MERGER AND ACQUISITIONS NOTES

CONCEPT OF CORPORATE RESTRUCTURING

Introduction

The process of corporate restructuring is considered very important to eliminate all the financial
crisis and enhance the company’s performance. The management of the concerned corporate
entity facing the financial crunches hires a financial and legal expert for advisory and assistance
in the negotiation and the transaction deals.

Usually, the concerned entity may look at debt financing, operations reduction, any portion of
the company to interested investors. In addition to this, the need for corporate restructuring
arises due to the change in the ownership structure of a company. Such change in the ownership
structure of the company might be due to the takeover, merger, adverse economic conditions,
adverse changes in business such as buyouts, bankruptcy, lack of integration between the
divisions, over-employed personnel, etc.

Meaning

Restructuring as per Oxford dictionary means “to give a new structure to, rebuild or rearrange".

Corporate restructuring means rearranging the business of a company for increasing its
efficiency and profitability. Restructuring is a method of changing the organizational structure
in order to achieve the strategic goals of the organizations. Corporate restructuring is a wide
expression and it includes various kinds of tools. Thus, it is the purpose or object of the
organization which will determine the kind of tool to be used in corporate restructuring.

Corporate restructuring is a comprehensive process by which is company consolidates it

business operation and strengthen its position for achieving its short term and long term
corporate objectives.

Eg- ABC Limited has surplus funds but it is not able to consider any viable projects. Whereas
XYZ Limited has identified viable projects but has no money to fund the cost of the project.
The merger of ABC LTD and XYZ Limited is a mutually beneficial option and would result in
positive synergies of both the Companies.
 OBJECTIVES OF CORPORATE RESTRUCTING

• Deploying surplus cash from one business to finance profitable growth in anothe
• Exploiting inter dependence among present or prospective business within the
corporate portfolio
• Development of core competencies
• Orderly redirection of the firm’s activities
• Risk reduction

NEED AND SCOPE OF CORPORATE RESTRUCTING

Needs for Corporate Restructuring:

The various needs for undertaking a corporate restructuring exercise are as follows:

➢ To focus on core strengths, optional synergy and efficient allocation of managerial

capabilities and infrastructure.
➢ Consolidation and economies of scale by expansion and diversion to exploit extended
domestic and global markets.
➢ Revival and rehabilitation of a sick unit by adjusting losses of the sick unit with profits
of a healthy company.
➢ Acquiring constant supply of raw materials and access to scientific research and
technological developments.
➢ Capital restructuring by appropriate mix of loan and equity funds to reduce the cost of
servicing and improve return on capital employed.
Scope of Corporate Restructuring:

i. Reduction in cost
ii. Greater efficiency
iii. Economies of scale

REASONS FOR CORPORATE RESTRUCTING

Corporate restructuring is a pivotal strategy that allows a business to navigate an ever-evolving

landscape. In the life cycle of every business or industry, as operations grow more complex
with size, operational inefficiencies may arise. Sometimes, organizations initiate this
transformative process in anticipation of future challenges, while at other times it is a reaction
to current circumstances. This strategy is not driven by a single motive but rather by a complex
interplay of both internal and external factors.
 1. INTERNAL FACTORS

Operational Inefficiencies: When internal processes and operations become inefficient, it

affects productivity and overall performance. Companies often face the need to streamline their
operations, reduce redundancies, and enhance efficiency through restructuring. In the case of
conglomerates, operational inefficiencies can lead to spinning off segments or divisions
through divestitures.

High Operational Costs: High operational costs can gradually erode a company’s
profitability, making cost reduction a vital motivation for restructuring. Organizations
frequently undertake measures such as consolidating functions, downsizing, or implementing
process improvements to optimize costs.

Change in Leadership or Management Vision: New leadership often brings fresh

perspectives and strategies. A change in management may lead to a shift in the company’s
direction, necessitating a restructuring to align with the new vision. In practice, this is the most
frequent cause of corporate restructuring. Based on management decisions, these events may
lead to operational restructuring, financial restructuring, or a combination of both.

Financial Pressures: Debt levels, credit ratings, or financial constraints can exert significant
pressure on a company’s financial health. This financial stress can trigger restructuring efforts
to enhance financial stability and credibility with stakeholders.

Labor Issues and Union Negotiations: Labor strikes, disputes, or negotiations can impact
company operations. Such issues can trigger multiple restructuring efforts like unit divestiture,
workforce reduction, or bankruptcy.

Cultural Misalignment: Organizational cultures can arise from factors like multiple
geographic locations, diverse customer segments, or significant differences in average age. If
there’s a mismatch between the organizational culture and desired values, restructuring may be
necessary. In these instances, companies frequently choose divestitures as a component of
corporate restructuring.

2. EXTERNAL FACTORS

Globalization and Competition: Increased globalization expands competition and forces

companies to reassess their strategies. Businesses might restructure to enter new markets, form
strategic alliances, or fortify their competitive position.

Natural Disasters / Global Pandemics: Natural disasters or global pandemics can wreak
havoc on a company’s physical, financial, and operational characteristics. This situation
necessitates a strong requirement for corporate restructuring, which entails adjusting to new
circumstances, mitigating risks, and ensuring the business’s long-term sustainability.

Environmental Sustainability: Growing environmental concerns and regulations have driven

companies to undergo restructuring, aiming to minimize carbon footprints, embrace sustainable
practices, and fulfil consumer expectations for environmentally friendly products. Pursuing
environmental sustainability has prompted companies to either acquire businesses that
contribute to carbon emission reduction or divest assets to decrease carbon emissions.

Trade Tariffs and International Relations: Shifts in trade policies, tariffs, and international
relations can exert a substantial influence on global supply chains, compelling numerous
companies to reorganize their operations. These adjustments frequently result in deal
cancellation, divestiture of units, or even the bankruptcy of certain business segments.

CONCLUSION

Corporate restructuring serves as a dynamic reaction to the complex interplay of internal and
external factors shaping a company’s trajectory. Organizations capable of acting early find
themselves well-prepared for future growth and have the capacity to adapt to the continually
changing business environment.

BARRIERS TO CORPORATE RESTRUCTURING

Barriers to restructuring refer to the challenges or obstacles that hinder organizations, financial
institutions, or industries from successfully implementing changes or reforms aimed at
improving efficiency, reducing costs, or adjusting to market conditions. These challenges can
arise from internal and external sources, and they need to be carefully managed to ensure
successful restructuring. Here are some of the key barriers to restructuring:

1. Regulatory and Legal Challenges

• Regulatory Approval: Some types of restructuring, such as mergers or divestitures,

require approval from regulatory bodies, which can be time-consuming and uncertain.

• Complex Legal Frameworks: Laws related to labor, taxation, corporate governance,

and competition can impose constraints on restructuring, making it difficult to execute
certain changes. The process of completing these procedures can be very time-
consuming and complex. There are risks from legal actions by partners, such as labor
disputes or civil contract disputes. Risks also stem from intentional or unintentional
 actions or negligence by the company’s managers and employees, leading to litigation
or other legal issues.

• Litigation Risks: Restructuring efforts can trigger legal disputes, particularly with
creditors, employees, or other stakeholders who may challenge the restructuring plan.

2. Cultural and Organizational Resistance

• Employee Resistance: Employees often resist restructuring due to fears of job losses,
changes in roles, or shifts in organizational culture. This resistance can slow down or
derail the process.

• Ingrained Corporate Culture: Strong, established corporate cultures can create

inertia, making it difficult to implement changes that disrupt long-standing practices or
norms.

• Management Pushback: Resistance from middle or senior management, who may fear
losing control or authority, can also be a significant barrier.

3. Financial Constraints

• High Costs: Restructuring can involve significant upfront costs, including severance
payments, legal fees, and investments in new technology or processes. Companies with
limited resources may struggle to afford these costs.

• Debt Obligations: Companies with high levels of debt may face difficulties in
obtaining the necessary financing to support restructuring efforts.

• Investor Pressure: Shareholders and creditors may oppose restructuring plans if they
believe the short-term financial impact (e.g., loss of dividends or reduced stock value)
outweighs the long-term benefits.

4. Strategic Uncertainty

• Lack of a Clear Vision: If management lacks a clear vision or strategy for the
restructuring process, it can lead to confusion, inefficiency, and failure to achieve the
desired outcomes.

• Uncertain Market Conditions: Market volatility or uncertain economic conditions

can make companies hesitant to restructure, as the risks of failure may seem too high.
 • Technological Disruption: In industries facing rapid technological changes,
restructuring plans may quickly become outdated or insufficient to address new market
realities.

5. Conflicting Stakeholder Interests

• Diverging Stakeholder Interests: Different groups, such as shareholders, employees,

creditors, and customers, often have conflicting interests, which can make it difficult to
reach consensus on restructuring decisions.

• Union Opposition: Labor unions may oppose restructuring efforts, particularly if they
involve layoffs, wage reductions, or changes to working conditions.

• Board-Level Conflicts: Disagreements at the board level can create gridlock,

preventing the company from moving forward with its restructuring plans.

6. Operational Disruptions

• Interruption of Business Operations: Restructuring, especially large-scale changes,

can disrupt day-to-day operations, causing a loss of productivity and negatively
impacting customer relationships.

• Supply Chain Issues: Changes in business structure may affect supply chains, leading
to delays or increased costs.

7. Political and Social Barriers

• Political Opposition: In industries where governments have a strong interest (such as

public utilities, defense, or banking), political opposition to restructuring can be a major
hurdle.

• Public Perception: Restructuring plans that result in significant layoffs or closures may
face public backlash, damaging the company’s reputation and leading to negative media
coverage.

8. Technological Barriers

• Legacy Systems: Companies reliant on outdated or inflexible technology systems may

find it difficult to restructure, as these systems can be expensive and time-consuming
to overhaul.

• Skills Shortages: A lack of internal expertise or the inability to recruit the necessary
talent to support new technologies or processes can be a major obstacle.
9. Inadequate Communication

• Lack of Transparency: Poor communication between management and stakeholders

can lead to misunderstandings, fear, and resistance to restructuring efforts.

• Inconsistent Messaging: If the company fails to clearly explain the reasons for
restructuring and the expected benefits, it can erode trust and lead to confusion or
opposition from employees, customers, and investors.

10. Short-Term Focus

• Focus on Immediate Gains: Pressure from investors or management for quick

financial returns may prevent companies from implementing long-term restructuring
strategies that are necessary for sustainable growth.

• Quarterly Performance Pressure: Companies with a focus on short-term earnings

(quarterly performance) may hesitate to engage in restructuring that could lead to
temporary financial setbacks.

11. Cultural and Geographic Diversity

• Geographically Dispersed Operations: Global companies may face challenges in

restructuring due to differences in local laws, cultures, and market conditions.

• Cultural Differences: In multinational corporations, restructuring can be complicated

by differing cultural expectations, norms, and communication styles across regions.

Overcoming these barriers requires careful planning, effective communication, stakeholder

management, and often, the willingness to make difficult decisions. Companies that are
proactive in addressing these obstacles are more likely to achieve successful restructuring
outcomes.

FOR SHORT ANSWER-

Each form of M&A has its legal regulations. Businesses often conduct thorough research before
proceeding with M&A transactions; however, there are still certain barriers that may arise.

Legal Barriers. Applicable laws for mergers and acquisition transactions vary depending on
the industry. However, most M&As are governed by the Law on Enterprise, Law on
Investment, Law on Competition, and Law on Security, including the relevant decrees and
circulars. The process of completing these procedures can be very time-consuming and
complex. Legal barriers can also include risks arising from business operations such as
suspension, bankruptcy, tax obligations, debts, and non-compliance with legal regulations.
Additionally, there are risks from legal actions by partners, such as labor disputes or civil
contract disputes. Risks also stem from intentional or unintentional actions or negligence by
the company’s managers and employees, leading to litigation or other legal issues.

Financial Barriers. These barriers are of particular concern to the buyer. Financial barriers
include serious risks related to capital contribution. Enterprises that have not contributed
enough capital or have unclear business funds pose risks to assets, such as incorrect asset
valuation and outstanding debts to state agencies and partners. These barriers are typically
addressed by having the acquiring company hire an independent audit unit to review and assess
financial-related content to identify financial risks. For asset-related issues, a valuation firm is
hired to revalue the enterprise. Therefore, before engaging in any M&A activity, investors must
thoroughly understand legal regulations to determine if the investment purpose is achievable
and how to ensure the best legal protection for their rights and interests.

Cultural Barriers. Each company has its unique company culture which has been built over
time. Combining these distinct characteristics can create difficulties and barriers for businesses,
causing fatigue for employees. Staff may feel confused working in a mixed cultural
environment and must adapt to new changes, altering their trust in leadership. They must
maintain the old corporate culture while integrating the new one. If the company’s leadership
cannot find an optimal method to harmonize the cultures, it will take a long time to blend the
new cultures into a unified and stable entity. Otherwise, employees will feel disconnected, and
the new corporate culture will become chaotic and fragile.

Barriers to mergers and acquisitions are an inevitable part of the M&A process. To ensure the
highest efficiency in mergers, businesses need to understand these barriers and find appropriate
solutions.

TYPES OF CORPORATE RESTRUCTURING

Merger

Merger is the combination of two or more companies which can be merged together either by
way of amalgamation or absorption. The combining of two or more companies, is generally by
offering the stockholders of one company securities in the acquiring company in exchange for
the surrender of their stock. Mergers may be-
 (i) Horizontal Merger: It is a merger of two or more companies that compete in the same
industry. It is a merger with a direct competitor and hence expands as the firm's operations
in the same industry. Horizontal mergers are designed to achieve economies of scale and
result in reduce the number of competitors in the industry.
(ii) Vertical Merger: It is a merger which takes place upon the combination of two
companies which are operating in the same industry but at different stages of production
or distribution system. If a company takes over its supplier/producers of raw material, then
it may result in backward integration of its activities. On the other hand, Forward
integration may result if a company decides to take over the retailer or Customer Company.
Vertical merger provides a way for total integration to those firms which are striving for
owning of all phases of the production schedule together with the marketing network.
(iii) Co generic Merger: It is the type of merger, where two companies are in the same or
related industries but do not offer the same products, but related products and may share
similar distribution channels, providing synergies for the merger. The potential benefit
from these mergers is high because these transactions offer opportunities to diversify
around a common case of strategic resources.
(iv) Conglomerate Merger: These mergers involve firms engaged in unrelated type of
activities i.e. the business of two companies are not related to each other horizontally nor
vertically. In a pure conglomerate, there are no important common factors between the
companies in production, marketing, research and development and technology.
Conglomerate mergers are merger of different kinds of businesses under one flagship
company. The purpose of merger remains utilization of financial resources enlarged debt
capacity and also synergy of managerial functions. It does not have direct impact on
acquisition of monopoly power and is thus favoured throughout the world as a means of
diversification.

Demerger

It is a form of corporate restructuring in which the entity's business operations are segregated
into one or more components. A demerger is often done to help each of the segments operate
more smoothly, as they can focus on a more specific task after demerger.

Reverse Merger

Reverse merger is the opportunity for the unlisted companies to become public listed company,
without opting for Initial Public offer (IPO).In this process the private company acquires the
majority shares of public company, with its own name.
Disinvestment

Disinvestment means the action of an organization or government selling or liquidating an asset

or subsidiary. It is also known as "divestiture".

Takeover/Acquisition

Takeover means an acquirer takes over the control of the target company. It is also known as
acquisition. Normally this type of acquisition is undertaken to achieve market supremacy. It
may be friendly or hostile takeover.

➢ Friendly takeover: In this type, one company takes over the management of the target
company with the permission of the board.
➢ Hostile takeover: In this type, one company takes over the management of the target
company without its knowledge and against the wish of their management.

Joint Venture (JV)

A joint venture is an entity formed by two or more companies to undertake financial activity
together. The parties agree to contribute equity to form a new entity and share the revenues,
expenses, and control of the company. It may be Project based joint venture or Functional based
joint venture.

➢ Project based Joint venture: The joint venture entered into by the companies in order to
achieve a specific task is known as project based JV.
➢ Functional based Joint venture: The joint venture entered into by the companies in order
to achieve mutual benefit is known as functional based JV.

Strategic Alliance

Any agreement between two or more parties to collaborate with each other, in order to achieve
certain objectives while continuing to remain independent organizations is called strategic
alliance.

Franchising

Franchising may be defined as an arrangement where one party (franchiser) grants another
party (franchisee) the right to use trade name as well as certain business systems and process,
to produce and market goods or services according to certain specifications.

The franchisee usually pays a one-time franchisee fee plus a percentage of sales revenue as
royalty and gains.
Slump sale

Slump sale means the transfer of one or more undertaking as a result of the sale of lump sum
consideration without values being assigned to the individual assets and liabilities in such sales.
If a company sells or disposes of the whole or substantially the whole of its undertaking for a
predetermined lump sum consideration, then it results in a slump sale.

Debt restructuring

It is a process in which a borrower, typically a company or government, negotiates with its

creditors to modify the terms of its existing debt obligations to improve its financial stability
or avoid default. The goal of debt restructuring is to make it easier for the borrower to manage
and repay their debt, often by extending repayment periods, reducing interest rates, or even
reducing the principal amount owed. Types of debt restructuring are-

• Debt Rescheduling
• Debt Reduction:
• Lower Interest Rates:
• Debt-for-Equity Swap:.
• Debt Consolidation
• Debt Repurchase

M & A: CONCEPT

INTRODUCTION

Mergers and acquisitions both refer to the joining of two or more business entities that entail a
restructuring of their corporate order. They are aimed at achieving better synergies within the
organization in order to increase their competence and efficiency. However, there are key
differences between a merger vs. acquisition in terms of initiation, procedure, and outcome.

A merger occurs when individual organizations decide to join their forces and give rise to a
new business entity. On the other hand, an acquisition is a situation wherein a larger, financially
stronger organization takes over a smaller one. The latter ceases to exist, and all of its
operations and assets are acquired by the larger business enterprise.
MERGER

When two or more individual businesses consolidate to form a new enterprise, it is known as
a merger. The merged entity usually takes on a new name, ownership, and management that is
composed of employees from both companies. The decision to merge is always mutual since
the merging companies combine their forces to seek certain benefits, even at the cost of diluting
their individual powers. There is usually no exchange of cash.

The motive for mergers may be to expand market share, gain entry into new markets,
reduce operating costs, increase revenues, and widen profit margins. The parties to the contract
are generally similar in terms of size and scale of operations, and they treat each other as equals.
A merged company issues new shares, and the shares are distributed proportionately among
existing shareholders of both parent companies.

ACQUISITION

An acquisition entails one organization acquiring the business of another. The acquirer must
purchase at least 51% of the target company’s stock in order to gain absolute control over it. It
usually occurs between two companies that are not equal in stature: a financially stronger entity
generally acquires a smaller, relatively weaker one. It is not necessary for the decision to be a
mutual one; when a company takes over the operations of another without the latter’s consent,
it is termed a hostile takeover.

The smaller company continues its operations under the name of the larger one. The acquirer
can choose to either retain or lay off the staff of the acquired company. In fact, the acquired
company ceases to exist in its previous name and operates under the name of the acquiring
company; only in some cases does the acquired company gets to retain its original name. No
new shares are issued.

The motives for acquisition are similar to those for mergers. The basic aim is to gain a
better competitive advantage by combining resources with another organization.

In 2017, e-commerce giant Amazon acquired the American supermarket chain Whole Foods
Inc. The latter still operates in its original name and is run by the original CEOs; however, all
of its operations are controlled by the parent company Amazon.
M&A IN INDIA

M&A has manifoldly increased in India over the last few years. Following are the some of the
biggest M&A in India:

a. Zee Entertainment- Sony India Merger

Two of India's largest media companies, Zee Entertainment Enterprises Limited and Sony
Pictures Networks India, have agreed to a multibillion-dollar merger. The arrangement has the
potential to turn the merged entity into one of the largest and most sought-after in the country.
Both companies are expected to benefit from the merged entity and the synergies produced
between them, which will not only accelerate business growth but will also
allow shareholders to participate in its future success.

b. Bank of Baroda and Vijaya Bank and Dena Bank merger

Vijaya Bank and Dena Bank merged with Bank of Baroda in 2019. Bank of Baroda, in
December 2020 said that it had successfully integrated 3,898 branches of Vijaya Bank and
Dena Bank.

c. Flipkart and eBay India merger

E-commerce major Flipkart merged with eBay India's operations in 2017. The purpose of the
merger was to provide customers of Flipkart expanded product choices with the wide array of
global inventory available on eBay while eBay customers would have access to a more unique
Indian inventory from Flipkart sellers.

d. Walmart’s acquisition of Flipkart

Walmart's purchase of Flipkart marked its entry into the Indian market. Walmart defeated
Amazon in a bidding war and paid $16,000,000,000/- for a 77% stake in Flipkart. This helped
Walmart compete with Amazon in one of its key markets. Flipkart's logistics and supply chain
network grew as a result.

DIFFERENCE BETWEEN MERGER AND ACQUISITION

The terms merger and acquisition essentially refer to the consolidation of two or more business
entities for the purpose of achieving better synergies. The motives for entering into either
contract include expanding operations, gaining a higher market share, reducing costs, or
boosting profits. However, there are several prominent differences between the two, as
summarized in the following table:

Merger Acquisition

Procedure Two or more One company completely takes over the

individual companies operations of another.
join to form a new
business entity.

Mutual A merger is agreed The decision of acquisition might not be

Decision upon by mutual mutual; in case the acquiring company
consent of the takes over another enterprise without
involved parties. the latter’s consent, it is termed as a
hostile takeover.

Name of The merged entity The acquired company mostly operates

Company operates under a new under the name of the parent company. In
name. some cases, however, the former can retain
its original name if the parent company
allows it.

Comparative The parties involved in The acquiring company is larger and

Stature a merger are of similar financially stronger than the target
stature, size, and scale company.
of operations.

Power There is dilution of The acquiring company exerts absolute

power between the power over the acquired one.
involved companies.

Shares The merged company New shares are not issued

issues new shares.

CONCLUSION

M&A is really confirmed to be one of the most useful methods to overcome current difficulties
and improve the development of companies. Restructuring of business largely through M&A,
operation at a greater scale, and other synergy effects seem to have helped the domestic
companies to enhance their efficiency and competitiveness in international market. On the
other hand, entry of the foreign companies through M&A seems to have raised competitive
pressure in the domestic market forcing the firms to boost their competitiveness.

MOTIVES BEHIND M&A

Growth- One of the primary reasons companies pursue M&A is to achieve growth. Acquiring
or merging with another company allows businesses to increase their size, market presence,
and revenue streams. They can acquire established brands and distribution networks. This can
be particularly useful for companies that have reached a plateau in their growth trajectory or
those looking to expand into new markets. M&A can provide a faster and more efficient path
to growth than organic expansion, which can be slow and costly.

Diversification - Diversification permits a company in a different industry or product line to

reduce its dependence on a single market or product, thereby spreading its risk and increasing
its resilience to economic downturns.

Moreover, diversification can also provide companies with a competitive advantage. By

offering a wider range of products or services, companies can differentiate themselves
from competitors and build stronger customer relationships.

Synergy- When two companies merge, they can leverage their complementary strengths to
create value that is greater than the sum of their parts. This can be achieved through cost
savings, improved efficiency, and the ability to offer a wider range of products or services to
customers.

Merging companies can eliminate redundant functions, consolidate operations, and

reduce overhead costs. In addition, combining purchasing power and negotiating better deals
with suppliers can lead to lower costs for raw materials, components, and other inputs.

Market Share- Acquiring a competitor is a common strategy for companies looking to increase
their market share and gain a competitive advantage. This can be particularly beneficial in
industries with high barriers to entry or limited growth prospects.
Companies can achieve economies of scale and improve their bargaining power with suppliers
and customers. Eliminating a competitor increases a company's share of the market and reduces
competition, which can lead to higher pricing power and increased profitability.

Profitability- Companies can acquire a company that is more profitable or has higher margins
to increase their earnings and improve their financial performance. This provides access to new
markets, customers, and product lines, which can create new growth opportunities and increase
revenue. Lower costs, such as those resulting from higher productivity, can lead to an increase
in profits. As a result, consumers may benefit from lower prices, leading to an overall
improvement in economic welfare.

Tax Benefits- M&A can sometimes led to tax benefits if the target company is in a strategic
industry or a country with a favourable tax regime. Further, acquiring a company with net tax
losses enables the acquiring company to use the tax losses to lower its tax liability.

Geographical or other capital investment- M&A is aimed to smooth a firm's earnings

outcomes, which in turn smooths the stock price over time, providing conservative investors
more confidence in the company. This in turn offers the company new sales opportunities and
new areas to explore the possibility of their business.

Access to Technology and Innovation- Companies often acquire smaller firms with advanced
technologies or innovative products to enhance their technological capabilities and remain
competitive in fast-changing industries such as tech, pharmaceuticals, or manufacturing.

By acquiring firms with strong research and development (R&D) capabilities, companies can
accelerate innovation and reduce the time it takes to bring new products to market.

Defensive Mergers- Companies may merge or acquire other firms to make themselves larger
and less attractive as a target for hostile takeovers. This defensive strategy allows companies
to remain independent and maintain control.

In industries undergoing consolidation, companies may engage in defensive M&A to avoid

being left behind or weakened by larger competitors who are actively consolidating the market.

Conclusion:

Mergers and acquisitions are powerful strategic tools that companies use to achieve a variety
of objectives, from expanding market presence to improving financial performance, gaining
competitive advantages, or accessing new technologies. While M&A can offer significant
benefits, they also come with risks, such as integration challenges, cultural clashes, and
financial costs, which must be carefully managed for a successful outcome.

TYPES OF MERGERS

There are five commonly-referred to types of business combinations known as mergers:

conglomerate merger, horizontal merger, market extension merger, vertical merger and product
extension merger.

Conglomerate

A merger between firms that are involved in totally unrelated business activities. There are two
types of conglomerate mergers: pure and mixed. Pure conglomerate mergers involve firms with
nothing in common, while mixed conglomerate mergers involve firms that are looking for
product extensions or market extensions.

Example- A leading manufacturer of athletic shoes, merges with a soft drink firm. The resulting
company is faced with the same competition in each of its two markets after the merger as the
individual firms were before the merger. One example of a conglomerate merger was the
merger between the Walt Disney Company and the American Broadcasting Company.

Horizontal Merger

A merger occurring between companies in the same industry. Horizontal merger is a business
consolidation that occurs between firms who operate in the same space, often as competitors
offering the same good or service. Horizontal mergers are common in industries with fewer
firms, as competition tends to be higher and the synergies and potential gains in market share
are much greater for merging firms in such an industry.

Example- An example of a horizontal merger in India is the merger of Flipkart and Myntra in
2014. It is considered a horizontal merger because both companies operated in the e-commerce
industry and targeted similar customer bases, although Myntra had a more niche focus on
fashion. The merger allowed Flipkart to strengthen its position in the online fashion retail
segment, which was Myntra’s expertise.

Another example is the Disney+ Hotstar. A horizontal merger between Disney+ and Hotstar,
which created a streaming platform that holds 29% of India's streaming market share.
Market Extension Mergers

A market extension merger takes place between two companies that deal in the same products
but in separate markets. The main purpose of the market extension merger is to make sure that
the merging companies can get access to a bigger market and that ensures a bigger client base.

Example- One historic example of a market extension merger is that of Pizza Hut by Pepsi Co.
Pepsi observed and very clearly understood that people went to Pizza Hut, and hence the idea
to merge with them. This helped Pepsi in reaching a wider market. This merger took place long
back in 1977, and within a year, sales nearly went up to $436 million, helping pizza hut to open
a new headquarter, which is valued at $10 million.

Product Extension Mergers

A product extension merger takes place between two business organizations that deal in
products that are related to each other and operate in the same market. The product extension
merger allows the merging companies to group together their products and get access to a
bigger set of consumers. This ensures that they earn higher profits.

Example- An example of a product extension merger in India is the acquisition of Marico Ltd.
and Paras Pharmaceuticals in 2011. Marico Ltd. is a leading consumer goods company in India,
known for its products in the beauty and wellness space, particularly hair care, skin care, and
edible oils. Paras Pharmaceuticals was well-known for its personal care products, including
“Zandu Balm”, and over-the-counter healthcare products like “Zandu Chyawanprash” and
other Ayurvedic products. This acquisition is considered a product extension merger because
Marico aimed to expand its product line by integrating Paras Pharmaceuticals' offerings into
its portfolio. Marico sought to enhance its presence in the personal care and health segments
by acquiring products that complement its existing product range.

Vertical Merger

A merger between two companies producing different goods or services for one specific
finished product. A vertical merger occurs when two or more firms, operating at different levels
within an industry's supply chain, merge operations. Most often the logic behind the merger is
to increase synergies created by merging firms that would be more efficient operating as one.

To summarize, in simple words, a vertical merger joins two companies that may not be direct
competitors but exist under the same supply chain.
Example- An example of a vertical merger in India is the merger between Dish TV India
Limited and Zee Entertainment Enterprises Limited Ltd. (ZEEL). Dish TV India Limited is a
distribution platform, while ZEEL is a broadcaster. Both companies are in the same industry
but at different stages of production.

Another classic example that can be given would be eBay and PayPal. As we all know, eBay
is an online shopping and auction platform, whereas PayPal provides services to ease the
transfer of money, enabling users to make online payments. Though the services offered by
both are quite different, a merger helped eBay in increasing the number of transactions which
indeed proved to be a great strategic decision overall.

TYPES OF ACQUISITIONS

Acquisitions can take various forms, each with its own implications and benefits for the
acquiring company. Here are some common types of acquisitions:

1. Asset acquisition: In an asset acquisition, the buyer purchases specific assets of the target
company, such as equipment, inventory, or intellectual property. This type of acquisition allows
the buyer to select only the assets they desire while avoiding liabilities and obligations of the
target company.

2. Stock acquisition: In a stock acquisition, the buyer purchases the shares or stock of the
target company, thereby gaining ownership and control over the entire entity. This type of
acquisition results in the buyer assuming all assets, liabilities, and obligations of the target
company.

3. Merger: A merger involves the combination of two or more companies to form a new entity.
Mergers can be either horizontal, where companies in the same industry merge, or vertical,
involving companies in different stages of the supply chain.

4. Friendly acquisition: In a friendly acquisition, the target company agrees to the acquisition,
and both parties work together to negotiate and finalize the deal. This type of acquisition is
typically smoother and less contentious than hostile takeovers.

5. Hostile takeover: In a hostile takeover, the acquiring company seeks to purchase the target
company against its will. This can involve making a direct offer to shareholders or pursuing
aggressive tactics to gain control of the target company.
6. Reverse takeover: In a reverse takeover, a private company acquires a publicly traded
company, allowing the private company to become publicly listed without undergoing the
traditional initial public offering (IPO) process.

7. Horizontal acquisition: A horizontal acquisition occurs when a company acquires another

company that operates in the same industry and produces similar products or services. This
type of acquisition is aimed at increasing market share and eliminating competition.

8. Vertical acquisition: A vertical acauisition involves the acquisition of a company that

operates in a different stage of the supply chain. This type of acquisition can help streamline
operations, reduce costs, and improve efficiency.

Each type of acquisition offers unique advantages and considerations for the acquiring
company. Understanding these different approaches is essential for companies considering
growth through acquisitions.

EXAMPLE OF ACQUISITIONS

In India, notable examples of acquisitions include Walmart's acquisition of Flipkart in 2018,

marking Walmart's significant entry into the Indian e-commerce market. Another prominent
acquisition was Tata Motors' acquisition of Jaguar Land Rover in 2008, expanding Tata's global
footprint in the automotive industry.

These acquisitions highlight strategic moves by companies to enhance market presence, access
new technologies, or integrate complementary businesses, reflecting India's dynamic business
environment and the importance of M&A in corporate growth strategies.

REASONS FOR FAILURE OF M&A

Mergers and acquisitions (M&A) are one of the fastest ways for a company to achieve growth
and enter new markets. More and more companies are choosing M&A as a transformational
tool every year: in 2022 there were almost 50,000 M&A deals worldwide and about 28,000
M&A deals in H1 2023. However, not all deals end successfully. On the contrary, the number
of failed deals is also striking. According to research conducted by McKinsey & Company,
about 10% of all large mergers and acquisitions are cancelled every year. This number is quite
significant, considering that about 450 of such deals are announced annually.
However, the number might be even higher, considering the information presented by Roger
L. Martin in the Harvard Business Review, according to whom “M&A is a mug’s game, in
which typically 70–90% of deals fail.” Indeed, mergers and acquisitions quite often fail, no
matter the size of the transaction. Below mention are the common reasons for failure of M&A

Unclear goals and timelines- According to a survey conducted by Statista in 2021, most
respondents indicate that a clear M&A strategy is the most important factor for achieving a
successful M&A. Thus, lack of proper strategic planning is the most common reason why most
mergers and acquisitions fail.

Sometimes, companies rush an M&A deal when there’s an opportunity to acquire a competitor
or to gain a bigger market share. However, rushing often results in unrealistic expectations and,
thus, a failed transaction. Before entering into a transaction, both companies should clearly
understand the acquisition objectives and assess the potential synergies it can bring.

Poor due diligence- Sloppy or careless due diligence processes is another common reason why
the majority of mergers and acquisitions fail. According to Bain’s 2020 Global Corporate M&A
Report, more than 60% of executives indicate that poor due diligence is the main reason for
deal failure. Due diligence is an integral part of the M&A process that allows an acquiring
company to investigate the documentation, legal aspects, and internal processes of the to-be-
acquired company to help avoid surprises. On the other hand, due diligence is also a great
chance for target companies to ensure they’re fully prepared for the acquisition.

Proper due diligence ensures a smooth transaction by minimizing possible risks. Conversely,
lax due diligence may result in the deal failure and great financial losses.

eBay and Skype- In 2005, eBay thought by acquiring Skype, it would allow buyers and sellers
to get in touch more easily. However, as it turned out, eBay users had no real need for this
feature, and emails continued to suffice. The acquisition cost $2.6 billion and was labeled a
failure. The majority of Skype was sold for a loss four years later.

Google and Motorola- When Google and Motorola began to merge in 2012, it made a lot of
sense from a strategic perspective. Google’s operating system, Android, was already the second
biggest in the market and by acquiring Motorola, they’d have the opportunity to create high-
quality mobile phones. Ultimately, Google found the quality of Motorola’s mobiles too poor,
so instead, they contracted other manufacturers, like Samsung and LG, to develop its Nexus
phones. By 2014, Google rid itself of Motorola for $2.9 billion.
Overpaying- The McKinsey & Company analysis of about 2,500 deals conducted between
2013 and 2018 showed that the larger the transaction, the more likely it is to fail. Often,
companies become too focused on the potential benefits a deal may bring and overlook its
real value. This often results in a failed transaction and financial loss.

Quaker Oats and Snapple: Before embarking on its journey to merge with the bottled teas
and juices producer Snapple, Quaker Oats had already successfully managed to do so with
the widely popular Gatorade energy drink. Despite warnings from Wall Street that they were
paying $1 billion too much, Quaker Oats acquired Snapple for $1.7 billion.

Not only did Quaker Oats overpay, but they also didn’t know how to run the company. Within
27 months, Quaker Oats was forced to sell Snapple to a holding company for just $300
million - a loss of $1.6 million for each day while the company owned Snapple.

Lack of proper communication- This relates to poor communication both between the two
companies engaging in the deal and between the senior management and key team
members. Communication breakdowns between the sell- and buy-side lead to different
visions of the deal objectives. Additionally, poorly communicated deal objectives by the
senior executives leaves key team members confused and might lead to misunderstanding of
the combined company’s goals. This, in turn, results in executing the wrong goals.

Cultural Clashes- When two companies have completely different cultures, it might be
difficult to gain a cultural fit during post-merger integration. Different cultures, values, and
operational styles lead to confrontations among company staff. This results in poor
cooperation and impacts the overall company’s performance. According to Deloitte, cultural
differences are the reason for 30% of failed integrations. This was one of the main reasons
for the failure of the $35 billion deal between Sprint and Nextel in 2005. Sprint had a more
bureaucratic style of management, while Nextel had a more entrepreneurial spirit. The
incompatibility of the two companies was also evidently manifested by the fact that they kept
two separate headquarters.

Operational Difficulties -Just like with culture, the operational styles of two companies
entering a transaction also matter. When two companies have different approaches to
operations, it can lead to operational inefficiencies and M&A challenges. Operational
differences can include challenges related to integrating different corporate processes,
technologies, and management styles. These differences can contribute to the failure of M&A
deals by causing disruptions, decreasing employee morale, and affecting the overall
performance of the merged entity.

Lack of management and involvement- Often, company senior managers and leadership
teams choose to let professional advisors oversee the transaction and address the deal issues.
However, management involvement helps a company to close a deal successfully. This is
because company owners and senior managers have a better understanding of the deal
objectives and, thus, build an atmosphere of trust throughout the company teams actively
engaged in the integration process.

Regulatory Issues- McKinsey & Company research shows that out of 345 large M&A deals
announced between 2013 and 2020, 47 of them (14%) were cancelled because of antitrust or
regulatory reasons. As of 2023, there were 3 merger complaints filed due to the antitrust laws
so far, according to Bloomberg. These are the external factors that greatly impact a deal’s
success. However, thorough due diligence and prior analysis help to avoid regulatory
difficulties.

Poor post-merger integration- After a deal’s closure, the integration process begins. Often,
companies underestimate the importance of post-merger integration, which results in poor
post-acquisition management and poor execution of the deal’s objectives. Instead, an
acquiring firm and a target company should have a clear integration plan, which specifies
how the companies’ workforce, projects, products, and internal processes will be distributed
and shared.

High recovery cost- The complexity of the post-merger integration process typically leads
to high recovery costs, which are sometimes beyond the companies’ capacity. As a result, the
deal fails. When assessing the transaction and building a strategy, companies should take into
account the post-merger integration period and the costs it might incur. This is because a
newly formed company might need to invest in new processes or systems. Additionally, there
might also be layoffs that could lead to higher costs.

Synergy overestimation - Overestimated synergies go together with overpaying and are

what leads to the latter. Often, companies become too focused on the potential synergies a
deal can bring without proper analysis and, thus, might not notice certain issues a target
company lacks. This results in overpaying and possible deal failure.
CONCLUSION

Despite being a powerful transformation tool for companies, M&A is not always successful.
Moreover, the numbers prove M&A deals quite often fail: about 10% of all large transactions
are cancelled every year. Mergers and acquisitions often fail because of many factors which
have been discussed above.