Mergers & Acquisition Advisory

The major reasons for mergers and acquisition are listed below:

• Synergistic operating economies

Synergy is an escalation in the performance of combined entities over the existing performance of two entities independently. The major reason for synergy benefits is the economies arising due to a large scale. Also, the average cost of production reduces due to large scale production. Synergy can be cost synergy or revenue synergy.  Cost synergy is designed for the benefit of economies of scale while revenue synergy is designed for higher prices, an increase in market share, or cross-selling.

• Diversification

It is believed that the merger between two unrelated entities minimizes the business risk and maximizes the market value of the entity. As the combination of negatively co-related income streams and statistically independent merged companies is more the business risk goes down drastically. Cyclical industries can avoid the losses of the slowdown period of their industry by diversifying the cash flow to the non-cyclical industry.

• Taxation

Mergers and acquisitions are the great opportunities to grab the benefits arising from the provisions of carrying forward and set off of losses as defined in the Income Tax Act 1961. Also, the losses of one entity can be set off against the profits of other entities in case of an acquisition. This results in tax saving as well as a reduction in tax liability. So this can be a good tax planning opportunity

• Growth

The entities growth rate is faster while in mergers and acquisition transaction than the organic growth as the delays due to purchase of the site, installing pieces of equipment, hiring personnel are all avoided

• Consolidation of production capacities and market power

Combining two or more plants and machinery brings a considerable increase in production capacity. The competition is also reduced and in turn, increases the market power.

Following are the objectives that lure the entities to deal with the transactions of mergers and acquisition:

• To attain optimum size for the business or to use unutilized capacity
• To enlarge the market share
• To keep a check on the competition
• For economizing costs and eliminating avoidable taxes
• Mobilizing and utilizing idle funds for expansion of business
• Mergers of industrial entities with trading, investment or export entities for an increase in cash flow and other benefits
• Acquiring shell companies having all the licenses and other infrastructure but the promoters are not willing to continue the project.

• Horizontal merger

The merger between two industries having the same line of business is called a horizontal merger. This kind of merger is conducted to curb competition and increase the market value and with an objective to gain monopoly status. Example is Facebook and Instagram.  

• Vertical merger

Vertical merger means merger of companies in the same industry but involved in different stages of the production process. E.g. Company A is involved in manufacturing of automobiles but engines are purchased for the automobiles from independent markets, Company B is involved in manufacturing of engines. Then Merger of A and B will be termed as vertical merger. .  

• Conglomerate merger

The two entities coming together do not have any common factors like marketing, production, technology, development, and research. The conglomerate mergers are integration or coalition of different types of businesses under one showcase. The aim of these kinds of mergers is synergy in managerial functions, enlarging debt capacity, utilizing financial resources.  

• Congeneric merger

In this kind of merger, the entities are connected to each other through production processes, markets, basic technologies, etc. The merger is initiated for extension of the product line, market technologies or participants, etc. These mergers are a phenomenon by the purchasing company to move outward from its existing business to another related and relevant business venture with the same industry structure  

• Reverse merger

The private company acquires a public company which is normally a shell company to avoid the lengthy and complex formalities of being a public company, this kind of merger is called a reverse merger.  

• Acquisition

Acquisition refers to purchasing the controlling interest by acquiring the share capital of any entity. The process involves either of the following:

1. An agreement with the majority holder of an interest
2. Purchase of new shares by private agreement
3. Purchase of shares by open market
4. Acquisition of share capital of a company by means of cash, issuance of shares
5. Making a buyout offer to the general body of shareholders

VJM Global follows a ten-step processfor mergers and acquisitions. These ten steps are briefly described as follows:

• Acquisition strategy

o  The expert team of VJM Global discusses with the acquirer company about their idea and purpose behind this merger. And accordingly, we develop an acquisition strategy after analyzing if this merger is really beneficial or it i just a superficial one

• Acquisition criteria

o  After the initial discussions, the team sets the search criteria for potential target entities for mergers and acquisitions according to your requirement

• Search for targets

o  With the setcriteria’s the search for such an entity starts. Once some of the entities are found, they are compared and evaluated for the potential benefits of the merger

• Acquisition planning

o  A meticulous plan is prepared for approaching a few companies. Then, a meeting is held with such companies for initial discussions. The purpose of this meeting is to obtain information about the company and check the suitable it of the potential company for a merger.

• Valuing and evaluating

o  Once the initial conversations are satisfactory, we ask the entity to provide us the substantial information like the financials, etc. The team at VJM Global then evaluates and studies this information on the basis of its existing business and future prospects.

• Negotiation

o  We present our multiple valuation model reports about the target company to the management. This report forms a basis for the management to negotiate the offer to the target company.

• Due Diligence

Due diligence of the entity can be conducted only once the offer is accepted. This is one exhaustive process. VJM Global also assists you with the process of due diligence of the target company so that a detailed evaluation, inspection, and analysis of the target company’s every facet, such as human resources, customers, assets, liabilities, and financial metrics, is done.

• Purchase & sales contract

o  Once we submit the report of due diligence, it is up to the management to decide if the deal is still on. If yes, we will assist in preparing the draft contract for sale. Both the entities discuss on the method of purchase agreement namely:

• Stock purchase

o  In this method, the entity pays the shareholders of the target company the compensation in cash or shares in exchange for their holdings

• Asset Purchase

o  The assets of the target entity are purchased and paid for directly under this method.

• Financing

o  Here we suggest and recommend the various financing options to the management and help in getting the finance through the source finalized by the management for the purchase. But this is done only after the agreement is signed.

• Implementation

o  The transaction deal is closed. And now both the entities work together on the terms agreed. VJM Global ensure that the after working goes smoothly and if required also assist in any areas of working.