Understanding Mergers and Acquisitions in India, key concepts, types, and recent trends

Mergers and acquisitions serve as powerful growth catalysts for companies in India, where they are viewed as essential strategic tools. Businesses often pursue mergers or acquisitions to leverage established brands for market entry, eliminate competition, increase market share, enhance capabilities, optimize tax obligations, or offset accumulated losses against another company’s profits.

What is meaning of mergers and acquisitions ?

A merger is the combination of two independent companies into a single entity, typically to enhance market share, reduce costs, and achieve strategic growth objectives.

An acquisition is a business transaction in which one company purchases most or all of another company’s shares, thereby gaining control over its operations and assets. This process can occur with or without the target company’s consent and is often aimed at enhancing the acquirer’s market position, expanding product offerings, or achieving strategic objectives.

Difference between mergers and acquisitions ?

Mergers and acquisitions differ in several key aspects. A merger involves two companies combining to form a new entity, resulting in shared decision-making power and the issuance of new shares for the combined firm. In contrast, an acquisition occurs when one company purchases another, leading to the absorption of the acquired company into the acquirer’s operations, which may cease to exist or operate under the acquirer’s name. Decision-making power in a merger is typically equal between both companies, while in an acquisition, the acquiring company usually has greater control and can proceed with or without the target company’s consent. Additionally, mergers often involve companies of similar size and stability, whereas acquisitions frequently see larger, financially stronger firms taking over smaller, less stable ones. Lastly, mergers result in new shares being issued for the combined entity, while acquisitions usually do not involve new share issuance; instead, shareholders of the acquired company may receive cash or shares of the acquiring firm.

A notable example of a merger in India is the HDFC Ltd and HDFC Bank merger, which occurred in 2022. This significant financial deal combined India’s largest housing finance company, HDFC Ltd, with the largest private sector bank, HDFC Bank, creating a single entity valued at approximately $40 billion. The merger aimed to enhance operational efficiencies and expand service offerings while allowing both entities to continue providing their respective services separately.

An example of an acquisition is Zomato’s acquisition of Blinkit (formerly known as Grofers) for ₹4,447 crore in 2022. This strategic move allowed Zomato to enter the quick commerce sector, complementing its existing food delivery services and enhancing its competitive position in the rapidly evolving market.

Types of Mergers

Mergers can be categorized into several types, each serving distinct strategic purposes. 

Horizontal mergers occur between two companies in the same industry and at the same stage of production, aiming to increase market share and reduce competition. An example of this is the merger between two competing airlines.

Vertical mergers, on the other hand, involve a company merging with a supplier or distributor within its supply chain, allowing for greater control over production and distribution processes. A classic example is a car manufacturer acquiring a parts supplier.

Another type is the conglomerate merger, which involves companies from different industries that have no direct business overlap. This type of merger aims to diversify operations and reduce risk; for instance, a technology firm merging with a food processing company exemplifies this. 

Market extension mergers occur when two companies that sell the same products but operate in different markets combine to expand their reach, such as a regional beverage company merging with a national one.

Similarly, product extension mergers involve companies offering different but related products merging to enhance their product lines and customer base, like a snack food company merging with a beverage company.

Lastly, congeneric mergers involve companies operating in the same market but offering complementary products or services, such as an ice cream manufacturer merging with a chocolate producer.

Types of Acquisitions

Acquisitions can also be classified into various types based on their nature and intent.

A friendly acquisition occurs when the target company agrees to be acquired by another company, which enhances growth and market presence collaboratively; an example is Facebook’s acquisition of Instagram in 2012.

In contrast, a hostile acquisition takes place when the acquiring company attempts to take over the target company without its consent, often by purchasing shares on the open market, as seen in Kraft Foods’ acquisition of Cadbury in 2010, which faced significant resistance.

Another type is an asset acquisition, where specific assets of a company are acquired rather than its stock. This strategy allows the acquiring firm to gain valuable assets while avoiding liabilities associated with the entire company; for instance, a tech firm acquiring patents from a struggling startup illustrates this approach.

Conversely, a stock acquisition happens when one company purchases a majority stake in another, gaining control over its operations and decision-making processes. Amazon’s acquisition of Whole Foods serves as an example of this type of acquisition.

Lastly, reverse takeovers, often facilitated through Special Purpose Acquisition Companies (SPACs), occur when a private company acquires a public company to bypass the lengthy initial public offering (IPO) process, enabling quicker access to public markets; an example is DraftKings’ merger with Diamond Eagle Acquisition Corp in 2020.

Overview of the process

The typical process of mergers and acquisitions (M&A) involves several key stages that guide both buyers and sellers through the transaction. Initially, companies develop an M&A strategy, which includes setting search criteria and identifying potential targets. Following this, preliminary discussions are held, often accompanied by non-disclosure agreements to protect sensitive information. Once a target is selected, the buyer conducts thorough due diligence to assess the financial health, operations, and legal standing of the target company. This stage is critical for verifying claims and identifying any potential risks. After due diligence, negotiations take place to agree on terms, culminating in the signing of a purchase agreement. The final steps include obtaining necessary approvals, closing the deal, and executing a post-merger integration plan to combine operations and realize synergies. This entire process can take several months to years, depending on the complexity of the deal and the companies involved