Mergers and acquisitions: types, reasons, process and regulation

1. Meaning

• Merger: two or more companies combine into one. In an absorption one company survives and the other is dissolved (HDFC Ltd into HDFC Bank); in a consolidation (amalgamation in the strict sense) all combine to form a new company (A Ltd and B Ltd form C Ltd). Mindtree, for instance, was absorbed into L&T Infotech, which was then renamed LTIMindtree (2022).
• Acquisition: one company buys a controlling interest in another, by shares or assets, without the target necessarily ceasing to exist (Walmart’s purchase of a majority in Flipkart, 2018).
• Takeover: acquisition of control, often against the wishes of the target’s management (a hostile takeover); a friendly takeover is agreed with the board.

2. Types

3. Characteristics

A combination of two or more undertakings; transfer of assets and liabilities to one entity; shareholders of the transferor become shareholders of the transferee (or are paid cash); approval by shareholders, creditors, the National Company Law Tribunal and regulators; and an exchange ratio settled by valuation.

4. Reasons for merger

1. Synergy: the combined value exceeds the sum of the parts (2 + 2 = 5).
2. Economies of scale in production, purchase, marketing and finance.
3. Market share and reduced competition.
4. Diversification of risk and products.
5. Tax benefits: use of the accumulated losses and unabsorbed depreciation of the target, subject to the conditions of the income-tax law.
6. Acquiring technology, brands, licences or management talent.
7. Financial synergy: greater borrowing capacity and lower cost of capital.
8. Revival of sick units and growth faster than by building new capacity.

5. Limitations

• integration problems and clashes of culture and systems;
• overpayment: the bidder pays a premium that synergy never earns (the winner’s curse);
• dilution of EPS and of control of existing shareholders;
• loss of jobs and employee resistance;
• monopoly concerns and regulatory delay;
• hidden liabilities missed in due diligence.

6. The process of acquisition and deal structuring

1. Set the strategy and search for and screen targets.
2. Preliminary approach and a confidentiality agreement.
3. Due diligence: financial, legal, tax, technical and human-resource review.
4. Valuation by assets, earnings, market price or discounted cash flow (next note).
5. Negotiation and deal structuring: the consideration (cash, shares or a mix), the exchange ratio, earn-outs (part payment tied to future results), treatment of employees, debts and contingent liabilities; the term sheet and definitive agreement.
6. Approvals: boards, shareholders, creditors, NCLT, CCI, SEBI and stock exchanges, RBI or sector regulators where needed.
7. Integration after closing, and post-merger review.

7. Managerial stake: takeover defences

The target’s managers may resist: poison pill (rights that make the target costly to buy), white knight (a friendly rival bidder), golden parachute (large payments to managers on takeover), crown-jewel sale (selling the asset the bidder wants), Pac-Man defence (the target bids for the bidder). In India, once an open offer is announced the target board cannot sell material assets or issue securities without shareholder approval (SEBI Takeover Regulations, regulation 26), which limits these tactics.

8. Regulation

• Companies Act, 2013: sections 230–232 (compromise, arrangement, merger and amalgamation, sanctioned by the NCLT after meetings of shareholders and creditors); section 233 (fast-track merger of small companies, a holding company and its wholly owned subsidiary, and start-ups, approved by the Regional Director); section 234 (cross-border mergers, with RBI approval).
• Competition Act, 2002: section 5 defines combinations by asset and turnover thresholds; section 6 prohibits combinations that cause an appreciable adverse effect on competition and requires notice to the Competition Commission of India. The Competition (Amendment) Act, 2023 added a deal-value test, in force from 10 September 2024: transactions above Rs. 2,000 crore with a target having substantial business operations in India must be notified.
• SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011: acquiring 25% or more of the voting rights of a listed company, or control, triggers an open offer for at least 26% more; holders of 25% or more may creep up by 5% a year without an offer.
• Tax law: an amalgamation meeting the statutory conditions is tax-neutral for the companies and shareholders, and losses can be carried forward subject to conditions. The Income-tax Act, 2025 has governed this from 1 April 2026.
• FEMA, 1999 for foreign parties; the Insolvency and Bankruptcy Code, 2016 for acquisitions of insolvent companies through resolution plans.

9. Recent Indian mergers and acquisitions

1. HDFC Ltd with HDFC Bank, effective 1 July 2023.
2. Vistara with Air India, completed 12 November 2024.
3. Mindtree with L&T Infotech, forming LTIMindtree, November 2022.
4. INOX Leisure with PVR, forming PVR INOX, February 2023.
5. Vodafone India with Idea Cellular, forming Vodafone Idea, August 2018.
6. Vijaya Bank and Dena Bank with Bank of Baroda, 1 April 2019; Oriental Bank of Commerce and United Bank of India with Punjab National Bank, 1 April 2020.
7. Acquisitions: Walmart–Flipkart (2018); Zomato–Blinkit (2022).

How this is examined

The 10-mark essay on types is sections 1 and 2 with the table; on reasons, sections 1 and 4 with the limitations as a balance. The 6-mark notes are single sections: reasons (4), limitations (5), process of acquisition (6), list of recent mergers (9). A question on regulation or the “managerial state” in the syllabus is sections 7 and 8.