Merger and acquisition have always been a part of corporate strategy as they help the organization achieve faster growth, better visibility and consolidation of the market. Many companies merge or acquire new businesses when they want to enter new markets or diversify. This process helps them gain insights, catapults them into new areas not only to acquire substantial market share but secure the competency to run new businesses. The long term strategy may focus on diversification or moving up the value chain. The success of any such endeavor depends on the focused growth map of that organization.
In the 1990s, India undertook some major reforms in the financial sector by liberalizing its economic policy. Prior to this, M&A was not heard off or practiced. The MRTP (Monopolies and Restrictive Trade Practices) Act was a dampener due to the long arduous and bureaucratic procedure involved. Especially after deregulation of foreign investment and involvement of private players in various sectors, these activities have become one of the new economic drivers of the Indian growth story.
In the past few years, the country has continuously maintained lower inflation, stable exchange rates and a steady government which has followed and implemented consistent investor-friendly policies. The reforms in the debt markets have helped create opportunities for companies to easily access finance and grow organically or inorganically in the market. At the same time, global capital markets have been in turmoil because of the European crisis, China reporting deceleration in growth and falling oil prices in Middle East. This has propelled many foreign investors to look east to China and India – countries with impressive growth record and return on investments.In India, for the past 3-4 years, the outlook for M&A activities has been encouraging.
Foreign investors bring with them the entrepreneurial energy which has helped Indian business houses to experiment with various models of growth. They havebecome aggressive and enterprising at acquiring businesses not only within India but also outside the country.
Mergers are observed when two companies (usually similar magnitude) decide to move forward as a single new entity rather than two separate business houses and the stocks of both the companies are surrendered and new stock is issued for the single entity.
On the contrary, during acquisitions one company takes over another and establishes itself as the new owner of the business. The company acquired therefore fails to exist or maintain its identity.
Another interesting concept is a joint venture where two or more businesses come together for a specific purpose that may or may not be limited by time. This may be undertaken to enter a new market or business that may require specific skills, expertise or investment from each of the joint venture parties. The rights and obligations of each party are defined exclusively.
Usually, most of the announcements are publicized on the lines of merger although they are actual acquisitions. The word acquisition is avoided as it may send some negative signals about the buyer as well as among staff. To make this amicable, it is worded as merger.
Certain sectors which are witnessinga surge in M&A activities in India are Consumer goods, Medical devices, Healthcare, Pharmaceutical, Media & Technology, Energy and Infrastructure. Some examples are Star TV’s acquisition of TV Channel MAA and RePower’s acquisition of Suzlon in the energy sector.
The healthcare sector, especially the Pharmaceutical industry is a hotbed of these activities. Currently many pharma companies prefer to acquire the next blockbuster drug along with the company rather than develop it in-house. This results in leaner R&D divisions and reduction in dependency on a certain drug. In many ways, the pharmaceutical company focusses on manufacturing and distribution, while the R&D division is relegated to a smaller R&D company which could be acquired later. This decreases the operational costs for the manufacturing company and increasesits ability to offer competitively priced product lines in the market.
The impact of merger and acquisition is not restricted to the organization growthonly; it affects its people, future strategies, valuation in market as well as the ownership.One of the most important categories that is affected is the organization’s employees. There could be a possibility of layoffs if the new owner feels they have enough competencies to run the business. A new culture permeates within the acquired business with a resultant change in the environment at the workplace while the constant fear of layoffs creates insecurity leading to lower morale and productivity among the workforce.The shareholders of the acquiring company may feel cheated as there iserosion in value due to the acquisition cost and debt burdento acquire this business.The finalvaluation in the market depends on the appreciation of the new product portfolio, geographical reach and consolidation of services or product-line of the acquiring company.
One has to be aware that there could be chances of failure during the M&A. If the culture clash amongst the two corporates is not addressed, it can be damaging and limiting to the productivity of the new entity. Apart from this, dynamic external environment like technology, policy changes can also play dampeners on M&A activity.
Despite the challenges, the liberalized economic environment and acknowledged competency within Indian companies are moving towards M&A at the global level. The legal framework and bureaucratic procedures are some of the challenges they continue to face at home. As the legal framework is amended and bureaucratic procedures eased,we will see a larger number of Indian companies playing at International platform and vice versa – creating an even global playing field.