MERGER AND ACQUISITION: A STRATEGY FOR INORGANIC GROWTH

A company can grow in two ways; one is organic growth and another inorganic growth. Organic growth is growth when a company grows internally by its own efforts and performance; however Inorganic growth is when a company grows by external means such as merger, acquisition, and takeover etc.

Mergers and acquisitions can be termed as the consolidation of two companies through the various financial transaction. Such financial transaction takes place in the form of Merger, Acquisition, Consolidation, Tender offers, purchase of an asset, Management acquisition.

Such transactions usually take places between two entity that are about the same size and recognizes the advantages the other offers in terms of increasing sales, efficiencies, and capabilities.

Is there any difference between Merger and acquisition?

Legally, yes there is a difference although the two terms have usually been used as synonyms and interchangeable. In the merger at the end, a new company emerges and the new company includes members of both having equal ownership and management. On other hand in case of acquisition one company acquires, basically it acquires the overall management of the other company and it does not lead to the emergence of the new company, the two company may still continue to exist. Acquisition can be friendly Merger or Hostile Merger.

What are the different modes of inorganic growth?

Following are the certain ways to grow inorganically:-

Merger: One company absorbs another company completely and a new company is formed. Both companies Board of directors are involved and shareholders’ approval is required to be taken.

Acquisition: A company acquires the target company’s major stake, no change in name or structure takes place.

Consolidation: Two company come together to form a new company. There are common equity shareholders.

Tender offers: Acquiring a company offers to buy the outstanding shares of the target company (usually the shell company i.e. with limited assets or no running business as the case may be). This offer bypasses the management and the board of director and is made directly to the shareholders.

Purchase of asset: Simply the assets are bought by one company of another company. Note that the target company should take shareholders approval before accepting the offer.

Management acquisition: It is also known as a management-led buyout (MBO), wherein the executives of a company purchase a controlling stake in a company, this makes it private. Such a merger is usually done by a former executive partner with a financier or former corporate officers in order to help fund a transaction.

Reverse Merger: When a private company buys the public listed company (usually the shell company i.e. with limited assets or no running business as the case may be) it is called Reverse Merger.

What are the benefits of Merger and Acquisition?

1. Lower cost: Eliminating staffing redundancies can help reduce costs

2. Improving a company’s performance and accelerate the growth of the company.

3. Economies of scale: By being able to purchase raw materials in greater quantities, for example, costs can be reduced.

4. Diversification for higher growth products or markets

5. To increase market share and positioning giving broader market access: Increased market share.

6. Strategic realignment and technological change

7. Tax considerations

8. Undervalued target

9. Diversification of risk

Types of Merger: On the basis business activity merger can be classified into following types:

1. Horizontal Merger: In horizontal merger two entities which are dealing in the same products or providing similar services merges, basically these are the entities providing the substitute goods or services.
2. Vertical Merger: In vertical merger two or more entities which are providing services or goods to make finished products merge, basically these are the entities providing the complementary goods or services.
3. Conglomerate Merger: Two entities which are dealing or operating in an entirely different business. In other words, it is a merger between entities which are totally unrelated to each other.
4. Co-generic Merger: When two or more companies merge which are related to each other in terms of customers group, functions or technology it is called co-generic Merger.
5. Forward Merger: When an entity merges with another company which is a buyer. Such merger helps in increasing the profit of the firm.
6. Reverse Merger: When an entity merges with another company which provides raw material to complete the product or makes finished goods.