company may base their offers:
Price Earning ratio – (P/E RATIO) – In this ratio , an acquiring company makes an offer that is a multiple of the earnings of the target company. Looking at the P/E of all the stocks within the same industry group will give the acquiring company good guidance for what the target’s P/E Multiple should be .
EnterpriseValuetosalesratio (EV/Sales) – With this ratio, the acquiring company makes an offer as a multiple of the revenues again, while being aware of the Price – to – sales ratio of other companies in the industry.
Replacement cost – If we talk about few cases. Acquisitions are basically based on the cost f the replacement of the target company. To explain in it in more in a legal manner, suppose the value of a company is simply the sum of all its equipment and staffing costs. The Acquiring company can literally order to sell at that price. In deciding whether to buy business, Capital budgeting may be used. And also the effect of the new capital structure on the firm’s overall structure cost of capital has to be projected. In deciding on Acquisition terms, Consideration to be given to the following, Earnings in terms of absolute dollars and percentage change.

Dividends.

Market price of stock. Book value per share.
Net working capital per share.

The weight assigned to each of the above varies with the circumstances involved.

In Acquisitions’s strategy , document what a firm wants to accomplish by the acquisition and how the Acquisition will contemplate the Company’s overall strategy. Industries and company are then screened by employing various quantative measures and considering qualitative factors.

The broad industries sectors should be narrowed down by comparing each other industry to specified industry criteria. The industry best best satisfying set goals is then selected. After the target industry has been identified, companies In that industry are then screened.

Author Details: Akanksha Yadav (Mumbai University.)

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