New Lease of Life to Corporate Entity-Mergers And Acquisitions

A business activity always carries inherent risk. It the risk of competition which affects the survival of the business. There are various ways in which business activities are carried out but with risks of its own. It is carried out like individual entrepreneur who is responsible for profits as well as for loss for himself. There is another mode of caring on business i.e. by way of partnership firm where all the partners carry out the business along with distribution of profits and loss among themselves. The liability which is joint and several. In cases of liability each partner is responsible to the outsider. Now there is novel way to minimize the risk of loss and to carry out business at very large magnitude i.e. by way of creation of a company.

A company is purely a creation of law it is called as a ‘legal person’ and which exists independently and not depending on the existence of the persons who formed it i.e. the shareholders of it. Company is creation of English law and in India it is governed by Indian Companies Act 1956. By incorporation of a company individual risk of business is transferred to the company and in cases of loss the goes into liquidation and i.e. an end of life of company. Thus the risk of greater loss to individual is minimized substantially.

A company is run and manages by the Directors who are experts in business activities. However the functioning and profit of a company depends upon so many external factors like demand, consumer choice, economic policies of the government, legal environment of business and Constitutional framework.

So long as business environment is encouraging and protection is provided by government with its protective policies companies survive but if company cannot sustain competition and suffers a continuous loss it becomes a seek company and ultimately it has to go into liquidation. Thus it is and ends of the company and the corporate personality.

However there is another novel way of keeping companies existence alive i.e. Mergers and Acquisition (M&A). Which ultimately keeps company surviving in other capacity and protect the interest of shareholders also.

The phenomenon of M&A has come out of globalization of the economies of the world which intern created fierce competition and presently there is only one criterion in the business world i.e. competition and the moto is ‘Survival of fittest’.

Merger and Acquisition is a strategy adopted by the large corporate sectors to consolidate its position and improve its competitive strength to compete with competitors. It is a cheaper way of industrial structuring. Merger and Acquisition activities have started in USA by US firms during large century.

Now a day’s a global strategy is applied in business world and company affairs. Here the buzz world is ‘economics of scales’ which ultimately means ‘size does matters’. It gives lot of advantageous to big companies like reducing the competition in market reduction of cost of production and increasing market share.

Acquisition
It means one company acquires another co.’s total or controlling interest.

Thereafter the acquired co. operates as a part of the acquiring co. The original identity of the acquired co. is lost it is absorbed within the administrative framework of the acquiring co.

Merger
In this case all the combing forms relinquish their individuality & independence to create a new firm. In case of a merger, there is a change in both firms & administrative structure of both changes. It takes place generally between small Co’s

Merger & acquisitions are international phenomena which in turn reflect the globalization of industries. This trend is seen in both developed & developing countries. In developed countries it accounts for 90% of total mergers. In developing countries there is an increase in M & A activities. For eg. M & A sales in south-east Asia, Latin America & Eastern Europe countries have also shown this trend. This trend is shown as a result of various countries opting for liberalization & deregulations of industries. Many countries have gone for privatization of its industries which stimulated M & A’s particularly in the fields of insurance, finance & telecommunication industries.

The no.of foreign multinational Co’s have acquired a partner’s stake in their joint ventures in India. The foreign MNC’s have chopped the strategy to enter in to Indian market & to increase their competitiveness. For Eg. The soft drink industry witnessed the use of M & A to increase the share in the market & do away with the competition.

The objective of M & A in India can be summarize as
1. To improve revenues & profitability
2. To make faster growth in producing & to make quick entry in to the market.

The New Economic Policy 1991 brought certain vital changes in the Indian Economy. It is reflected by liberalization, privatization, de-licensing and liberalization of foreign investment policy. MRTP restrictions were removed and the Competition Act, 2002 was brought in to operation to boost the competition in industry.

The Indian corporate sector has also shown M&A’s trend and has entered the global scenario.

Indian companies have acquired foreign firms in various formats for example

A. Acquisition of foreign firms
B. Acquisition of foreign brands
C. Acquisition of MNCs affiliation in India.

It is interesting to note the following Indian acquisitions Tata tea buying Tetley. It became the combination of two biggest tea companies of the world.

Indian Rayon buying Madura Garments, the garment business of Madura Coats SUBCIDIARY OF Coats

Viyella (U.K)

Ranbaxey has acquired Bayer A.G of Germany, thereby entering into generics market of the world.

SUN Pharmaceutical Caraco Pharma abs to enter into USA generics market.

Globalization has changed the world industrial scenario completely. No doubt it has increased competition thereby benefiting consumers in the form of quality product of international standard competitive prices etc. and easy availability of product, but there is no end to this competition. There is always a lust among big corporate giants to become bigger and exercise its dominant position.

As I stated in the beginning that to do away the risk of business a company is a better position however now this scene has changed again. There is competition among Company to take over or acquire another company thereby destroying the identity of former corporate personality.

It is just the concept which is prevailing and that its survival of fittest. It is just like a big fish eating small fish. In order to avoid this company has to become more strong and with stand competition. It must create its position in the industry by keeping its own identity otherwise the end of company is not far away.

The  author can be reached at: kjayshri@legalseviceindia.com