Mergers & Acquisitions

Mergers and acquisitions (M&A) involve the consolidation of companies. It is a strategic business decision following which two or more companies become a single entity. Companies pursue M&A for reasons such as achieving economies of scale, expanding market share, and improving financial performance. For investors, tracking M&A events holds paramount importance. Those who stay informed are often able to identify undervalued companies, spot industry consolidation trends, and uncover value-creation investment opportunities.

Let us study this concept in detail and understand how you can improve your financial decision-making.

What are mergers & acquisitions?

Mergers and acquisitions (M&A) involve transactions where two companies come together in some capacity. While the terms mergers and acquisitions are often used interchangeably, they hold distinct legal definitions. A merger specifically occurs when two companies of comparable size unite to create a new, single entity.

What is a merger

A merger is a combination of two companies into one legal entity. In a merger, the companies form a new joint organisation by combining their:

• Operations
• Resources, and
• Assets

Mergers and Acquisitions (M&A) - Types

Two companies can merge in three different ways. Let understand how:

Types	Meaning	Example
Horizontal merger	This involves two companies operating in the same industry and competing for the same market.	A famous example is the merger between Exxon and Mobil in 1999, creating ExxonMobil, one of the world's largest oil and gas companies.
Vertical merger	This occurs when a company merges with a supplier or distributor in its supply chain.	In 2018, Disney acquired 21st Century Fox's entertainment assets in a vertical merger.
Conglomerate merger	This involves companies operating in entirely different industries.	In 2000, Tetley, a renowned British tea company, was merged into the Tata Group, which had interests in various sectors, including automobiles, steel, and IT services.

 

Some famous Indian mergers

India has witnessed several significant mergers over the years, reshaping industries and creating new opportunities. Here are a few notable examples:

1. Zee Entertainment – Sony India merger

• In 2021, The Zee Entertainment Enterprises Limited (ZEEL) and Sony Pictures Networks India (SPNI) merger took place.
• This merger created a significant impact in the media sector.
• ZEEL and SPNI came together to enhance content offerings and market presence.

2. ITC - Sunrise Foods Pvt. Ltd.

• In 2020, the merger between ITC and Sunrise Foods Pvt. Ltd. took place.
• ITC acquired 100% equity shares of Sunrise Foods Pvt. Ltd., marking a significant move in the food industry.

3. Hindustan Unilever Limited - GlaxoSmithKline Consumer Limited

• In April 2020, Hindustan Unilever Limited merged with GlaxoSmithKline Consumer Limited.
• This merger involved HUL paying Rs. 31,700 crore to GlaxoSmithKline Consumer Limited, along with acquiring the Horlicks trademark for Rs. 3,045 crore.

What are acquisitions

An acquisition is when one company takes over another company's operations and assets. The acquired company:

• Ceases to exist as a separate entity and
• Becomes part of the acquiring company

For example,

• In 2014, Facebook acquired WhatsApp for $19 billion (almost Rs. 1.2 lakh crore)
• In 2016, Microsoft acquired LinkedIn for $26.2 billion (almost Rs. 1.74 lakh crore)

Some popular acquisitions in the Indian market

Facebook - Jio

1. Facebook invested $5.7 billion (Rs. 43,574 crore) in Jio for a 9.99% stake.
2. This investment marked a strategic collaboration between tech and telecom giants.

RIL - Vitalic Health:

1. Reliance Industries Limited (RIL) acquired 60% of Vitalic Health for Rs. 620 crore.
2. RIL also acquired 100% ownership in Vitalic’s subsidiaries, which includes:
   • Tresara Health Pvt. Ltd. and
   • Netmeds Market Place Limited
3. Vodafone Hutch-Essar:
   • In 2007, Vodafone acquired a 67% stake in Hutch Essar for $11.1 billion.
   • Later on, in August 2018, Vodafone India and Idea Cellular merged to become Vodafone Idea.

How do mergers and acquisitions differ

Mergers and acquisitions are often used interchangeably, but they differ significantly in terms of their structures, processes, and implications. Read the table below to understand the key differences:

Parameters	Mergers	Acquisitions
Nature of the transaction	Two companies combine to form a new joint entity.	One company takes over and absorbs another company.
Ownership and control	Ownership and control are shared between the merging companies, and a new management structure is formed.	The acquirer assumes complete ownership and control over:   The target company or Its acquired assets
Legal and regulatory process	Mergers involve a more complex legal and regulatory process as they require the approval of:   Shareholders Regulatory authorities, and Courts	Acquisitions involve a simpler legal process, depending on the size and nature of the transaction. However, larger acquisitions still require regulatory approvals.
Culture integration	In a merger, two or more companies with different cultures, systems, and processes are combined. This sometimes leads to:   Cultural clashes and Resistance to change	In an acquisition, the acquirer has more control as the target company or its assets are absorbed into the acquirer's existing structure. This leads to lower chances of cultural differences.

 

Why companies do mergers & acquisitions

Mergers and acquisitions provide companies with several strategic advantages. Let us see some key ones below:

1. Economies of scale

• One of the primary advantages of M&A is the ability to achieve economies of scale, which leads to significant cost savings
• By combining operations, companies:
  • Eliminate redundancies
  • Streamline processes, and
  • Utilise shared resources more efficiently

2. Increased market share

• M&A helps companies expand their market reach and gain a competitive edge over rivals.
• Often, companies increase their market share by combining their:
  • Customer bases
  • Product portfolios, and
  • Geographic footprints

3. Access to new technologies

• Through M&A, companies can quickly acquire new technologies, products, or capabilities that would otherwise take years and significant resources to develop internally.

Also read: Technical analysis

Why should you track mergers & acquisitions

By tracking mergers and acquisitions events, you can:

• Identify potential investment opportunities
• Spot emerging trends, and
• Discover undervalued companies

Let us understand these benefits in detail:

Benefits	Meaning	Example
Helps to discover undervalued companies	When a company becomes a target for acquisition, it often signals that the target company is undervalued in the market. You can invest in these undervalued companies and enjoy the surge in prices.	In 2015, Pfizer announced its plan to acquire Allergan for $160 billion. Post announcement, Allergan's stock price surged. This event indicates that investors believed the company was undervalued before the deal.
Helps in spotting industry consolidation	M&A activity signifies industry consolidation, It creates larger, more dominant players with increased market share. You can position yourself in companies that are likely to benefit from such consolidation or identify potential acquisition targets.	Around the years 2018 and 2019, the wave of consolidation in the telecommunications industry began marked by mergers such as AT&T-Time Warner and Sprint-T-Mobile This wave presented opportunities for investors to invest in the emerging industry leaders and gain.
Helps in identifying new market opportunities	M&A transactions provide companies with access to: New markets Technologies, or Product lines You can identify companies that are expanding into promising markets and decide to invest.	Microsoft's acquisition of GitHub in 2018 gave the company a stronger foothold in the software development community, which ultimately led to an increase in its share price.

 

Conclusion

Mergers & acquisitions (M&A) are strategic business decisions that offer companies a strategic path for growth and competitive advantage. While in the former, two companies merge to become one, the latter represents the absorption of target companies. The most realised benefits of M&A for companies are economies of scale, increased market share, and improved financial performance.

Investors who track M&A events can identify undervalued companies and spot industry consolidation trends. This way, they can make better investment decisions and discover potential value-creation opportunities.

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