Definition of Merger & Acquisition
Merger / Amalgamation: A merger is a combination of two or more businesses into one business. Laws in India use the term ‘amalgamation’ for merger. Amalgamation is the merger of one or more companies with another or the merger of two or more companies to form a new company, in such a way that all assets and liabilities of the amalgamating companies become assets and liabilities of the amalgamated company.
- Merger through Absorption:- An absorption is a combination of two or more companies into an ‘existing company’. All companies except one lose their identity in such a merger. For example, absorption of Tata Fertilisers Ltd (TFL) by Tata Chemicals Ltd. (TCL).
- Merger through Consolidation:- A consolidation is a combination of two or more companies into a ‘new company’. In this form of merger, all companies are legally dissolved and a new entity is created. Here, the acquired company transfers its assets, liabilities and shares to the acquiring company for cash or exchange of shares. For example, merger of Hindustan Computers Ltd, Hindustan Instruments Ltd, Indian Software Company Ltd and Indian Reprographics Ltd into an entirely new company called HCL Ltd.
Acquisitions and Takeovers: An acquisition may be defined as an act of acquiring effective control by one company over assets or management of another company without any combination of companies. Thus, in an acquisition two or more companies may remain independent, separate legal entities, but there may be a change in control of the companies. When an acquisition is ‘forced’ or ‘unwilling’, it is called a takeover.
Benefits of Merger & Acquisition
- It helps the firm to enter into a new market easily.
- It Increases Market Share of the parent firm.
- It would be greater credibility in the market
- Parent /New Company become more attractive for new talent
- New technology comes into the business
- A large group means organized reporting structures and greater accountability on financial reporting and business health.
- More Synergies and Economies of Scale comes through Acquisition
- Easy Regional or national growth: It is less expensive to buy an existing business than to expand internally
- Reducing Competition: Competitors are reduced after merger or acquisition of firms.
- Diversification of the products, services and long-term prospects of your business.
- Revenue enhancement: Companies go for Mergers and Acquisition from the idea that, the joint company will be able to generate more value than the separate firms.
- To lower cost of operation and/or production
- Tax gain