Merger for Companies is Beneficial or Not By Shobhit Agrawal


Under the provisions of Companies Act, 2013 when merger or amalgamation or any kind of corporate restructuring occurs, any one of them loses its identity be it either transferor or transferee company or both and a new entity gets established. A riskier and popular way that companies can grow is through mergers and acquisitions strategy which can create synergies when companies with complementary products, services etc. can grow their revenues and profits from within by utilizing and growing demand for their products and services.

This strategy known as organic growth, it takes too much time but it pays big dividends when executed successfully.

There are certain merger failures such as:

  • Daimer-benz and Chrysler
  • Volvo and Renault
  • AOL & Time Warner

The reasons for such failures are also known as pitfalls after post mergers:

  • Ego problems on both sides – buyer and seller – rear up very frequently and resulting clashes make bad situations worse. Trying to have two chiefs is a formula for disaster.
  • Attempt to hasten the integration between both the parties raises the likelihood of making serious errors. Sudden and radical changes such as relocating the company’s entire production operations should be carefully considered before implementation.
  • Many buyers assert their ownership by moving quickly to convert the acquired company. This does not always work in the right direction.
  • A cautious approach should be applied to competitor end runs. While the company is focused on integration, it furnishes an ideal time for competitors to make a run on the market.
  • Unless the acquired business is in the exact same field, different dynamics might apply.
  • One of the most common and damaging mistakes is to lay off crucial employees from the acquired company. This is a very complicated, delicate matter and even the seller might not have an accurate idea as job titles can be misleading.

Pursuant to the Companies Act, 2013 M&A is approved when they got majority approval why those mergers are unsuccessful even though valuation is done or any other matter.

Besides that Merger has various advantage and also having disadvantages also.

Impact of Post Merger Re-organisation

Some instances of the effect of acquisitions to small shareholders worth mentioning are as under:

1. On the announcement of merger of ICICI Ltd. with ICICI Bank, share prices jumped from `47.70 and `77.00 on 25.9.2001 to `56.10 and `98.00 on 24.10.2001 respectively.

2. AV Birla group open offer for 25.5% shares in Indian Aluminium Ltd. (Indal) at `120/- per share opened on 14.10.2002 did not receive favourable response in view of Sterlite’s offer at `221/- per share made in 1998 against which the shareholders tendered their shares. There was a good chance for upward revision in the offer price or a strategic deal between Sterlite and AV Birla group.

3. The takeover bids for Ahmedabad Electricity Company (AEC) by Gujarat Torrent group and the Bombay Dyeing resulted in increasing the offer price from ` 65/- per share to ` 132/- per share and at this price Gujarat Torrent Group acquired AEC; undoubtedly, the small shareholders were benefited prior to acquisition of AEC 

How beneficial are mergers for shareholders?  

If there's a quick way to expand a company's scale of operations, widen its product portfolio, expand into new geographies and add to its technological capabilities, it's through mergers and acquisitions (M&As). However, while companies are able to gain and expand their balance sheets, shareholders might not always be able to make money from such deals.

If the past is an indication, M&As might not always turn out as anticipated. Experts say shareholders must always watch for the price and strategic intention. They reckon in the coming years, mergers, domestic and foreign, will increase; so should the scrutiny of such deals.

Says Mehraboon Irani, head (private client group), Nirmal Bang: "Not all mergers are profitable and not all will be profitable. But some will add a lot of value. Broadly, it depends on the price and the strategic intention of the company merging. 

The price a company pays for the acquisition is crucial. And, the return on investment is among the most crucial aspects of a merger. Says Parikh: "Any merger has to be at the right price. Sometimes, when companies run after acquisitions and acquire it at aggressive pricing, it tends to hurt the company in the long run and shareholder value is lost."

An M&A might deliver higher growth for a company, especially if it is being pursued with a clear vision and is cost-competitive. A lot of Indian companies have proven to be quite adept at acquisitions. But in case the price is steep and sector is faring well, acquisitions might see shareholder returns decline.

Human And Cultural Aspects

The merger is a period of great uncertainty for the employees of the merging organizations. It is natural for employees to fear the loss of their revenue or change in their status within the company after a merger since many of these employees literally invest their whole lives in their jobs. Further, the general chaos which follows any merger results in distortion in employee’s efficiency and effectiveness as well as in roles and responsibilities. This further leads to frustrations resulting into poor performance and low productivity since strategic and financial advantage is generally a motive for any merger.

Pre-merger survey and summarization of varying cultures of different companies merging, needs to be carried out. People belonging to the each defined culture need to be understand with other cultures of other merging companies.

The successful merger demands that strategic planners are sensitive to the human issues of the organizations. For the purpose, following checks have to be made constantly to ensure that:

  • sensitive areas of the company are pinpointed and personnel in these sections carefully monitored;
  • serious efforts are made to retain key people
  • a replacement policy is ready to cope with inevitable personnel loss;
  • records are kept of everyone who leaves, when, why and to where;
  • employees are informed of what is going on, even bad news is systematically delivered. Uncertainty is more dangerous than the clear, logical presentation of unpleasant facts;
  • training department is fully geared to provide short, medium and long term training strategy for both production and managerial staff;
  • likely union reaction be assessed in advance;
  • estimate cost of redundancy payments, early pensions and the like assets;
  • comprehensive policies and procedures be maintained up for employee related issues such as office procedures, new reporting, compensation, recruitment and selection, performance, termination, disciplinary action etc.;
  • new policies to be clearly communicated to the employees specially employees at the level of managers, supervisors and line manager to be briefed about the new responsibilities of those reporting to them;
  • family gatherings and picnics be organized for the employees and their families of merging companies during the transition period to allow them to get off their inhibitions and breed familiarity.

Merger can bring several changes in the company and its management itself such as :

  • Change in Name or Logo
  • Revised organization chart
  • Communication
  • Employee compensation, benefits and welfare activities
  • Aligning company policies
  • Aligning accounting and internal database management systems
  • Re-visiting internal processes
  • Re-allocation of people
  • Record keeping
  • Immoveable Property
Author
Shobhit Agrawal
He can be contacted at shobhitaits@gmail.com
 

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