Question

Critically evaluate the main theories, trends and obstacles for mergers and acquisitions.

Answer 1

The strategy of growth through Mergers and Acquisitions (M&As) has become popular across the globe especially in the last two decades.

The primary objective of a firm is to grow over the years to increase the profitability ofthe business and to enhance the wealth ofthe shareholders. A firm can grow either internally or externally for the purpose of enhancing profitability and shareholder value. The Internal growth or organic growth can be achieved either through the process of introducing or developing new products, or by expanding or enlarging the existing product markets. It includes opening of branches and setting up 11 of greenfield projects.

The term ‘merger’ involves coming together oftwo or more concerns resulting in continuation of one ofthe existing entities, or forming of an entirely new entity. In other words, it is a broader concept which includes both absorption and amalgamation. When one or more concerns merge with an existing concern, it is the case of absorption. Generally, in absorption, a larger company absorbs the business of one or more smaller companies. Most of the mergers take this form. In absorption, only one company survives and remaining companies go into liquidation. Absorption generally involves fusion of a small company with a large company. Consolidation or amalgamation involves the fusion of two or more companies and forming of a new company. All the existing companies involved in the amalgamation lose their identity and a new company is formed. Amalgamation is, generally, considered as the merger of equals. Shareholders ofliquidating companies will have stake in the newly formed company. In a merger, the acquiring company, either through absorption or amalgamation (existing or new), takes over the ownership ofthe other companies and combines their operations with its own operations. In the case of acquisition, the strategy is different. Acquisition is an act of acquiring effective control by one company over the assets or management of another corporate without any combination ofphysical operations ofthe companies involved. In an acquisition, two or more companies remain independent separate entities, but there is change in the management control ofthese companies. When the change in the management control ofthe target company is with the consent ofthe management ofthe target company, it is generally called acquisition. Often this is also called ‘friendly takeover’. When the acquisition is ‘forced’ or against the will ofthe management ofthe target company, it is generally called ‘takeover’. Such an acquisition is also called ‘hostile takeover’. Hostile takeover generally takes the form of ‘tender offer,’ where the takeover bid is made by the acquiring company directly to the shareholders of the target company bypassing the management ofthe target company.