Article by Varsha Chamakura, Edited by Adhip Ray. Subsequent Revisions made by independent authors to keep the article up-to-date.
The concept of Mergers and Acquisitions (M&A) has attracted the corporate sphere all over the world. Mergers and acquisitions (M&A) activity in India is no different.
M&A culture in India increased over the years, after the removal of constrictive arrangements and liberalisation of the Indian economy.
M&As are strategic tools that are used for the development of the economy.
This is done by expanding to low cost markets or emerging markets, especially those which have a high number of skilled workers or by acquiring well established corporate entities.
M&A culture in India has been prevalent since 2015, and has only become grown in popularity over the years.
M&As is most common in the sectors of Energy, Mining and Utilities, followed by Telecommunication, Consumer Durables and Pharmaceuticals. However, key point to note is that there is no restriction regarding the industries which can conduct mergers. Even law firms often merge into one as part of their marketing plans, to serve more clients in different target markets.
What is a Merger?
A merger is an agreement between two or more corporate firms, to create a new entity by exchange of shareholding.
It is a transaction where two or more corporations pool their resources and operations, and combined to form a single corporation.
It can also refer to an event where the assets and liabilities of two or more corporate organisations are invested in another organisation, which is the merged organisation.
A merger is basically a mutually agreed decision of organisations for the joint ownership of a corporate entity.
Merger in simple terms means the combination of two or more corporations into one single organisation.
In India, laws do not use the term merger, rather they use the word “amalgamation”.
Section 2(1B) of the Income Tax Act, 1961 defines amalgamation asthe “merger of either one or more companies with another company or merger of two or more companies to form one company in such a manner that:
- All the property/liability of the amalgamating company/companies becomes the property/liability of amalgamated company.
- Shareholders holding minimum 75% of the value of shares in the amalgamating company (other than shares already held therein immediately before the amalgamation by, or by a nominee for, the amalgamated company or its subsidiary) become shareholders of the amalgamated company”.
What is an Acquisition?
An Acquisition means the process by which a company purchases another company or gains a majority in another organisation.
One firm takes ownership of another corporate firm because of this. Acquisitions are commonly known as Takeovers.
An acquisition takes place when an organisation’s capital resources are utilized. Such capital resources include debt, cash, stock, etc.
It involves two parties; the acquiring party and the acquired party.
Acquiring party is the one that buys the majority of shares or gains ownership of the acquired company.
Acquired party is the one that surrenders their majority of shares or ownership of the acquiring company.
The latest trend in the Indian Corporate sector is the acquisition of Foreign companies by the Indian businesses.
There are generally 4 types of acquisitions –
- backflip and
- Reverse takeover.
A friendly acquisition is when both the acquiring and acquired parties willingly corporate in negotiations and in the process of takeover.
While a hostile acquisition is one when the acquired party is not willing to sell or when the acquired party’s board members have no knowledge of such an offer.
Generally, acquisitions refer to the buying of smaller corporate organisations by larger corporate firms.
However, when a small unlisted private company acquires a larger and well established listed public company, it is called reverse takeover. This takeover can be either friendly or hostile. This is mainly done to achieve listing status.
When a bidding company becomes the subsidiary of the acquired company, it is called Backflip takeover.
Backflip takeover is one where a bidding company becomes the subsidiary of the taken over company. The main reason for such a takeover is to have the advantage of the brand value of the taken over firm.
Types of Mergers
There are generally 4 types of mergers – Horizontal, Vertical, Concentric, Conglomerate.
If two or more companies that are involved in the same business activity and are competitors merge together, it is called Horizontal Merger. If these companies are in direct competition for the same product type and market and merge together, it would be horizontal merger.
The main benefit of this kind of merger is that it eliminates competition and helps the firm to increase its market share, customer base, revenue and profits.
It increases cost efficiency, as wasteful activities are removed from operations. If two or more companies that are involved in different stages of the operation of manufacturing merge together, it is called Vertical merger.
If a supplier firm merges with a customer firm, it would be a vertical merger.
This kind of merger is usually adopted to secure the supply of essential goods, and avoid any disruption and interruption in supply of goods.
They offer a high margin of profit and also cost saving, since manufacturers share is no longer there. This is opted for the smooth supply of raw materials to the acquiring party.
If two or more companies that operate in the same industry but not in the same line of products of business merger together, it is called Concentric merger. After such a merger, a new company is formed all together so as to become more competitive. This also helps increase the customer base.
Such mergers offer opportunities to corporate firms to venture into other areas of the industries to reduce risk and more access to resources. Markets that were unavailable before would also be available now.
If two or more companies that have no common business areas or no common business activity merge together, it is called Conglomerate merger.
This merger is usually adopted to diversify into new industries, which helps reduce risks. The main risk of such a merger is the sudden shift in business operations. Such a merger is further divided into Pure Conglomerate and Mixed Conglomerate merger.
When both companies have nothing in common, business operations of both companies are unrelated, it is called Pure Conglomerate merger.
When both companies merge together to expand customer or market base, it is called Mixed Conglomerate merger.
In terms of M&A, India is one of the leading nations because of the majority of the Indian Companies favouring Mergers and Acquisitions.
M&A deals increased in India since 1999, especially after Liberalization. During the years of 2000, 2007 and 2008 such deals declined due to the crisis of the global credit.
The trend of M&A in India has been decreasing from 2000 to 2008. Though by 2010, such deals hit a new peak. Since then, Indian companies have considered M&As to be key in corporate restructuring.
Since 2010, there has been a considerable increase in M&A deals in India.
Multinational companies (MNCs) have entered India with the help of Joint ventures or Acquisitions because of Liberalisation.
This has increased competition between local and foreign firms greatly over the past few years.
In 2018, nearly 70% of the M&A activity included distresses deals. However this has changed and now there are a lot of acquisitions in businesses focusing on clean-tech and solar energy.
This was enabled because of the Corporate Insolvency Resolution Process (CIRP) under the Insolvency and Bankruptcy Code, 2016.
Various foreign investments as part of M&A deals, were seen among various sectors and industries in India in 2023.
Another trend that has been seen since 2019 is that M&A deals quite popular in the start-up sector as well.
Various reforms were introduced in 2019, which boosted the growth of M&As in India. Such reforms included –
- New framework by SEBI on the aspect of issuance of Shares with Differential Voting Rights. This enables organisations and its members to receive investment without losing any control.
- Tax incentives and exemptions were granted to all registered start-ups, which increases M&As in the start-up sector.
- Reform of Corporate Income Tax rates reduction has made India to be a high in investment all over the world, which would increase M&As in all sectors.
- The PLI Scheme introduced in the third quarter of 2021, that is ongoing in 2023 also caused a floodgate of investments to pour in from foreign companies, which resulted in a lot of mergers and acquisitions.
- The budget of 2021-22, 2022-23 as well as 2023-2024 had a very favourable reception by industrialists throughout the world.
- India’s ongoing tryst with privatisation also seems to motivate businesses in acquiring the businesses and set up shop in India.
There were many M&A deals last year, but these are the most popular and of great importance –
- Acquisition of Yatra with a majority stake of 71% for $337.8 Mn by Ebix Inc.
- OYO acquires Innov8 for INR 220 Cr.
- Acquisition of CloudCherry by Cisco.
- Paytm Acquires travel startup NightStay.
- PayU Acquires Wibmo in a deal worth $70 Mn.
The Most Popular and Major Mergers and Acquisitions in 2020 are:
- ITC acquired 100% equity shares of Sunrise Foods Pvt. Ltd for Rs. 2150 crores, all of which was paid in cash.
- Facebook invested $5.7 billion in Jio Platforms for a 9.99% stake in Jio.
- Zomato acquired Uber Eats for $350 million. However the deal was via stock exchange and Uber got 9.99% of ownership in Zomato.
- RIL acquired 60% of Vitalic Health and acquired 100% ownership in Vitalic’s subsidiaries which included Tresara Health Pvt. Ltd and Netmeds Market Place Limited for Rs. 60 crores.
- Hindustan Unilever Limited merged with GlaxoSmithKline Consumer Limited and paid the latter Rs. 31,700 crore, plus Rs. Rs3,045 crore getting for itself the Horlicks trademark.
The Most Popular and Major Mergers and Acquisitions in 2021 are:
- Prosus acquired Indian payment service provider BillDesk for $4.7 billion.
- Adani Green Energy Limited acquired SB Energy Holdings Limited (SB Energy India) for $3.5 billion, all of which was paid in cash.
- Thyrocare was bought by PharmEasy for $610 million.
- Tata Sons acquired Air India for ₹18,000 crore. Of the sum, ₹2,700 crore was to be paid to the Government in cash and ₹15,300 crore of Air India’s debt was to be taken over by the Tata Sons.
- Byju acquired Aakash Educational Services for around $1 billion in a cash equity (70:30) deal.
The Most Popular and Major Mergers and Acquisitions in 2022-2023 are:
- Merger between Tata Group and Air India: Tata Group acquired Air India for a value of $2.4 billion or Indian Rupees 18000 crore, wherein INR 2700 crore was paid upfront and INR 15,300 of debt was taken up by Tata Sons. Further, Tata Group also announced a merger between Air India and Vistara, whereby Singapore Airlines (the owner of 49% of Vistara equity) will get ownership of 25.1% of the combined merged entity.
- Adani Group – NDTV merger: Adani Group, had already held an ownership of 29.18% equity stake in NDTV via an indirect subsidiary (RRPR). Via this acquisition, RRPR bought 27.26% equity stake in NDTV owned by its founders, at a price of INR 342.65 per share, for a total sale value of around INR 602.30 crore.
- HDFC Limited – HDFC BANK Merger – HDFC Bank and HDFC Ltd are merging to create a financial services conglomerate. The merger is expected to be completed by the end of 2022. The merger ratio is 25 HDFC shares for 42 HDFC Bank shares. The merger will create a banking behemoth with a market capitalisation of Rs 14 lakh crore.
- Zomato – Blinkit merger – Zomato and Blinkit have reached an agreement for a merger. The all-stock deal values Blinkit between $700 million and $750 million. Blinkit, formerly known as Grofers, has recently revamped itself to focus on an instant grocery delivery portal.
- Acquisition of Ambuja Cement by Adani – Adani Group has acquired a 72.3% stake in Ambuja Cements Limited from Holcim Group for Rs. 24,680 crore ($3.3 billion). The acquisition was completed in March 2022. Ambuja Cements Limited is a cement manufacturing company in India that is part of the global LafargeHolcim group. The acquisition will help Adani Group to expand its footprint in the cement industry and strengthen its position in the Indian market. However, post the Hindenburg research paper, Adani group is planning on pre-paying its debts and may sell off this acquisition to gather funds to make the prepayment.
The government’s steps to develop the Indian economy has increased the M&A deals in India. Along with this, interest of Foreign Investors to invest in Indian companies and Indian market has also increased.
This would help India become a hub for foreign cross-border mergers. Though it has increased competition among MNCs and local businesses which has also led to the downfall of many Indian companies.
Are you thinking of selling your business and wish to know the legal processes surrounding the entire process? We can help you from start to finish. Book a free consultation now!
- Recent M&A trends in the US (Analyzed!)
- LLP vs Private Company: Choose Which You Should go for
- Audit of Indian Private Companies: How to Do It.
- How You Can Protect Your Software from Piracy in India? An Analysis
- Why Thorough Due Diligence is so important for a Merger and Acquisition process
- The Changing Landscape of Mergers and Acquisition in the Technology Sector
Author Bio: Varsha Chamakura is a BA, LLB(H) student at Symbiosis Law School Hyderabad. Connect with her on LinkedIn. This article has been subsequently edited and kept up-to-date by independent WinSavvy authors.