Merger's & Amalgamation's From Legal Point of View
Merger is a tool used by companies for the purpose of expanding their operations often aiming at an increase of their long term profitability. Usually mergers occur in a consensual (occurring by mutual consent) setting. The dictionary meaning of Mergers is “to combine commercial or industrial firms” or “to lose identity by being absorbed in something else”.
However the Companies Act, 1956 does not define the term ‘Merger’ or ‘Amalgamation’. It deals with schemes of merger/ acquisition which are given in s.390-394 ‘A’, 395,396 and 396 ‘A’.
In common parlance, the terminologies “Amalgamation” or “merger” would mean the two business entities joining together to make totally new business entity or to allow one business entity to survive absorbing the other one. Amalgamation or merger is also a method of reconstruction. In amalgamation, two or more companies are fused into one by merger or by one taking over the other.
When two companies are merged and are so joined as to form third company or one is absorbed into other or blended with another, the amalgamating company loses its identity. There may be amalgamation either by transfer of two or more undertakings to a new company or by the transfer of one or more undertakings to an existing company. An amalgamation may be defined as an arrangement whereby the assets of the two companies which has as its share holders all, or substantially all the share holders of the two companies.
But they differ in this regard that amalgamation is a used where two or more companies are there but merger is when one company is blended with another.
Classifications of Mergers
Horizontal mergers take place where the two merging companies produce similar product in the same industry. A horizontal merger is when two companies competing in the same market merge or join together. This type of merger can either have a very large effect or little to no effect on the market.
When two extremely small companies combine, or horizontally merge, the results of the merger are less noticeable. These smaller horizontal mergers are very common. If a small local drug store were to horizontally merge with another local drugstore, the effect of this merger on the drugstore market would be minimal. In a large horizontal merger, however, the resulting ripple effects can be felt throughout the market sector and sometimes throughout the whole economy.
Vertical mergers occur when two firms, each working at different stages in the production of the same good, combine.
Vertical mergers involve firms in a buyer-seller relationship -- a manufacturer merging with a supplier of component products, or a manufacturer merging with a distributor of its products. A vertical merger can harm competition by making it difficult for competitors to gain access to an important component product or to an important channel of distribution. This is called a "vertical foreclosure" or "bottleneck" problem.
Vertical mergers can further be classified into (a) Forward Integration and (b) Backward Integration. A recent example of the latter is Reliance purchasing FLAG Telecom Group. Reliance Gateway, a wholly-owned subsidiary of Reliance Infocomm, has signed an amalgamation agreement with Flag Telecom Group for this acquisition
Congeneric mergers occur where two merging firms are in the same general industry, but they have no mutual buyer/customer or supplier relationship, such as a merger between a bank and a leasing company. Example: Prudential's acquisition of Bache & Company.
Conglomerate mergers take place when the two firms operate in different industries. It is the merger of two companies that have no related products or markets. In short, they have no common business ties. Such merger moves for diversification of risk constitutes the rationale.
The completion of a merger does not ensure the success of the resulting organization; indeed, many merger result in a net loss of value due to problems. For the merger not to be considered a failure, it must increase shareholder value faster than if the companies were separate, or prevent the deterioration of shareholder value more than if the companies were separate.
Merger is a tool used by companies for the purpose of expanding their operations often aiming at an increase of their long term profitability. Usually mergers occur in a consensual (occurring by mutual consent) setting. The dictionary meaning of Mergers is “to combine commercial or industrial firms” or “to lose identity by being absorbed in something else”.
However the Companies Act, 1956 does not define the term ‘Merger’ or ‘Amalgamation’. It deals with schemes of merger/ acquisition which are given in s.390-394 ‘A’, 395,396 and 396 ‘A’.
In common parlance, the terminologies “Amalgamation” or “merger” would mean the two business entities joining together to make totally new business entity or to allow one business entity to survive absorbing the other one. Amalgamation or merger is also a method of reconstruction. In amalgamation, two or more companies are fused into one by merger or by one taking over the other.
When two companies are merged and are so joined as to form third company or one is absorbed into other or blended with another, the amalgamating company loses its identity. There may be amalgamation either by transfer of two or more undertakings to a new company or by the transfer of one or more undertakings to an existing company. An amalgamation may be defined as an arrangement whereby the assets of the two companies which has as its share holders all, or substantially all the share holders of the two companies.
But they differ in this regard that amalgamation is a used where two or more companies are there but merger is when one company is blended with another.
Classifications of Mergers
Horizontal mergers take place where the two merging companies produce similar product in the same industry. A horizontal merger is when two companies competing in the same market merge or join together. This type of merger can either have a very large effect or little to no effect on the market.
When two extremely small companies combine, or horizontally merge, the results of the merger are less noticeable. These smaller horizontal mergers are very common. If a small local drug store were to horizontally merge with another local drugstore, the effect of this merger on the drugstore market would be minimal. In a large horizontal merger, however, the resulting ripple effects can be felt throughout the market sector and sometimes throughout the whole economy.
Vertical mergers occur when two firms, each working at different stages in the production of the same good, combine.
Vertical mergers involve firms in a buyer-seller relationship -- a manufacturer merging with a supplier of component products, or a manufacturer merging with a distributor of its products. A vertical merger can harm competition by making it difficult for competitors to gain access to an important component product or to an important channel of distribution. This is called a "vertical foreclosure" or "bottleneck" problem.
Vertical mergers can further be classified into (a) Forward Integration and (b) Backward Integration. A recent example of the latter is Reliance purchasing FLAG Telecom Group. Reliance Gateway, a wholly-owned subsidiary of Reliance Infocomm, has signed an amalgamation agreement with Flag Telecom Group for this acquisition
Congeneric mergers occur where two merging firms are in the same general industry, but they have no mutual buyer/customer or supplier relationship, such as a merger between a bank and a leasing company. Example: Prudential's acquisition of Bache & Company.
Conglomerate mergers take place when the two firms operate in different industries. It is the merger of two companies that have no related products or markets. In short, they have no common business ties. Such merger moves for diversification of risk constitutes the rationale.
The completion of a merger does not ensure the success of the resulting organization; indeed, many merger result in a net loss of value due to problems. For the merger not to be considered a failure, it must increase shareholder value faster than if the companies were separate, or prevent the deterioration of shareholder value more than if the companies were separate.