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Corporate Action

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Mergers and Acquisition (M&A)

Mergers and Acquisitions (M&A) play an important role in the corporate action of a company. Here in this unit, let us learn how? 

A merger is a corporate strategy that involves the consolidation of two or more companies to operate as under the legal banner of a single legal entity. A share swap ratio is decided on the basis of market prices of both the companies (if the target is a listed company). Shareholders of the target company are eligible to receive shares in the acquiring company if the merger is successful. 

If a company undergoes a merger, it may indicate to shareholders that the company has confidence in its ability to take on more responsibilities. On the other hand, a merger could also indicate a shrinking industry in which smaller companies fall prey to market stalwarts.

In the case of an acquisition, however, a company seeks out and buys a majority stake of a target company's shares; the shares are not swapped or merged. Acquisitions can often be friendly but also hostile, meaning that the acquired company does not find it favourable that a majority of its shares were bought by another entity.

A situation of M&A can turn out to be favourable or unfavourable for the minority shareholder and has both the faces to it. If the consideration paid for the acquisition turns out to be favourable then it is beneficial for the shareholders of both the companies. However, if the acquisition cost turns out to be much higher than the market value of the company then it is not viewed positively by the minority shareholders of the acquirer company but positively by the acquired company.

Features of Mergers/Acquisitions 

  • A merger is a corporate strategy that involves the consolidation of two or more companies to operate as a single legal entity. It is friendly in nature i.e., both the parties agree to the terms of the merger
  • An Acquisition or Takeover refers to a company buying a majority/controlling shares of another company in order to obtain control over the same. Acquisitions can be friendly or hostile in nature.
  • Since the target company is usually bought at a premium, the share prices increase in the short term.
  • Acquirer’s future is uncertain and thus there is a fall in the share prices of the acquirer company in the immediate term
  • Future status of share prices depends upon the synergies from the merger

Examples: 

Demerger - A demerger occurs when a conglomerate that has varied business interests under a single entity hives off one or more units into a separate legal entity. Usually, the parent company hives off its non-core business segments under a different entity to improve focus on its core business and also unlock value of the other businesses which are embedded with the company. Demergers are generally interpreted positively by market analysts. Herein also, a share swap ratio is decided on the basis of which shareholders in the parent company get additional shares in the subsidiary company. 

For example: - In 2009, the boards of Reliance Industries (RIL) and Reliance Petroleum (RPL) approved the demerger of the two firms, with a ratio of one RIL share for 16 RPL shares.

In 2015, the Board of Max India Ltd approved a Corporate Restructuring plan to split the company through a demerger, into three separate listed companies with three separate business verticals ‐ life insurance, health and allied businesses and manufacturing industries. The company split into three entities – Max Financial Services Ltd with the insurance business, Max India Ltd with the healthcare and allied businesses and Max-Ventures and Industries Ltd with speciality packaging film business. 

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