August 11, 2023

What is Merger and Acquisition

Merger and Acquisition Meaning. Even companies get married for a better future….

“You and I….. in this beautiful world….” Remember this tune? 

I’m sure, yes! We’re all nostalgic for the ad by Hutch in which a cute pug follows a little boy everywhere he goes.

Relive the moments. 

But, soon after, the cute pug was replaced by the energetic Vodafone’s zoozoo characters. 

This transition happened after Vodafone acquired Hutch Essar to form Vodafone Essar. 

This is Acquisition. 

There is more to it. Keep reading the blog to learn what is merger and acquisition, the types of mergers and acquisitions, and other related topics. 

Content:

What is Merger and Acquisition?

Merger and Acquisition are two distinct corporate actions with similar outcomes and different objectives. 

A merger means when two separate entities of similar sizes club their forces to function as a new single entity. 

On the other hand, acquisition occurs when a bigger entity completely or partially buys another entity that is smaller in size.

Merger and Acquisition Examples

Examples of Mergers are: 

  1. Bank of Baroda merged with Vijaya Bank and Dena Bank

After combining with Dena Bank and Vijaya Bank in 2019, Bank of Baroda (BoB) became the second-largest state-owned bank.

  1.  Disney merged with Pixar

In 2006, Disney merged with its rival, Pixar, for $7.4 billion, and then released blockbuster hits like WALL-E and Toy Story 3 that generated revenue worth billions.

Examples of Acquisitions are: 

  1. Zomato acquired Uber Eats

On 21st January 2020, Zomato announced the news of acquiring Uber Eats in India. Here, Uber enjoyed 9.99% of its ownership in Zomato. 

  1. Walmart acquired Flipkart

Walmart got into the Indian markets when it acquired Flipkart. It spent $16 billion to buy a 77% stake in Flipkart.

Let’s move on to the types of Mergers and Acquisitions. 

Types of Mergers and Acquisitions

There are four types of mergers and acquisitions: 

  1. Horizontal
  2. Vertical
  3. Conglomerate
  4. Congeneric 

1. Horizontal

A horizontal merger occurs when two entities of similar fields combine, but they are not direct competitors of each other. 

Example: Instagram and Facebook Merger. Both companies are in the social media industry, but Instagram is more popular amongst the younger generation while Facebook is for all age groups. 

2. Vertical

A vertical merger is when an entity and one of its customers or suppliers join together. The entity joins hands with one of its players in the supply chain to strengthen its position in the market.

Example: eBay and PayPal Merger. eBay is a website for online shopping and auctions, and PayPal offers services for money transfer and online payment.

3. Conglomerate

This is a combination of entities belonging to different industries. This means the acquired entity is nowhere related to the acquiring entity. Conglomerates aim to diversify their products and services. 

Example: Reliance Industries Limited. It is a multinational conglomerate with diversified businesses in the energy, petrochemicals, natural gas, retail, telecommunications, mass media, and textiles industries.

4. Congeneric

This is a combination where two or more entities join forces to serve the same consumer base with different products. 

Example: Broadcom and Mobilink Telecom. These are electronic firms that were combined in 2002. Mobilink Telecom designs and produces mobile communication systems, while Broadcom supplies semiconductors and software.

How is Merger and Acquisition Structured?

Based on the agreement between two entities, merger and acquisition are structured in three ways: 

  1. Asset Acquisition: The buyer purchases the assets of the other entity.
  2. Stock Purchase: The buyer purchases the stock of the other entity.
  3. Merger: The buyer combines with the other entity.

1. Asset Acquisition

This implies that the buyer acquires all the assets of the smaller entity. Assets can include machinery, equipment, real estate properties, contract rights, accounts receivables, intellectual property (e.g., trademarks, copyright, etc.), a customer database, and many others.

2. Stock Purchase

Stock Purchase is nothing but the buyer purchasing stocks from the stockholders of its targeted entity. When the stockholders sell their shares to the new buyer, they transfer the ownership of the shares to the new buyer. 

Example: Walmart acquired a 77% stake in Flipkart. 

3. Merger

A merger occurs when two entities combine to form one new single entity. 

When two entities merge, one will “survive” the merge and continue to exist, while the other will discontinue existing. The surviving company is frequently referred to as the “surviving corporation,” while the other company is referred to as the “disappearing corporation” or the “merged corporation.”

Difference between Merger and Acquisition

When two or more business entities decide to join forces and form a new business entity, this is called a merger. On the other hand, an acquisition occurs when a bigger and much more financially stable company takes over a smaller company.

Most of the time, the merged entity gets a new name, ownership, and a new management team composed of members from both entities. In acquisition, the acquired entity continues to operate under the name of the larger one. Older staff can be terminated, and mostly, the acquired company runs under the name of the acquirer entity. 

In mergers, both companies are about the same in size, status, and operations. On the other hand, in acquisitions, the parent company is more significant and financially stronger than the acquired company.

When two companies are merged, new shares are issued, but when a financially stronger company acquires a smaller one, no new shares are issued. 

Now that we know so much about mergers and acquisitions, let us move on to the last topic of the blog. 

How do Merger and Acquisition affect Shareholders?

Whenever two or more companies merge into a new company, shareholders of both the companies will have a stake in the new one. Usually, the terms and conditions of the deal will state how many shares of the new company each group of shareholders will own.

When a larger company acquires a smaller one, the smaller company’s shares are acquired by the larger company. The acquiring company’s shares remain unaffected, but the acquired company stops trading in the stock market. 

Quick Summary

  1. A merger is when two separate entities of the same size join forces to work as a new single entity. 
  2. Acquisition is when a larger entity completely takes over the forces of a smaller entity.
  3. Some of the notable examples of Merger and Acquisition are – 

Merger- Disney merging with Pixar.

Acquisition- Zomato acquiring Uber Eats

  1. Types of Merger and Acquisition:
    • Horizontal
    • Vertical
    • Conglomerate 
    • Congeneric
  2. Mergers and acquisitions are structured in three ways: 
  • Asset Acquisition
  • Stock Acquisition
  • Merger
  1. Whenever two or more companies merge into a new company, shareholders of both the companies will have a stake in the new one. When a larger company acquires a smaller one, its control of the larger company will is based on the dilution of its previous shares.

FAQs

1. How is Merger different from Acquisition?

A merger is when two separate entities of similar sizes club their forces to function as a new single entity, whereas an acquisition occurs when a bigger entity completely takes over the forces of another entity that is smaller in size.

2. Why is merger and acquisition important?

Merger and Acquisition is important for various reasons. Many companies use mergers to expand or maximize operational productivity. Others use acquisitions to get unique skills or resources, gain more market power, or make their businesses more diverse.

3. Which firm regulates mergers and acquisitions in India?

The Competition Act, 2002 regulates mergers and acquisitions in India. 

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