Merger

A merger is a corporate process through which two or more companies join to become one. By tracking the latest merger events, investors can identify lucrative investment opportunities. This happens because when companies merge, it usually creates value by saving costs or boosting revenue. This strengthens the newly formed entity and causes its share price to increase.

Now that you know the merger definition, let us understand the concept of a merger in detail and see how investors can benefit from such a process.

What do you mean by merger

A merger represents a strategic business decision taken by two or more companies to join and form a single entity. In a merger, the companies involved combine their:

• Operations
• Assets, and
  
• Liabilities

The ultimate goal of every merger is to create a new, larger company that can benefit from synergies and economies of scale.

Why do companies merge

To expand market presence:

• Mergers allow companies to:
  • Enter new markets or
  • Strengthen their presence in existing ones
    
• They become stronger by combining resources and customer bases.

To enhance competitiveness

• Through mergers, companies gain access to:
  • New technologies
  • Improved products, or
  • Novel expertise
• This acquisition enhances their competitive advantage in the marketplace.

To achieve cost savings

• Merging companies can eliminate duplicate functions by streamlining operations.
• This elimination leads to cost savings and improved efficiency.

To diversify products or services

• Mergers enable companies to diversify their product or service offerings.
• This diversification reduces their dependence on specific markets or industries.
  

To accelerate growth

• Mergers provide opportunities for accelerated growth by combining the complementary strengths and capabilities of the merging companies.
  

The extended benefits of a merger

A merger’s meaning in business is quite straightforward. However, mergers do not just benefit the companies joining together; they also bring advantages to the entire industry and the shareholders involved. Let us see the extended benefits of mergers in the corporate world:

Drives innovation

• Mergers improve innovation by bringing together different:
  • Perspectives
  • Expertise, and
  • Resources

Consolidates industry

• Mergers reduce competition and create larger, more dominant players in the market.

Creates value for shareholders

• Successful mergers unlock value for shareholders through:
  • Increased profitability
  • Growth opportunities, and
  • Stock price appreciation

How does a merger happen

An observation of merger examples in India shows that corporate mergers involve a detailed process and require various regulatory approvals. Let us see some key steps and necessary regulatory approvals:

Steps	Explanation
Approvals	The process for mergers requires obtaining approval from various parties, including the: Board of directors Shareholders, and Indian regulatory authorities, which include The National Company Law Tribunal (NCLT) The Securities and Exchange Board of India (SEBI), and The Competition Commission of India (CCI)
Documentation	Once the merger terms are agreed, both companies prepare and execute legal documents, such as a merger agreement or a purchase agreement.
Integration	After obtaining approvals and preparing the necessary documentation, the companies begin the process of integrating their: Operations Systems, and Cultures

 

What is the timeline for a merger

This is not fixed. The timeline for a corporate merger in India varies and depends on:

• The complexity of the merger and
• Required regulatory approvals

Generally, the process of a merger can take between six and eight months.

However, for fast-track mergers, there are definite timelines set by the Companies (Compromises, Arrangements, and Amalgamations) Amendment Rules, 2023. Section 233 of the Companies Act, 2013 allows for fast-track mergers of certain classes of companies like:

• Start-up companies
• Small companies, and
• Holding companies with wholly owned subsidiaries.

What are the legal requirements for a merger in India

In India, the merger of two or more companies follows a structured process and is governed by various laws and regulations. Let us explore some key legal requirements:

Companies Act, 2013

• Sections 230-240 of the Companies Act, 2013 cover provisions related to mergers and acquisitions
• These sections outline the procedures for corporate restructuring and confer the National Company Law Tribunal (NCLT) the power to enforce such arrangements.

Competition Act, 2002

• The Competition Act aims to:
  • Prevent unfair trade practices
  • Avoid the creation of monopolistic markets
  • Protect consumer interests, and
  • Check the abuse of power
  • It promotes healthy competition and plays a crucial role in regulating mergers.

Court sanction:

• Any scheme for mergers in India must be sanctioned by the high courts of the respective states where the transferor and transferee companies are located.
• The courts supervise the arrangements and modifications in the scheme and issue necessary sanctions for the merger after due consideration.

What are the tax implications of mergers

The tax implications vary based on the nature of the transaction and the specific circumstances involved. Let us study some key tax implications relating to mergers and acquisitions (M&A) transactions in India:

Capital gains tax	Tax exemptions
In an M&A transaction, the seller is liable to pay capital gains tax on the profits made from the sale of assets. The tax rate for long-term capital gains is: 20% for listed securities and 30% for unlisted securities	Certain M&A transactions are eligible for tax exemptions. For example, under Section 47 of the Income Tax Act, specific types of mergers and demergers are exempt from capital gains tax. Additionally, the conversion of debentures and preference shares into equity shares is exempt from capital gains tax.

 

What are the different types of mergers

Types	Merger definition	Example
Horizontal mergers	Horizontal mergers bring together companies operating within the same industry and offering similar products or services.	A horizontal merger happened between two pharmaceutical companies that produce similar drugs.
Vertical mergers	Vertical mergers unite companies at different stages of the supply chain, often occurring between suppliers and customers.	A car manufacturing company (customer) merged with a tyre manufacturer (supplier).
Conglomerate mergers	Conglomerate mergers involve the combination of companies from unrelated industries or with diverse business interests.	A conglomerate merger happened between a: Technology company and Food and beverage company

 

Why should you as an investor track mergers

Mergers impact the entire industry by creating synergies and driving growth. By tracking mergers, investors can:

• Identify investment opportunities, and
• Maximise their overall portfolio returns

Let us see some major benefits of tracking mergers happening in India:

Spotting investment chances

• Watching mergers helps investors find possible opportunities to invest in companies that are either merging or being acquired.
• By understanding why companies are merging and how it might affect their stock prices, investors can:
  • Make smart choices about buying or selling stocks and
  • Take advantage of changes in the market

• Getting the most out of investments
  • Mergers that succeed often make shareholders' investments more valuable.
  • By identifying companies involved in these kinds of mergers, investors can maximise their portfolio returns, as stock prices usually change after the merger is announced.

Conclusion

Merger’s definition is fairly intuitive; it refers to a strategic business decision in which two or more companies merge to become a single entity. This process requires various regulatory approvals and court sanctions and is governed by several legal acts. We can also categorise mergers into different types, such as horizontal, vertical, and conglomerate mergers.

By tracking mergers, investors can identify lucrative investment opportunities and execute profitable trades in the financial markets. Through continuous education and research, investors can stay ahead of market trends and build a successful investment portfolio.