Types of mergers

Concept of a merger:

When two or more companies are combined, the term used is mergers and acquisitions. The other terms used are amalgamation, combination, absorption, acquisition, takeover, etc. The usage of these terms changes with the perspective and the context. Many a time terms are used alternatively.
What happens in mergers and amalgamations? Two companies are combined to form a single company. The shares of the resulting company are given to the shareholders of the the original companies in a certain proportion of the mutually agreed share valuations. Typically, it is expected that all the shareholders from the old companies remain in the new company or occasionally some are partially compensated in cash & may exit in full or part.
When is merger carried out? One can see that mergers do not bring liquid cash to a business account. But they bring lot of mutual synergies and fulfill the gap of deficits. It is not required to expand anything to make these economical gains. There are numerous advantages of mergers.


Types of mergers based on relative size of merging companies

Merger:

Mergers generally take place between two companies of approximately equal size. The existing two companies lose their legal existence to form a new company. This is also called consolidation. This can be represented in the following way:
A + B = C; A approximately equal to B

Amalgamation:

A + B = C;
A >>>>>> B
In case of amalgamation, the acquiring company is very very large than the acquired company. It is also called absorption.
When are mergers undertaken? Mergers are undertaken to create a very big market force by joining together major players of nearly equal size.


Classification of mergers based on roles in the product value chain:

A business value chain consists of raw material suppliers, Tier 1, Tier 2, tier 3 vendors, suppliers of utilities, suppliers of technology, suppliers of machine tools, users of byproducts, various players in the distribution channel such as wholesalers, retails, warehouses, logistics companies, retail chains, etc. Value chain also consists of replacement products, substitution product, competing products, niche products and their value chains. Depending upon the role of the two companies involved in merger and acquisition in the supply chain or value chain, mergers and acquisitions are classified in the following manner:

Vertical mergers:

Vertical merger means either acquisition of the direct suppliers or the acquisition of the other key players in the distribution channel. Following are the two types of vertical mergers:

Forward integration:

Forward integration means acquisition of a company belonging to the distribution channel the product of a company. Using forward integration, the company participates in the next stage of value addition to the final product. It is a general observation that as we move forward in the value chain the profitability increases. Ownership of the distribution channel also reduces the risk by competition and substitution. Example: Company in manufacturing of paper acquires a company in two newspapers, magazines, publications, notebooks, etc.’

Backward integration:

Backward merger means acquiring the key suppliers of a company. This saves the company from the supply chain shocks of availability of raw material, prices, etc. Example: If a famous retail brand of clothes acquires a textile mill, it is called backward integration.

Horizontal merger:

Horizontal merger means that the merging companies are in the production of the same products with different name or brand. Example: Acquisition of a cold rolled steel company by another company producing cold rolled steel.

Lateral merger:

Lateral merger means a merger with a accompany in a different but similar product including at a different stage of production. But the companies being in overall the same sector or industry. Example: A company in in school education acquire another company in professional corporate training.

Co-generic mergers:

It is a merger between two or more entities which are related to each through the same set of customers, experts or technology, suppliers, skills, business environment, etc. Example: Merger of a allopathic medicine company with Ayurvedic medicine company.

Concentric mergers:

It is special variety of cogeneric mergers in which two businesses have the same customers, but merging companies offer different products and services to these clients. For example: Merger of a steel company and cement company both of which supply to the real estate and infrastructure sector.

Forward merger:

Forward Merger, the company gets acquired by its client company. The concept is not any different than forward integration except with the difference of the perspective which legal entity remains.

Reverse Merger:

In a reverse merger, a company gets acquired by its supplier. The concept is not any different than a backward integration except with the difference of the perspective and which entity remains.

Conglomerate mergers:

It is a merger between entities operating in an entirely different products, sectors, industries and maybe even markets. It is a merger between entities totally unrelated to each other in terms of what they do and how they generate revenue. Conglomerate merger results in creation of a diversified businesses.

Triangular Merger:

In a triangular merger, the acquirer creates a wholly-owned subsidiary, which in turn merges with the selling entity. The selling entity then liquidates. The acquirer is the sole remaining shareholder of the subsidiary.

Apohan very well understands the role of a SME company in the value chain. Apohan helps its clients in understanding the impact on the value chain of the business. Apohan carries out professional, end-to-end, customized consultancy services through value chain analysis of M&A deals. Apohan manages the transaction right from the problem identification phase, to the closure of deal with perfection.


Classification of mergers based on the type of integration:

Statutory Merger:

It is a type of merger in which all the assets/control of the smaller company is acquired by the bigger company as a result of which the smaller company loses its legal existence.

Subsidiary Merger:

In this type of merger the target company becomes the subsidiary of the acquiring company. The existence of both companies continues.

Consolidation Merger:

It is the type of merger when both the entities i.e. the acquiring legal entity and the acquired legal entity lose their existences and a new legal entity is formed. This type of merger takes place when both the entities are of the same size.


 

Apohan’s services for mergers

Following are the Apohan’s services for M&A of Indian SME businesses:

Understanding business client objectives
Preparation of client profile
Industry scanning for strategic investor company for best fit

Industry scanning for financial investor company

Secondary market research of the sector and industry
Study of applicable local legal and regulatory framework for mergers
Inception report with M&A strategy for M&A transaction to the business management
Analysis of broad M&A options (contractual, equity, local, foreign, etc)
Analysis of mode of subscription to equity (private placement, etc)
Analysis of form of equity (common, preference, convertible, etc)
Orientation of client management for the M&A process
Preparation of the desired target investor profile (ticket size, fund types, etc)
Anonymous advertising in print media, online media, social media
Circulation of opportunity among investor forums, business forums, online deal platforms
Preparation of the a list target investors
Ice-breaking discussions with target companies
Selection of the target investor

Preparation of mutual NDA between principles

Structuring of the merger
Negotiation for sharing of control

Role of the previous directors

Financial performance targets in case of turnaround
Formulation of a strategy for a new project (size, location, capacity, etc)
Preparation of project information memorandum
Preparation of project profile
Preparation of a Business plan
Preparation of time Schedule of investment requirement
Negotiation on mode of issue of equity
Finalization of type of equity
Preparation of nature of amendments in MOA & AOA
Preparation of of drafts of board resolutions for internal approvals
Preparation of the financial model
Preparation of valuation for various levels of Equity stakes in the company
Preparation of key strategic terms of merger agreement
Selection of accounting, taxation and secretarial experts
Valuation for the purpose of taxation through certified valuers
Identification of due diligence agencies
Due diligence (corporate, financial, key contracts, marketing, procurement, key assets, real estate, manufacturing facility, permits & certifications, technology, operations, brand, intellectual property, compliance, associate companies, forensic, human resources, information technology, administration, etc.)
Preparation of due diligence report
Preparation of risk profile of the envisaged merged entity

Compilation of data for specific query
Preparation of term sheet
Preparation of draft business transfer agreement
Assistance in board meeting and General Meeting as special expert invitees
Preparation of disclosure schedule
Assistance in negotiation of business transfer agreement
Assistance in execution of the investment document
Assistance in understanding the investment payment process

Assistance in disbursement of payment

Resolution of deadlocks
Key inputs on integration process

Hand holding support for management of joint venture after the deal