Merger and Acquisition basics

Merger & Acquisitions

Merger refers to a situation where two or more existing firm combine to form a new entity either a new firm is incorporated or one of the existing firm survives and another is merged with it. Acquisitions and takeover refers to acquiring ownership right in another firm. The other firm of which control is acquired remains as same entity and is not liquidated but there is a change in control. Acquisition takes place when one firm purchases controlling interest in the share capital of another firm. This can be done by entering into an agreement with persons holding controlling interest or by subscribing new shares or by purchasing shares at stock exchange or by making an offer to buy shares to the existing shareholders.

Merger can be classified on the basis of functional relationship between the two companies.

1) Horizontal Merger:

It is a merger of two or more companies that compete in the same industries. It is a merger with direct compititor and hence expands the firms operations in the same industries.

2) Vertical Merger:

It is a merger of two or more companies operating in the same industries but at different stages of production & distribution. If a companies takeover its supplier of raw material it is backward integration. If a companies take over its retailers it is forward integration.

3) Conglomerate Merger:

It is a merger of firms operating in different and unrelated industries. It results in diversification of the firms activities.

Merger can also be classified on the basis of procedure of acquisition.

1) Negotiated merger or friendly merger:er:

It is a merger where management of both the firm comes to an agreement which is than placed before shareholders.

2) Tender offer:

The acquisition companies directly approaches shareholders of target company and offers to purchase their shares. The offer price is usually higher than the market price to encourage the shareholders to sell.

3) Hostile takeover:

The acquiring firm without knowledge of the management of target companies try to get control by purchasing shares at stock exchange.

4) Arranged merger:

In India BIFR has been arranging merger for financially sick company with others.

The above is just basics about Merger and Acquisition that I wanted to share if anyone has suggestions for improvement please let me know.