Challenges and Issues Confronted in Merger and Acquisition of a Company?

Abstract

The usage of merger and acquisition have increased in the recent corporate world. They have now become an important tool for the emerging companies to scale up and grow their business. Because of this many a time the company sets a goal which becomes very difficult to fulfill and thus faces issues and challenges that come with it.

Introduction

While arranging merger and acquisition, there are numerous issues that need to be looked at in advance. The objective organization and the getting organization should be completely aware of the problem, challenges and issues that may arise after the merger or acquisition of the company[1].

Meaning / Definition of Merger

Merger[2] means “to combine” i.e. it is the combination of two companies, often of the same size, that decides to go further as one single business entity rather than to remain separately owned and operated. In this both the companies’ stocks are surrendered and new stocks are issued in its place.

  • For example: Daimler-Benz and Chrysler ceased to exist when the two firms merged and a new company named Daimler Chrysler, was created.

There are six different types of merger namely:

  1. Vertical Merger.
  2. Horizontal Merger.
  3. Conglomerate Merger.
  4. Market Extension Merger.
  5. Product Extension Merger.
  6. Concentric Merger.

Meaning / Definition of Acquisitions

Acquisition[3] means “to acquire” i.e. when one company takes over another company entirely and establishes itself as the new owner. Acquisition can also be explained as forcefully acquiring of the targeted company by the buyer company.

For example: Walmart acquisition of Flipkart marking its entry into the Indian market by winning a bidding war against amazon and went on to acquire 77% stakes in Flipkart.

There are four different types of acquisition namely:

  1. Friendly Acquisition.
  2. Reverse Acquisition.
  3. Backflip Acquisition. 
  4. Hostile Acquisition.

Reason for Merger and Acquisition

Merger and Acquisition are the most used tools by the corporate companies to mark their presence in the market and to maintain their graph with changing market scenarios.

Some of the main reason why companies opt for Merger and Acquisition are:

  1. Synergy: It is the concept that the whole of an entity is worth more than the sum of the parts. In other words, by combining two companies in a merger, the new company’s value will be greater than the sum of the values of each of the two companies being merged. Synergies can be due to cost reduction or maybe higher revenues. While cost synergy is created due to economies of scale and revenue synergy are formed due to cross selling, increasing market shares or high prices.
  2. Increase in market share: Combining and acquiring of two companies will definitely increase the market share of the new combined company.
  3. Reduces the cost of operation: The companies can achieve economies of scale through bulk buying of raw material as two companies have combined now leading to cost efficiency.
  4. Acquiring new technology: To remain in the competition the bigger companies have to keep up with their technology thus by acquiring small technology companies having advanced features gives a competitive edge over other companies with not so advanced technology.
  5. Increase in market reach and industry visibility: A merger between two companies may expand their reach and distribution in the market thus giving them new sale opportunities by increasing the competitiveness as compared to financially weak parent company organization.

Apart from this there are other reasons for merger and acquisition i.e. the company gets tax benefits, helps in eliminating companies from buying out and to stop company’s own takeover by other companies.

 Successful Merger and Acquisition that has taken place over the years[4] 

  1. ArcelorMittal
  2. Vodafone Idea Merger
  3. Walmart Acquisition Flipkart
  4. Tata and Corus Steel
  5. Vodafone Hutch-Essar

Challenges or Issues or Failure arising in Merger and Acquisition

Following are the most common challenges, issues and failure arising due to the loopholes that are not looked upon while acquiring the firm.

  1. Integration Difficulties: Technically integration comes after the merger of the firm but that does not mean it should be left as an afterthought because change in the management, work culture, environment tends to affect the working of the employees and create tension.

It is very important that the buyer and target company make a detailed integration plan about working of the company, scrutinize the employee’s performance and how customers’ requirements continue to be met  before the ink has dried on the deal contract.

  1. Large and Extraordinary debts: Costly debts can become a burden on newly acquired companies because at the time of merger and acquisition the buyer company gets submerged in large and extra-ordinary debts. Most of the mergers and acquisition is financed by the unsecured debt for which the interest rate is very high. This high cost debt eventually leads to falling in the stock prices of the parent company. 
  2. Monopoly: Monopoly exists when specific firms have complete control over the manufacturing, distribution and pricing of the product in the market and determine significantly the terms on which the individual  who shall have access to it. A merger can lead to a monopoly in the market thus shifting the bargaining power from consumer to producer in  order to make high profit but now due to stringent law made by the government to check the menace of the merger and their monopolies this has now become impossible.
  3. Working in Global Environment: Merger and Acquisition mostly are done between the companies whose headquarters are situated in different countries. This complicates the working of the company as the manager thinks that their practices are the best and apply them universally without realizing the way of working and performance of employees differs from culture to culture.
  4. Over Estimating the Value of the Target Company: The basic objective is merger and acquisition to provide benefit to the shareholder and maximize company’s overall profit but in reality very few companies are able to achieve this. According to the survey done by Mckinsey company most of the companies overestimate the value of their targeted company due to the lack of due diligence. Another reason for this is, many a time two companies at the same time are interested in acquiring the company resulting in the price to shoot up and in turn have to meet out for the targeted company.

Apart from this there are various other factors which lead to the failure in the merger and acquisition of the company such as large and extraordinary debts, inability to achieve the synergies, overly diversified, managers overly focused on acquisition, losing trust on important stakeholders etc.

Biggest Merger and Acquisition fail in India

  1. HDFC &  Max  Life 
  2. IDFC-Shriram Finance
  3. RCOM-Aircel merger 
  4. Flipkart-Snapdeal Merger 
  5. Cross-Border-Apollo-Cooper Merger 

According to the survey conducted by Mckinsey and Company nearly 61% of the merger and acquisition fail as the companies are not able to meet the set targets. A deep analysis into the historical trends also shows that two third of the big mergers and acquisitions are not successful

Conclusion

With FDI policies becoming more liberalized, merger acquisitions are increasing in the  market. They are no longer limited to one area of business, they range from Pharmaceutical to Banking to Telecommunication. It has now become very important for the companies to merge and acquire in order to diversify himself and establish their monopoly but as mentioned above more than 61% of the merger and acquisition are unsuccessful because the companies are not able to meet their set targets and to reduce that it is the need of an hour that all the aspect involved in the merger and acquisition are given proper attention. As in the coming year this process is only going to get bigger and therefore it is ripe time for the business houses and corporates to look after the  market and grab the opportunity as it comes. 

Reference

https://www.corporatelivewire.com/top-story.html?id=mergers-and-acquisitions-transactional-challenges-in-india

https://dealroom.net/blog/challenges-during-m-a

https://taxguru.in/company-law/merger-acquisition-india-issues-challenges.html

http://www.legalserviceindia.com/article/l463-Laws-Regulating-Mergers-&-Acquisition-In-India.html

http://www.legalservicesindia.com/article/228/Why-Mergers-and-Acquisitions-fail?.html 


[1] Laws Regulating Merger and Acquisition in India  http://www.legalserviceindia.com/article/l463-Laws-Regulating-Mergers-&-Acquisition-In-India.html

(Last visited on 14th, March 2021 14:07)

[2] Merger and Acquisition in India : Issues and Challenges https://taxguru.in/company-law/merger-acquisition-india-issues-challenges.html

(Last visited on 14th, March 2021 14:08)

[3] Acquisition Definition,  https://www.investopedia.com/terms/a/acquisition.asp

 (Last visited on 14th March, 2021 14: 15)

[4] 5 Biggest Merger and Acquisition in India https://tradebrains.in/biggest-mergers-acquisition-india/

 (Last visited on 14th March, 2021 14: 17)

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