Introduction
Did you know that most exchanges in mergers and acquisitions (M&A) often fail to accomplish their planned destination of business due to the complexity of the transaction and due to failing to understand their intricacy because it is not just about companies announcing collaborations; it can land a business in great trouble? That's why mergers and acquisitions around the globe are really “devil in the details.”.
There are 40,000 deals in 2023 in the world, which is a drop as compared to the statistics of last year. The first half of 2024 witnessed a downfall in M&A deals by 25% in comparison to the first half of 2023. This decline in the statistics is due to the key strategic flaws, legal challenges, and unexpected complexities.
This blog is going to give you the essentials of mergers and acquisitions in a nutshell. Let's dive into the pool of knowledge to get ourselves well-equipped before dealing with this domain.
Keywords: Mergers & Acquisitions, M&A transaction stages, M&A process, legal compliances M&A, M&A Risk Management.
Meaning
Mergers and acquisitions are interchangeable terms that have distinguishable prominence in the ocean of the corporate world. Generally, the term merger has diverse meanings, such as “blend” or “to immerse." At the same time, in its legal connotation, it means “to incorporate two or more entities together to transform it into a new enterprise that can benefit the shareholders to expand the business. The term acquisition refers to the transaction when one corporation acquires most of the shares of another company and takes over the autonomous identity of the target company.
1. Procedure concerned in M&A transactions
The foremost step in the procedure is to create an information memorandum by the seller, which includes the attributes of the company, and buyers sign an NDA to confirm its confidentiality.
In the second step, buyers negotiate terms and draft a Letter of Intent.
The third stage includes the due diligence performed by the buyer to inspect the status of the target enterprise.
After that, conclusive negotiation occurs between the parties with the signing of documents such as a purchase agreement.
2. Categories of Mergers and Acquisitions
Horizontal Merger
These are those mergers that are contenders as well as functioning in the identical industry. Example: Disney and 21st-century Fox in 2019
Vertical Merger
These are those companies that are operating in the same industry but at different levels with diverse objectives, such as lessening costs and gaining control over the chain.
For instance, one is the supply chain of another industry, or one is delivering ice cream while the other is producing cones.
Example: Amazon and Whole Foods (2017).
Conglomerate mergers
These are operating in totally different industries to diversify the business. Example: Berkshire Hathaway and Precision Castparts. (2016) Market Elongation Merger
The name itself suggests that the purpose of this merger is to access new markets by merging two businesses selling similar goods and providing similar services in distinct markets.
Example: Sprint and T Mobile (2020)
Product Elongation Merger
In this, two companies work together in the same market but sell different products.
Example: PepsiCo and Quaker oats.
Acquisitions of Assets
When one company is at the stage of bankruptcy, another company usually acquires the assets of such companies.
For example, Google and Motorola Mobility.
Administration Acquisition
In this management, they acquire the assets and works they manage with the help of external entities. Example: Dell Inc. with the collaboration of Silver Lakeate Equity.
3. Legal factors in M&A transactions
3.1 Documentation
Prerequisite Documents
There are a few prerequisite documents mandated in M&A dealings, such as the MoA, Letter of Intent, Term Sheet, Non-Disclosure Agreements, and Non-Solicit agreements.
Essential Documents
Share acquisition: Share Subscription Agreements and Share Purchase Agreements are the need of the hour in share acquisition.
Where assets or businesses are transferred: Asset Purchase, Business Transfer Agreement.
Other ancillary document requirements are based on the nature of the transaction.
3.2 Due Diligence
This is the most crucial step to ensuring a victorious transaction. This is the process in which a corporation starts analyzing the probable risk factors and liabilities of cooperating with the target enterprise. This is just like an institution of wedlock in which the spouse must be aware of every detail of the other to ensure a flourishing union.
It contains financial, legal, strategic, and operative due diligence to be well equipped about the potential risk factors so that parties should be sufficiently informed regarding “what to expect and what to not.”.
3.3 Legal Compliances
The Indian framework for mergers and acquisitions is a blend of legislation, laws, statutes, regulations, and guidelines, and failing adherence to such laws is also the most significant basis of the failed deals.
Companies Act 2013
The Companies Act is the foundational legislation that deals with merger, acquisition, and amalgamation sections 230 to 234.
Competition Act 2002
It is to ensure fair competition in the country's market. CCI is to approve the excess threshold turnover or asset and to evaluate the adverse effects.
SEBI regulations
It governs M&A through the takeover code 2011 for share acquisitions.
Cross-border M&A and foreign investments through FEMA 1999. Income Tax Act 1961: It governs the tax implications of M&A transactions. The Insolvency and Bankruptcy Code, 2016: distressed assets and bankrupt companies are guided by IBC.
Conclusion
From the above explanation, it is concluded that big-picture goals are essential for a successful deal, but focusing on small details is equally important for its success. Secondly, along with the procedure, companies need to be aware of current trends, such as ESG and tech challenges. If these details are carefully handled, this can turn the failure into new opportunities.
These concepts were originated to give a last expectancy to the drowning businesses by giving them a chance to rebuild their dreams.
References:
1.Statista research department, Institute for mergers, acquisitions, and alliances (June 3, 2024): https://imaa-institute.org/mergers-and-acquisitions-statistics/ma-statistics-by-countries/
2. PwC Malta, Oct. 2022, https://pwc.to/3CEy7Y2
3. Adam Hayes, M&A Types, Structures, and Valuation, Investopedia, July 12, 2024, https://www.investopedia.com/terms/m/mergersandacquisitions.asp
4. Pooja S. Mahajan, M&A documentation in India, Lexology, Chandhiok, and Mahajan advocates, 11/04/2018https://www.lexology.com/library/detail.aspx?g=cadd0ff2-1437-4216-9be0-4022ef189a0c
5. Shelley Bougnague, Importance of Due Diligence in Mergers and Acquisitions, Sep 20 2023, https://www.cloudficient.com/blog/the-importance-of-due-diligence-in-mergers-and-acquisitions
6. Jay Bahvesh Parekh, Understanding Legalities: Mergers, Acquisitions, and Combinations, ICSI, 30.3.2023. Pg. 67
7. Raghubir Menon, Analysis of M&A Laws in India, law.asia, 18 July 2024, https://law.asia/mergers-acquisitions-india/
AUTHOR:
Sunidhi Sharma
Bharat College of Law, Kurukshetra University
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