Mergers and acquisitions (M&A) are a means for companies to expand their operations, strengthen their market position and gain a competitive advantage. Rather than developing new capabilities from scratch, companies often use M&A deals to access new markets or acquire specialised skills.
Professionals often start by understanding the meaning of acquisitions and the distinction between acquisitions and mergers in terms of their structures
What is acquisition?
Acquisition is a business transaction in which one company acquires a controlling or majority stake in another company. This allows the acquiring company to gain access to the target company’s assets, operations, intellectual property and employees.
The meaning of acquisitions shows that it enables rapid expansion without setting up new infrastructure or building capabilities internally.
Unlike mergers, acquisitions usually involve one dominant company taking over another. This can happen through share purchases, asset purchases or other structured agreements that transfer control of the target company to the acquiring company.
What is the difference between mergers and acquisitions?
These two terms are often used together, but they are different strategies that companies may use in their business operations. A merger occurs when two companies combine to form a single entity, with both parties agreeing to operate on relatively equal terms.
An acquisition is when one company takes over another company, with the acquired company coming under the control of the acquiring company.
Mergers in India are governed by Sections 230-232 of the Companies Act, 2013, under which schemes of arrangement must be filed with the National Company Law Tribunal (NCLT).
Acquisitions, on the other hand, are usually carried out through share purchase agreements, slump sales or asset transfers. In listed companies, acquisitions may also be governed by the Substantial Acquisition of Shares and Takeovers (SEBI) Regulations, 2011. This illustrates the meaning of acquisitions within the context of corporate restructuring strategies.
What are some of the different types of mergers and acquisitions?
M&A transactions can take various forms depending on the strategic objectives of the companies involved. Broadly, they fall into the following categories:
Horizontal mergers
These occur between companies operating in the same industry. Organisations aim to increase market share and reduce competition by merging into a single entity.
Vertical mergers
These involve companies operating at different stages of the supply chain. For example, a manufacturer acquiring a supplier can improve operational efficiency and reduce costs.
Conglomerate Mergers
This is the combination of companies that operate in unrelated fields. It helps diversify business risk.
Congeneric Mergers
This involves companies that serve similar customers but offer different products or related services within the same industry segment.
Market-extension acquisitions
This allows companies to enter new geographic regions by acquiring businesses already operating in those markets. Entering untapped markets becomes a strategic move rather than a risky experiment.
Acquiring
This modern strategy involves acquiring a company primarily to gain access to its skilled workforce and specialised expertise.
In India, large M&A initiatives must also comply with regulations overseen by the Competition Commission of India to prevent anti-competitive practices.
What is the M&A Process in India?
The Indian M&A model involves a series of structured steps to complete a transaction successfully.
These steps are as follows:
Strategic planning
The first step is to clearly define the business objectives a company aims to achieve. This also involves identifying a target company that aligns with these objectives.
Confidentiality agreements
Both parties enter into a confidentiality agreement to protect sensitive information. This is a standard practice in M&A transactions.
Due diligence
The company conducts a detailed analysis of financial records, contracts, systems, tax implications and compliance history. This allows the company to identify risks and opportunities related to the target company.
Negotiation and valuation
At this stage, the companies finalise deal structures, purchase price and contractual terms.
Regulatory approvals
Depending on the deal structure and size, approvals may be required from authorities such as the National Company Law Tribunal (NCLT), SEBI and the Reserve Bank of India (RBI).
Integration
After the transaction is completed, companies integrate systems, processes and teams to realise expected synergies. This is the final step and the culmination of the M&A process.
What are some of the benefits and risks of M&A?
Mergers and acquisitions can provide significant business advantages, making them a commonly used strategy for companies.
The benefits are:
- Accelerated business growth
- Improved market share
- Realised operational synergies
- Access to new technology and skills
- Product diversification
Mergers and acquisitions also involve risks, as two distinct business entities combine into one.
The risks are:
- Paying a higher price than the target company's value
- Culture clashes between the organisations
- Challenges in integrating processes, systems and teams
- Regulatory compliance issues
- Uncovered financial liabilities or obligations
What are India’s regulations?
India’s M&A ecosystem is governed by multiple regulatory frameworks, including the Companies Act 2013, the Competition Act 2002 and SEBI’s securities regulations.
Larger deals must be approved by the Competition Commission of India if they exceed financial thresholds related to the assets or turnover of the combining entities. Cross-border transactions may also require approvals or compliance under the Foreign Exchange Management Act (FEMA), administered by the RBI.
What is the accounting process for M&A?
M&A accounting is covered under Ind AS 103 (Business Combinations). It requires using the acquisition method, which involves identifying the acquiring entity and the acquisition date.
Next, the company measures assets and liabilities at fair value and records any resulting goodwill or bargain purchase gains.
After the acquisition, the company must prepare consolidated financial statements in accordance with Ind AS 110 to ensure transparent financial reporting.
Conclusion
Mergers and acquisitions are important strategies for business growth, helping organisations expand their operations and strengthen their market presence. Effective M&A requires careful strategic planning and compliance with regulatory requirements.
Applying the meaning of acquisitions practically, along with financial management solutions such as TallyPrime, can help organisations manage M&A processes more efficiently and reduce the risk of errors.
