The merger and acquisition (M&A) activities have grown significantly around the world over the last two decades, the amount and volume of mergers and acquisitions is reaching a record braking levels. Major factors underlying this process are attributed to emergence of globalization, low cost funding and current financial turmoil, hence the need to create large entities to be able to compete for seeking out growth and profits. Mergers and acquisitions are a topic of great debate in today’s business world. Some proponents argue that mergers increase efficiency whereas opponents argue that they decrease consumer welfare by monopoly power. The motives of merger and acquisition are ultimately related to a common objective: maximizing profit or returns for shareholders. They have been playing an important role in the external growth of a number of leading companies the world over. In the wake of economic reforms, Indian industries have also started restructuring their operations around their core business activities through acquisition and takeovers because of their increasing exposure to competition both domestically and internationally.
In the turbulent global economy, mergers and acquisitions of industries takes place to protect Indian businesses. Such mergers and acquisitions are taking place in Heavy Industries and in major service industries. In fact, acquisitions during a recession actually can create greater value and impact for three reasons. First, the “entry price”—the cost to gain access to the stream of cash flows, market segment, capability and synergies from the acquired business—is often much lower, as companies’ market capitalizations have dropped around the globe to levels around 40 – 70 percent below where they were just a year ago. Second, due to the lower values, organizations are able to go after targets that were formerly out of reach. Third, companies that have relied on debt and equity financing or have less favorable financial positions typically must sit on the sidelines, meaning far less competition for an acquisition, and, thus, fewer companies bidding up the price.
Post Contributed by:
Miss Kaushiki Brahma
Assistant Professor of Law
Indian Institute of Legal Studies
