Mergers & Acquisition Advisory

Mergers & acquisitions have been very popular these days. Developed economies like Europe, the US, Japan, etc have been in corporate mergers & acquisitions regularly. Corporate strategies in India have also started adopting mergers and acquisitions. Merger implies combining two organizations into one. Whereas acquisition implies one organization buying or absorbing another one.

Proper structuring of the mergers & acquisition deal is our expertise. The factors that we consider while formulating a deal are antitrust laws, corporate laws, tax implications, market conditions, specific negotiation points, forms of financing, accounting issues, rival bidders, securities regulations, etc. We ensure that the impact of all these factors is considered while formulating the deal.

Merger and Acquisition

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Though mergers and acquisitions are always used as synonyms but they do have a major difference in them.

Mergers imply combining of two similar size companies and form a new single entity. In case of merger, one or more of the existing entities loses its identity and ceases to exist and another entity or new company clubbs assets and liabilities of the merged company in its financial statement.

Whereas, in case of acquisition, none of the companies into transactions close down. Rather, the buying company obtains controlling stake into the selling company. However, the legal entity of both companies remains the same. Buying company obtains control into the acquired company through buying controlling shares and then continues the company with its changed management.

The major reasons for mergers and acquisition are listed below:
  • Synergistic operating economies
Synergy is an escalation in the performance of combined entities over the existing performance of two entities independently. The major reason for synergy benefits is the economies arising due to a large scale. Also, the average cost of production reduces due to large scale production.Synergy can be cost synergy or revenue synergy.  Cost synergy is designed for the benefit of economies of scale while revenue synergy is designed for higher prices, an increase in market share, or cross-selling.
  • Diversification
It is believed that the merger between two unrelated entities minimizes the business risk and maximizes the market value of the entity. As the combination of negatively co-related income streams and statistically independent merged companies is more the business risk goes down drastically.Cyclical industries can avoid the losses of the slowdown period of their industry by diversifying the cash flow to the non-cyclical industry.
  • Taxation
Mergers and acquisitions are the great opportunities to grab the benefits arising from the provisions of carrying forward and set off of losses as defined in the Income Tax Act 1961. Also, the losses of one entity can be set off against the profits of other entities in case of an acquisition. This results in tax saving as well as a reduction in tax liability. So this can be a good tax planning opportunity
  • Growth
The entities growth rate is faster while in mergers and acquisition transaction than the organic growth as the delays due to purchase of the site, installing pieces of equipment, hiring personnel are all avoided
  • Consolidation of production capacities and market power
Combining two or more plants and machinery brings a considerable increase in production capacity. The competition is also reduced and in turn, increases the market power.
  1. Following are the objectives that lure the entities to deal with the transactions of mergers and acquisition:
    • To attain optimum size for the business or to use unutilized capacity
    • To enlarge the market share 
    • To keep a check on the competition
    • For economizing costs and eliminating avoidable taxes
    • Mobilizing and utilizing idle funds for expansion of business
    • Mergers of industrial entities with trading, investment or export entities for an increase in cash flow and other benefits
    • Acquiring shell companies having all the licenses and other infrastructure but the promoters are not willing to continue the project.
  • Horizontal merger
  • The merger between two industries having the same line of business is called a horizontal merger. This kind of merger is conducted to curb competition and increase the market value and with an objective to gain monopoly status. Example is Facebook and Instagram. 
  • Vertical merger
  • Vertical merger means merger of companies in the same industry but involved in different stages of the production process. E.g. Company A is involved in manufacturing of automobiles but engines are purchased for the automobiles from independent markets, Company B is involved in manufacturing of engines. Then Merger of A and B will be termed as vertical merger.. 
  • Conglomerate merger
  • The two entities coming together do not have any common factors like marketing, production, technology, development, and research. The conglomerate mergers are integration or coalition of different types of businesses under one showcase. The aim of these kinds of mergers is synergy in managerial functions, enlarging debt capacity, utilizing financial resources. 
  • Congeneric merger
  • In this kind of merger, the entities are connected to each other through production processes, markets, basic technologies, etc. The merger is initiated for extension of the product line, market technologies or participants, etc. These mergers are a phenomenon by the purchasing company to move outward from its existing business to another related and relevant business venture with the same industry structure 
  • Reverse merger
  • The private company acquires a public company which is normally a shell company to avoid the lengthy and complex formalities of being a public company, this kind of merger is called a reverse merger. 
  • Acquisition
  • Acquisition refers to purchasing the controlling interest by acquiring the share capital of any entity. The process involves either of the following:
    • An agreement with the majority holder of an interest
    • Purchase of new shares by private agreement
    • Purchase of shares by open market
    • Acquisition of share capital of a company by means of cash, issuance of shares
    • Making a buyout offer to the general body of shareholders
  1. VJM & Associates LLP follows a ten-step process for mergers and acquisitions. These ten steps are briefly described as follows: 
  2. Acquisition strategy
  3. The expert team of VJM & associates LLP discusses with the acquirer company about their idea and purpose behind this merger. And accordingly, we develop an acquisition strategy after analyzing if this merger is really beneficial or it is just a superficial one 
  4. Acquisitions criteria
  5. After the initial discussions, the team sets the search criteria for potential target entities for mergers and acquisitions according to your requirement 
  6. Search for targets
  7. With the set criteria’s the search for such an entity starts. Once some of the entities are found they are compared and evaluated for the potential benefits of the merger 
  8. Acquisition planning
  9. A meticulous plan is prepared for approaching a few companies. Then a meeting is held with such companies for initial discussions. The purpose of this meeting to obtain information about the company and check the amenability of the potential company for merger 
  10. Valuing and evaluating
  11. Once the initial conversations are satisfactory, we ask the entity for providing us the substantial information like the financials, etc. The team at VJM & associates LLP then evaluates and studies this information on the basis of its existing business and future prospects. 
  12. Negotiation
  13. We present our multiple valuation model reports about the target company to the management. This report forms a basis for the management for negotiating the offer to the target company. 
  14. Due Diligence
  15. Due diligence of the entity can be conducted only once the offer is accepted. This is one exhaustive process. VJM & Associates LLP also assists you with the process of due diligence of the target company so that a detailed evaluation, inspection, and analysis of the target company’s every facet such as human resources, customers, assets, liabilities, financial metrics is done. 
  16. Purchase & sales contract
  17. Once we submit the report of due diligence, it is up to the management to decide if the deal is still on. If yes, we assist in preparing the draft contract for sale. Both the entities discuss on the method of purchase agreement namely: 
  18. Stock purchase
  19. In this method, the entity pays the shareholders of the target company the compensation in cash or shares in exchange for their holdings 
  20. Asset Purchase
  21. The assets of the target entity are purchased and paid directly under this method. 
  22. Financing
  23. Here we suggest and recommend the various financing options to the management and help in getting the finance through the source finalized by the management for the purchase. But this is done only after the agreement is signed. 
  24. Implementation
  25. The transaction deal is closed. And now both the entities work together on the terms agreed. VJM & associates ensure that the after working goes smoothly and if required also assist in any areas of working.
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FAQs on Mergers & Acquisition Advisory

Merger implies combining of two organizations into one. In case of merger, one or more entity cease to exist. Whereas in case of acquisition,  one organization buying or acquires another one through purchase of shares and control. Acquired Company continues to exist with changed control and management.

Some of the examples of Mergers & Acquisition are Flipkart & myntra, Merck & Sigma, Sun Pharma & Ranbaxy, TCS & CMC, Thomas Cook & Sterling India, etc

When two separate entities combine together to form a new entity, it is called a merger. In case of merger, one or more existing entities cease to exist. While a case of acquisition, no existing entity ceases to exist. Company buys controlling shares in an existing company.

Merger and acquisition are carried out when an entity finds it beneficial in combining operations of two or more entities and that contributes to increasing shareholder value and market share

Importance of a merger can be seen from the following points:
  • Instantaneous growth
  • Snuffing out competition
  • Increased market share
  • Entry into new markets or product segments
  • Access to funds
  • Tax benefits
  • Acquisition of competence or capabilities
Following are the major reasons for the failure of mergers & acquisition:
  • Misleading value of an investment
  • Lack of clarity in the integration of entities
  • Mismatch in the cultural aspects
  • Poor communication
  • External factors
  • Negotiation errors
Entities normally divest assets due to bankruptcy, to raise funds, restructuring, or to reduce debts. Following are some of the reasons for the same:
  • Sustained lack of profitability
  • Expansion of business requires more capital
  • Over leveraging of entity
  • The division is not aligned with core business
The purchaser becomes liable for all the liabilities and debts once the transaction of the merger is finalized.However, if the merger is conducted through the assets purchase method, then the acquiring entity is not liable for any liabilities, obligations, and debts of the target entity as the acquiring company only buys assets of the company.There are some exceptions if the agreement states that the purchaser company would be liable for the debts and liabilities in exchange for lower prices.

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