Analysing the Regulatory Framework for Mergers and Acquisitions

Abstract

Mergers and acquisitions are increasingly utilized by businesses in India as a means of achieving economies of scale (Economies of scale are the cost advantages that a company can achieve by increasing its level of production or output) and growth. However, the implementation of these strategies is subject to a complex legal framework that includes various laws. While India’s merger and acquisition (M&A) activity was mainly stable between 2015 and 2019, India saw a boom in deal values in 2022, when strategic M&A deal volume and value in India reached all-time highs while dealmaking declined in the rest of the world. The purpose of the paper is to evaluate, summarise, and debate key regulations related to M&A in India and to offer useful policy guidelines involved in merger and acquisition deals. The paper also gives a succinct description of the legal aspects of M&A, including the regulatory framework, the key legal requirements, the procedures to be followed, and the consequences of non-compliance. The other portion of the paper demonstrates how an M&A transaction has a negative impact on market competition.

Introduction

Mergers and acquisitions (M&A) have become increasingly prevalent as a strategic approach employed by companies to expand their operations and bolster their market presence. In India, enterprises are increasingly turning to mergers and acquisitions as a means to extend their reach and attain economies of scale. A comprehensive knowledge of the legal system and the accompanying regulatory framework is imperative for the successful execution of M&A transactions. Moreover, M&A framework is a part of combinations (business transactions that involve the consolidation or integration of two or more enterprises) which includes a range of activities like mergers, amalgamations, acquisitions, joint ventures, and other similar arrangements. However in this paper we will generally be focusing on our particular topic which is mergers and acquisitions and will  analyse the challenges and issues encountered by various organisations during its process. Additionally, this paper endeavours to examine the extent and applicability of some of the legal regulations governing such transactions. 

As a concept, a merger refers to the combination of two or more entities into one, the desired effect being not just the accumulation of assets and liabilities of the distinct entities but the organisation of such entities into one business. Legally, a merger entails the consolidation of two businesses into a single organisation with a new ownership and management structure (ostensibly with members of each firm). For example, Exxon Corp. and Mobil Corp. completed their merger in November 1999 following approval from the Federal Trade Commission (FTC). Prior to the merger, Exxon and Mobil were the top two oil producers in the sector. The combined company underwent a significant restructuring as a result of the merger, which included selling more than 2,400 petrol outlets around the country. The joint company is still listed on the New York Stock Exchange under the name Exxon Mobil Corporation. In India, the term merger is not defined under the Companies Act, 2013 or the Income-tax Act, 1961. The Income-tax Act’s Section 2 (1B) defines the term “amalgamation” in regard to companies as the combination of two or more companies to establish a single entity or the merging of one company with another company.

Types of mergers:

• Horizontal Mergers: This type of merger, also known as “horizontal integration,” occurs between organisations engaged in rival businesses that are at the same stage of the industrial process. The other benefits of this form of merger are economies of scale and economies of scope. (It refers to the cost savings and efficiencies gained by integrating two or more enterprises that can produce a broader range of products or services more efficiently than they could individually). Both Vodafone and Idea were telecom service providers in India. The merger was completed on August 21, 2018, and the new entity was named Vodafone Idea Limited. With a market share of more than 40%, Vodafone and Idea combined to become India’s largest telecom operator. The deconsolidation of Vodafone India will reduce the net debt of the Vodafone Group by around INR 552 billion (US$8.2 billion) and the leverage of the Vodafone Group by about 0.3x Net Debt/EBITDA once the transaction closes. The deal is anticipated to improve Vodafone’s cash flow starting in the first full year after completion.
• Vertical Mergers: A vertical merger is the combination of two organisations that are in different phases of the same production or industrial process. The merger leads to lower transaction costs and better synchronisation of demand and supply. Reliance, which is a telecommunications carrier, merged with Flag Telecom, which is a provider of international wholesale network transport and communications services. The merger was completed on January 13, 2004. Additionally, Flag Telecom had a proven track record of offering global data services. As a result, Reliance was able to provide a greater selection of foreign data services to its clients, including voice over IP (VoIP) and video conferencing.
• Conglomerate Mergers: It is a merger between two organisations from unrelated industries. Utilising financial resources, increasing debt capacity, increasing the value of outstanding shares through higher leverage and earnings per share, and decreasing the average cost of capital are the main drivers of conglomerate mergers. The merger between Berkshire Hathaway, an investment company, and Precision Castparts, a manufacturer of aerospace components, was completed in 2007. Precision Castparts is a leading supplier of aerospace components to Boeing, Airbus, and other major aircraft manufacturers. Berkshire Hathaway could benefit from Precision Castparts’ knowledge and experience in this industry. Berkshire Hathaway has a diversified portfolio of enterprises across several areas. This network may lead to chances for collaboration, knowledge sharing, and company development for Precision Castparts.

• Con-generic Mergers: A congeneric merger is a particular kind of merger in which two companies are in the same or related industries but do not offer the same products. Congeneric mergers can benefit from synergies between the companies’ similar distribution networks. Entities looking to extend their product ranges or improve market share frequently turn to this form of merger. The merger between Mahindra & Mahindra, an automotive and farm equipment company, and Mahindra Satyam, an information technology company. The merger was completed in 2013 and aided Mahindra & Mahindra in increasing their scale and market share, diversifying product lines, and gaining access to new markets and technology. 
• Cash Mergers: The shareholders of one corporation receive cash rather than shares in the combined entity in a “cash merger,” also known as a “cash-out merger.” This is effectively an exit for the cashed-out shareholders. The merger of Bharti Infratel and Indus Towers, where Vodafone Idea Ltd. (VIL) has received about ₹3,760 crore in cash for its 11.15% holding in Indus.
• Triangular Mergers: This is a tripartite arrangement where the target merges with an acquirer subsidiary. A triangle merger can be forward (when the target merges into the subsidiary and the subsidiary survives) or reverse (when the subsidiary merges into the target and the target survives), depending on which entity remains after such a merger. The merger between Tata Consultancy Services (TCS) and CMC Limited (CMC) in 2009 is an example of a reverse triangular merger. In this case, CMC was the surviving entity.

In the context of an acquisition, the emergence of a new entity does not emerge. Instead, the smaller company is typically assimilated and ultimately dissolves, with its assets integrated into the larger company. An acquisition transpires when one company assumes full control over the operational management of another. Companies may engage in acquisitions with the aim of procuring their supplier, enhancing economies of scale and leading to a reduction in per unit production costs as output scales up. Such strategic maneuvers are often pursued to augment market share, streamline expenditures, and venture into uncharted product lines. When a business is acquired on a going-concern basis, it is referred to as a ‘slump sale’ under the Income Tax Act, 1961. For example, On June 15, 2018, AT&T Inc. completed its acquisition of Time Warner Inc. Within three years of the transaction’s closing, the $42.5 billion acquisition is anticipated to result in cost savings for the combined business of $1.5 billion and revenue synergies of $1 billion.

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