MERGERS
Definition
Mergers have been defined as, “The combining of two or more companies, generally by
offering the stockholders of one company securities in the acquiring company in exchange
for the surrender of their stock.” This is further explained as, “Basically, when two companies
become one. This decision is usually mutual between both firms.”
In India, the laws use the term amalgamation for merger. The Income Tax Act 1961 defines
amalgamation as the merger of two or more companies with another, or the merger of two or
more companies to form a new company, in such a way that all assets and liabilities of the
amalgamating companies become the assets and liabilities of the amalgamated company.
A merger is said to have taken place when owners of separate, roughly equal sized firms
pool their interests in a single firm. Once the merger occurs, one company survives and the
other loses its identity. The surviving firm takes on the assets and liabilities of the selling
firm. The surviving company either retains its identity or is rechristened.
Mergers are used to increase long term profitability by the expansion of operations. Mergers
take place with the consent of the two companies merging with each other.
History of mergers
Mergers in the modern corporate scenario started in the United States and mergers in the
United States have been divided into five waves.
First wave (1897 – 1904)
Merger waves began in 1883 following the depression ending that year. The merger wave
came about due to the economic expansion occurring at the time. The mergers were mostly
all horizontal mergers within the manufacturing industry. The wave was at its zenith between
1898 and 1902. It affected all major mining and manufacturing industries.
During this wave the mergers were mainly horizontal and industry consolidations which
resulted in near monopolistic companies. Another feature of this wave was the formation of
trusts, where the investors invested funds in a firm and entrusted their stock certificates with
directors who ensured they received the dividends for their trust certificates.
The 1904 decision of the Supreme Court in the Northern Securities case in March of 1904 is
credited by many for ending the merger wave. This decision paved the way for the antitrust
laws which now regulate mergers.
As several monopolies came into existence, the Sherman Act was enacted to check
monopolies.
Second wave ( 1916 – 1929)
This wave began with the upturn in business activity. During the second wave of mergers
there was the consolidation of several industries. In this wave oligopolistic industry structures
emerged
Third wave (1965 – 1969)
This was a period of economic prosperity and there were several mergers. Many of these
mergers resulted in diversified conglomerates – companies that had diverse activities.
Fourth wave ( 1984 – 1989)
The fourth wave is known as the wave of mega mergers. There were many mergers – most
of them hostile. These mainly were in the oil and gas, drugs, medical equipment, banking
and petroleum industries.
Fifth wave ( 1992 onwards)
During this period there were major economic changes in many countries. There were large
expansions. There were mega mergers and consolidations.
History of merger and acquisition in India
Immediately after India got independence, there was a wave of acquisitions. Several British
managements wishing to exit sold their companies to Indian entrepreneurs.
After that a very small percentage of businesses in the country used to come together,
mostly into a friendly acquisition with a negotiated deal. The key factor contributing to fewer
companies involved in the merger is the regulatory and prohibitory provisions of MRTP Act,
1969.
Through the eighties there was a spate of takeovers and acquisitions – some of them
hostile.
The situation further changed after liberalization. Apart from issuing licenses more freely the
Government encouraged /Indian companies to merge and to also acquire companies
abroad. Mergers and acquisitions are occurring in most sectors of the economy .
Large Indian companies are going through a phase of growth and are exploring growth
potential in foreign markets. International companies are targeting Indian companies for
growth and expansion. Some of the major factors resulting in this sudden growth of merger
and acquisition deals in India include favorable government policies, excess of capital flow,
economic stability, corporate investments, and dynamic attitude of Indian companies. In
2011 Tata Steel acquired Corus Group Plc, a UK based company for $12,000 billion and
Hindalco acquiring Novelis from Canada for US $6,000 million.
Forms of Mergers
Mergers take two forms:
 Mergers through absorption
 Mergers through consolidation
Classification
There can be several forms of mergers. However, they can be broadly classified as:
 Horizontal
 Vertical
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Co-Generic
Conglomerate
Accretive
Dilutive
Merger Differentiation
Mergers are also distinguished by the manner they are financed. Each has certain
implications for the companies involved and for investors:
Purchase Mergers - As the name suggests, this kind of merger occurs when one company
purchases another. The purchase is made with cash or through the issue of some kind of
debt instrument. The sale is taxable. Acquiring companies often prefer this type of merger
because it can provide them with a tax benefit. Acquired assets can be written-up to the
actual purchase price, and the difference between the book value and the purchase price of
the assets can depreciate annually, reducing taxes payable by the acquiring company. .
Consolidation Mergers - With this merger, a brand new company is formed and both
companies are bought and combined under the new entity. The tax terms are the same as
those of a purchase merger.