MERGER,ACQUISITION,TAKEOVER

Merger:

A merger occurs when two companies combine to form a single company. A merger is very similar to an acquisition or takeover, except that in the case of a merger existing stockholders of both companies involved retain a shared interest in the new corporation. By contrast, in an acquisition one company purchases a bulk of a second company's stock, creating an uneven balance of ownership in the new combined company.

The entire merger process is usually kept secret from the general public, and often from the majority of the employees at the involved companies. Since the majority of merger attempts do not succeed, and most are kept secret, it is difficult to estimate how many potential mergers occur in a given year. It is likely that the number is very high, however, given the amount of successful mergers and the desirability of mergers for many companies.

A merger may be sought for a number of reasons, some of which are beneficial to the shareholders, some of which are not. One use of the merger, for example, is to combine a very profitable company with a losing company in order to use the losses as a tax write-off to offset the profits, while expanding the corporation as a whole.

Increasing one's market share is another major use of the merger, particularly amongst large corporations. By merging with major competitors, a company can come to dominate the market they compete in, giving them a freer hand with regard to pricing and buyer incentives. This form of merger may cause problems when two dominating companies merge, as it may trigger litigation regarding monopoly laws.

A merger is usually handled by an investment banker, who aids in transferring ownership of the company through the strategic issuance and sale of stock. Some have alleged that this relationship causes some problems, as it provides an incentive for investment banks to push existing clients towards a merger even in cases where it may not be beneficial for the stockholders.

Types of merger:

A vertical merger

Horizontal mergers Conglomerate mergers

A vertical merger is one of the most common types of mergers. When a company merges with either a supplier or a customer to create an extension of the supply chain, it is known as a vertical merge or integration. An example of a vertical merger may be a steel company merging with a car manufacturer. The steel company was previously a supplier to the car manufacturer but after the merge would be part of the same company.

A vertical merger:

Horizontal mergers are types of mergers that involve companies in direct competition with one another. Often horizontal mergers are considered hostile, which means a larger company "takes over" a smaller one in more of an acquisition than a merger. An example of a horizontal merger in the traditional sense is the combination of car companies Chrysler and Daimler Benz. Both companies wanted the merger and once combined were called Daimler Chrysler. In the Daimler Chrysler case, there was synergy in market share, financial obligations, and operating costs that made the resulting company better than the two companies had been separately.

Horizontal mergers:

Conglomerate mergers are types of mergers that are in different market businesses. There is no relationship between the type of business one company is in and the type the other is in. The merger is typically part of a desire on the part of one company to grow its financial wealth. By merging with a completely unrelated, but often equally profitable company, the resulting conglomerate gains a revenue stream in many types of industries.

Conglomerate mergers:

Acquisition:

A corporate action in which a company buys most, if not all, of the target company's ownership stakes in order to assume control of the target firm. Acquisitions are often made as part of a company's growth strategy whereby it is more beneficial to take over an existing firm's operations and niche compared to expanding on its own. Acquisitions are often paid in cash, the acquiring company's stock or a combination of both

Acquisitions can be either friendly or hostile. Friendly acquisitions occur when the target firm expresses its agreement to be acquired, whereas hostile acquisitions don't have the same agreement from the target firm and the acquiring firm needs to actively purchase large stakes of the target company in order to have a majority stake.

In either case, the acquiring company often offers a premium on the market price of the target company's shares in order to entire shareholders to sell. For example, News Corp.'s bid to acquire Dow Jones was equal to a 65% premium over the stock's market price.

TAKEOVER

In general parlance takeover also means acquisition. Thus a takeover occurs when acquiring company acquires the control of target company by possessing substantial shares of target company.

Under monopoly restrictive trade practices act takeover means acquisition of not less than 25% of the voting rights of a target firm.

Section 372 of Indian company’s act defines takeover as investment of more than 10% of subscribed capital in a company.

Definition:

Acquiring control of a corporation, called a target, by stock purchase or exchange, either hostile or friendly.

Kinds of Takeover:

I. LEGAL CONTEXT:

From legal perspective , takeover is of three types:

Friendly takeover

Bail out takeover

Hostile takeover

Friendly or Negotiated Takeover: Friendly takeover means takeover of one company by change in its management & control through negotiations between the existing promoters and prospective invester in a friendly manner. Thus it is also called Negotiated Takeover. This kind of takeover is resorted to further some common objectives of both the parties. Generally, friendly takeover takes place as per the provisions of Section 395 of the Companies Act, 1956.

Bail Out Takeover :

Takeover of a financially sick company by a financially rich company as per the provisions of Sick Industrial Companies (Special Provisions) Act, 1985 to bail out the former from losses.

Hostile takeover:

Hostile takeover is a takeover where one company unilaterally pursues the acquisition of shares of another company without being into the knowledge of that other company. The most dominant purpose which has forced most of the companies to resort to this kind of takeover is increase in market share. The hostile takeover takes place as per the provisions of SEBI (Substantial Acquisition of Shares and Takeover) Regulations, 1997.

II. BUSINESS CONTEXT:

Horizontal TakeoverVertical takeover

Conglomerate takeover

Horizontal Takeover:

Takeover of one company by another company in the same industry. The main purpose behind this kind of takeover is achieving the economies of scale or increasing the market share. E.g. takeover of Hutch by Vodafone.

Vertical takeover:

Takeover by one company of its suppliers or customers. The former is known as Backward integration and latter is known as Forward integration. E.g. takeover of Sona Steerings Ltd. By Maruti Udyog Ltd. is backward takeover. The main purpose behind this kind of takeover is reduction in costs.

Conglomerate takeover:

Takeover of one company by another company operating in totally different industries. The main purpose of this kind of takeover is diversification.