April 19, 2019

Merger & Acquisition

Merger is the most popular way of absorption of one company by another company, including all its assets and liabilities. The acquiring firm retains its name and identity, and after merger the acquired firm ceases to exist.
A purchase of business is an acquisition; a sale agreement is executed under which buyer assumes all or some of seller’s assets and assumes all, some or none of the seller’s liabilities.
In general, mergers and acquisitions are very similar financial reconstruction actions, as they both combine two previously separate firms into a single entity; however, underlying business rationale and financing methodology are different in both the cases.
Merger involves mutual decision of two relatively equal companies to combine and become one entity. One of the biggest merger deals of all time – Tata Steel & Corus (2007), Tata Steel ,one of the biggest ever Indian’s steel company and the Corus, Europe’s second largest steel company; another is Vodafone –Hutchission Essar merger in 2007.
Acquisition also known as A Take-over, characterized as the purchase of a smaller company by a much larger one or vice-versa, leading a combination of “un-equals”, though it can produce the same benefits as merger, but it does not necessarily have to be a mutual decision. One of the famous takeovers witnessed in 2000- Tata Tea took over Tetley Tea, the company which was twice Tata Tea’s size.
In above strategies, the acquirer pays a premium on the stock value of the companies they buy, justification being to reap the benefits arising out of re-construction strategy which is termed as “Synergy”, refer to larger combined value of merged firms than the sum if individual entities.
Purchase consideration is decided on the merger ratio based on popular financials formula combination, or even mutually acceptable formula.

(Source: ICAI.org)

Ankit Gupta
Tax Consultant
Future Investments, New Delhi

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