Guide to Mergers and Acquisitions

“Synergy is what happens when one plus one equals ten or a hundred or even a thousand! It’s the profound result when two or more respectful human beings determine to go beyond their preconceived ideas to meet a great challenge.”
Stephen Covey

One of the most important measures of performance for fundamental analysts is growth. A company can grow in two ways; one is organic growth and another inorganic growth. When you start a business you initially focus on growing your customer base, reinvesting profits in new assets for greater income, and improving productivity to increase your bottom line. All of these efforts are examples of organic growth. Organic growth is the growth rate a company can achieve by increasing output and enhancing sales internally. Organic growth strategy seeks to maximize growth from within.However restructuring of business is an integral part of modern business enterprises. The globalization and liberalization of control and restrictions has generated new waves of competition and free trade. This requires shift of strategies towards inorganic growth.

Inorganic growth is when a company grows by external means such as merger, acquisition, and takeover etc. Growing your business inorganically involves joining with another business through a merger or an acquisition. This immediately expands your assets, your income and your market presence. You will have a stronger line of credit because of the combined value of the two businesses. You will also benefit from the added expertise from personnel at the new business. Inorganic growth is considered a faster way for a company to grow compared to organic growth.

Corporate Strategies

Now let us take a broad view about the strategies.
The terms mergers, acquisitions and takeovers are often used interchangeably in common parlance however there are differences.

Mergers: A merger is an agreement that unites two existing companies into one new company. Thus merger results in legal dissolution of one or both the companies.
Acquisitions: An acquisition is when one company purchases most or all of another company’s shares to gain control of that company. In acquisition both the acquiring and acquired entities are still left standing as separate entities at the end of the transaction.
Takeover: Though the words “acquisition” and “takeover” means the same there are differences. A takeover occurs when one company makes a bid to assume control of or acquire another, often by purchasing a majority stake in the target firm. Where they differ is that a merger involves two equal companies while a takeover generally involves unequal – a larger company that targets a smaller one. In general, “acquisition” describes a primarily amicable transaction, where both firms cooperate; “takeover” suggests that the target company resists or strongly opposes the purchase.
Divestiture: A divestiture is the partial or full disposal of a business unit through sale, exchange, closure, or bankruptcy. A divestiture most commonly results from a management decision to cease operating a business unit because it is not part of a core competency.

Strategic Alliances: A strategic alliance is an arrangement between two companies to undertake a mutually beneficial project while each retains its independence. A strategic alliance will usually fall short of a legal partnership entity, agency, or corporate affiliate relationship.

What are the benefits of Merger and Acquisition?

  1. Access to new markets and thus Enhanced competitive position: Improving accessibility to clients in new attractive markets and/or enhancing access in existing markets fundamentally changes the market position. For example, by moving the organization from a subordinate position to a more dominant position.
  2. Improving a company’s performance and accelerate the growth of the company.
  3. Enhanced capacity and avoidance of capital expenditures :providing operational capacity for services at a lower cost and/or in a better timeframe than would be required to create such capacity without an acquisition or merger.
  4. Improved financial and credit position :enhancing the organization’s financial performance and credit rating, thereby improving access to capital and lowering the cost of capital.
  5. Economies of scale: By being able to purchase raw materials in greater quantities, for example, costs can be reduced.
  6. Strategic realignment and technological change
  7. Tax considerations
  8. Diversification of risk
    Let us take practical scenarios of mergers and acquisitions in India and the objectives of the companies to enter into such arrangements.
Entities Objectives
Facebook – Whatsapp (2014) Instantaneous growth, sniffing out competition, Increased market share
Facebook acquired its biggest threat in chat space
Google – Motorola (2011) Acquisition of competence and capabilities Google got access to Motorola’s 17000 patents
Ranbaxy – Sun Pharma (2014)
Jaypee – Ultratech (2014)
Access to funds
Vodafone – Idea (2018) To create country’s largest telecom company
Flipkart – Myntra (2014) To strengthen a particular business line Flipkart poised to strengthen its competency in apparel e-commerce market.

So to conclude whether you choose to grow your organization organically or inorganically, your greatest focus should be on doing so in the most strategic way possible. Formulate the best strategy based on your company’s current health, competition, industry trends, and financial capacity, then design a strong business case around that strategy by projecting short- and long-term financial forecasts.

To know more about the formal education in mergers and acquisitions you can also check out our certification program