MERGERS AND ACQUISITIONS: BOON OR BANE?
Author: Aastha Ranjan, IV year of B.B.A.,LL.B. from Bharati Vidyapeeth's New Law College, Pune
The Ministry of Corporate Affairs defines Mergers as the unification of two companies into a single entity wherein Acquisitions have been defined as a situation wherein a company buys out the other company to combine the bought company with itself. To better understand it we can take the example of Vi which came into existence recently after Vodafone and Idea decided to merge and form the new entity by the name of ‘Vi’. Walmart acquiring Flipkart is one of the best examples of acquisition which not only helped Walmart to enter into the Indian market but also created a strong start point for the acquiring corporation i.e., Walmart.
Mergers and Acquisitions which are mostly used as a consolidated term have entirely different meanings but due to the nature of transactions, possible outcomes that take place in both cases are similar in ways like they both increase the value of the company, unlocks full potential, create more opportunities for the organization etcetera.
Mergers and Acquisitions (M&A) have been taking place globally for centuries now and there have been many such landmark M&A that changed not just an industry but at times a whole continent. It was M&A that in a way caused globalization, economic growth, liberalization etc. It was due to this process that a lot of nations were able to prosper, contributing to the country’s GDP as well, opening up a lot of economies thereby leading to several opportunities for them to grow as a whole and not just in a sector or industry.
India was one such country as well which benefited from this process. By the late 1980s, the process gained some popularity in our country with then famous and renowned Swaraj Paul acquiring DCM Ltd. and Escorts Ltd to overpower them. But that was just a start point after then there has been no looking back and with changing times the economy changed as well. The companies or organisations are readily available these days to merge or business giants are on the lookout to acquire new and emerging talent in a bid to give them an upper hand in the market or business. If we compare the value of M&A transactions for the year 1996 to that of the year 2020, the difference between the number of transactions and the total value for the same speaks for itself because in the year 1996 there were 115 M&A transactions that took place which amounted to a figure of $1.6 billion. Whereas the number of M&A transactions that took place last year i.e., 2020 was 798 and they together amounted to $33.299 billion. So much so that the year 2018 witnessed a total of 1,798 M&A which when added together amounted to a whopping $106.48256 billion.
There have been many landmark Mergers and Acquisition deals that took place in India which didn’t just affect the merging companies or acquired/acquiring parties but also India as an economy like when Tata Steel bought the UK based Corus Steel for $8.1 billion and later renamed it to Tata Steel Europe. Post this acquisition Tata Steel went on to become one of the largest steelmakers in the world.
Pros of Mergers and Acquisition deals
There are numerous ways in which the companies, industry or in a way even the nation is even benefitted from M&A transactions, few of the important ones are discussed below:
Economies of Scale – This is one of the most important reasons why companies go for M&A transactions as through them there is increased access to capital, reduced costs, enhanced production volume, increased profits. Companies with similar products opt for this as it helps them to reduce their operational cost, expand their customer base while enjoying maximum profits at minimum costs. In 2015 when H. J. Heinz and Kraft Foods merged (worth $100 billion) then the newly formed Kraft Heinz Company became the fifth-largest food and beverage company worldwide and the third-largest in the US and renowned brands like Heinz® Tomato Ketchup and so on came under its umbrella.
Unlocking Synergies – If we talk in terms of M&A, synergy can be described as the total sum of two companies put together being greater in terms of value and performance than the sum of two companies added together individually. In layman language synergy can be understood by the phrase ‘one plus one equals to three’. Lucasfilm had already created a name for itself in entertainment, innovation, and technology when Disney decided to acquire it in 2012. Post this acquisition when their franchise ‘Star Wars’ was released it generated massive profits.
Economies of Scope – In the case of organic growth in companies one cannot for sure guarantee attaining economies of scope but M&A has made that possible as well. Economies of Scope can be described as a situation wherein the production of a product reduces the production cost of a related item. It can be achieved by companies if they widen their product range but in a cost-effective manner. The best example of this benefit can be seen in the case of WhatsApp’s acquisition by Facebook when it realised that the latter was lagging after WhatsApp got launched and thus decided to tap on to the much larger client base of the acquired company and thus benefited from it.
Access to Talent - M&A deals help the companies to not only acquire skilled talent from other companies but also ensure that it helps the already existing talent in the company. This is done to retain as well as enhance the highly skilled talent. It helps to revive companies as with a new set of people come new ideas as well a broad skill set.
Pixar’s acquisition by Disney in the year 2006 was mainly for this reason as this purchase not only brought with it the top-class animation studio of Pixar but also the staff behind it, the creative minds which was the real deal.
M&A helps to strengthen the companies as they are combined under it. This improves their chances of survival even in tough times like this global pandemic we are facing. It is due to M&A transactions that many companies were able to combat drastic changes that took place or take place both nationally as well as internationally. Like many conglomerates, Unilever has brands ranging from shampoos to cereals through M&A deals because of which even if it faces loss in one of its brands it is compensated by another brand under its portfolio which was only made possible by mergers and acquisitions.
The list of benefits of M&A deals is endless as it helps from diversification of product line to improved financial position, from tax benefits to increased market share but like everything in this world it i.e., Mergers and Acquisitions to have its cons besides the pros we discussed above.
Cons of Mergers and Acquisition deals:
In cases of an acquisition, it is mostly a bigger company that acquires a small or emerging company to add to the value and talent of the acquiring company due to which the acquired company tends to lose its originality and individuality.
Synergy may not always be positive as there are times when M&A deals lead to negative synergy i.e., the value of the two companies put together is comparatively less than the two companies if operated individually.‘One plus one equals three’ sounds good but in reality, that isn’t the case always and as per historical trends, roughly 2 thirds of such mergers tend to let down on their terms.
Brand value might take a hit if the M&A deals do not pan out well which ultimately will affect the overall functioning of the company/companies as it is after years of being in the market that a company creates a name for itself that cannot sustain itself by just one good deal.
Not necessary that productivity goes through the roof by undergoing M&A transactions for the very basic reason that there might be cultural conflicts between the two entities, their objectives might not be the same and bringing in a new entity might end up making things worse for the company that underwent such a deal.
If the right company is not acquired or merged with then it might very well hamper the productivity of the company that was faring well in its respective sector. There have been M&A deals wherein post them the entities faced a massive blow in the industry as the deals backfired causing huge losses, unemployment, damaged brand value etcetera. AOL and Time Warner had decided to merge in the year 2000 and after that their market value declined dramatically wherein this merger was one of the biggest in America’s business world. Later on, the two companies decided to end the deal after having faced such humongous losses and that not just financially but in other aspects as well.
But all said and done Mergers and Acquisitions have been the driving force for many industries, took them to new heights, provided the companies with numerous opportunities, opened up new avenues previously not ventured in and nothing in this world can be guaranteed for so there have been not so good experiences as well but from such deals, the business world learned its lesson and paved way for deals more thought through. Mergers and Acquisitions have now become an indispensable part of every economy especially post COVID-19 as it caused GDP to dip, industries to close down but through M&A deals countries have started to open up yet again.