How to Ensure the Success of Your M&A Deals in India?
We list some best practices and guidelines for investors looking to structure mergers and acquisitions in India and key stages of the deal making process.
Mergers and acquisitions (M&As) offer opportunities for company expansion and can add new revenue streams that can improve the bottom-line profitability of a business.
India’s M&A activity reached unprecedented levels in 2021. With 598 deals worth US$112.8 billion struck during that year, India has emerged as among the most viable choices for an M&A investment. This is helped by more liberalized laws on monopolies and restrictive trade practices, economic reforms, need for investment, and the dynamic attitude of Indian firms.
Some of the top M&A deals in India in 2021 include Piramal Group, Prosus acquiring BillDesk; Adani Green Energy Limited (AGEL) acquiring SB Energy India; Tata Digital acquiring BigBasket; and a merger between Sony Picture Network India and Zee Entertainment Enterprises. A detailed analysis of M&A activity in India in 2021 can be viewed here.
- A merger is defined as the collaboration of two or more companies to form a new company in an expanded form.
- An acquisition refers to the process of selling one company to another.
- An amalgamation, on the contrary, is a combination of two or more companies to form a new entity.
While M&A transactions can both drive growth within and open access to new markets or product and service offerings, they also come with their unique set of challenges. An acquisition allows the acquirer to gain control over the target, but it can be costly, and the acquirer not only gains access to the target’s business but also its liabilities, which can be significant.
Mergers or acquisitions can enhance the company’s competitive position in the market and improve its financials significantly. Besides, M&A’s allow businesses to improve channel relationships, expand offerings of products and services, grow brand visibility, and increase capacity at a lower cost.
How to ensure a successful M&A?
Various factors must be considered while deciding to pursue an M&A. These include commercial aspects, detailed due diligence, identifying potential issues with costs or cultural conflicts, or any negative impact on existing or new customers. It is important for the buyer to ascertain the attached obligations, litigation risks, contingent liabilities, and much more prior to finalizing their deals.
It is important for the buyer to spend adequate time and resources to explore the following:
- Financing the deal: An important aspect before considering an M&A deal is to decide if the buyer will pursue a stock or an asset deal. Some other factors needed to be considered here are the additional costs, like tax implications, capital expenditures, comparative ratios, and replacement costs.
- Rival bidders: As a buyer, one shouldn’t assume that they are the only party interested in the target company. A smart buyer sets its price parameters based on its own analysis of the target’s market and prospects, and how the combined businesses will match up. A target company, on the other hand, must explore multiple bids to funnel in the best bid, rather than accepting the first option.
- Due diligence: M&As typically involve a significant amount of due diligence, as on completion of an M&A deal, all penalties and risks of the target company are passed on to the acquirer and the future business can be made liable for the past non-compliances of the target company. Comprehensive due diligence is necessary to reveal facts that may otherwise be difficult to identify, thus helping the stakeholders to the deal to make an informed decision.
- Clear timelines: The strategic goals for M&A deals are often time-based, but negotiations between large companies can often stretch on for months or even years. Hence, it is important to have a roadmap of milestones and deadlines, to ensure the process stays on track.
- Cross-border differences: When acquiring a foreign company, it is essential to consider the differences in accounting standards, labor laws, and environmental regulations beforehand. There has been rapid growth in strict and contradictory laws in India that restrict cross-border transfers of crucial business data.
- Employee turnover: Managing employee turnover during mergers and acquisitions can be challenging as M&As often tend to result in employee attrition. The buyer would want to replace or cut back workforce, which can be devastating and lead to low morale of the rest of the workforce. Further, it is equally important to retain key employees who are well versed with the organization and the existing work culture.
- Tax and regulatory issues: An M&A transaction will attract various forms of taxes, and depending on the industry, it may require regulatory oversight.
Who governs mergers and acquisitions transactions in India?
The primary regulating bodies for mergers and acquisitions in India are the Securities Exchange Board of India (SEBI), the Reserve Bank of India (RBI), the National Company Law Tribunal (NCLT), and the Competition Commission of India (CCI).
- SEBI is India’s securities law regulator and compliance with regulations laid by SEBI is necessary for prescribed categories of transactions involving listed companies (e.g., mandatory tender offers, buybacks, delisting, etc.).
- The RBI is India’s central bank and regulates foreign investment into India, implying foreign investments into India should comply with the mandatory pricing guidelines issued by the RBI and may also require RBI approval in some instances.
- The NCLT regulates schemes of arrangement.
- The CCI is India’s competition / antitrust regulator.
How long does the M&A process take?
The duration of the M&A process in India may take anywhere from six months to several years, depending upon the complexity of the deal. There are several individual steps that need to be completed successfully by the respective companies before they are legally combined into a single entity.
Planning for an M&A in India? Here are key steps in the process
An M&A is a multi-layered process, and a carefully drafted blueprint can help buyers prioritize a bunch of scattershot ideas into a comprehensive M&A strategy. The fast pace of today’s M&A activity demands decision-makers to strategize and act swiftly to avoid missing opportunities, and this requires clarity and an in-depth understanding of the deal.
Below are the steps one should follow for a successful M&A deal.
1. Strategy development
A strategy addressing what the company hopes to achieve and how it will achieve the desired results should be developed by the buyer company. A careful analysis of these strategies will help set clear expectations for all the stakeholders involved.
A strategy should cover various aspects including:
- Purpose of the transaction
- Amount of capital to be invested
- Process of acquiring finances for the transaction
- Structure of end operating model
- Entities to be involved
2. Target identification
In this phase, the buyer needs to start identifying and evaluating their potential target companies. Researching on the companies that fit their criteria and further contacting them to obtain more information and measuring their interest in such a transaction. Target identification may vary in different cases based on the type, size, and level of merger.
For example, in case of subsidiaries or related entities, it is important to identify what industry they work in, where they are located, etc.
3. Information exchange
After both entities (buyer and seller) have shown their interest in the M&A deal, they begin the initial documentation, which generally includes submission of a Letter of Intent to officially express interest in the transaction and signing a confidentiality agreement to ensure the confidentiality of the proceedings and discussions. Further, the entities exchange information, including the financials, company history, etc., so that both entities can assess the benefits of the deal to their respective shareholders.
4. Valuation analysis
The next step is to value the target company’s suitability in line with the M&A’s strategic plan, wherein the buyer needs to access information regarding the target’s operations, customers, financials, products, and more. Once the entities are known, the next step would be to find out if they are in good standing and in compliance with all jurisdiction requirements. If not, it could be a deal breaker. The buyer needs to assess whether the issue(s) can be resolved and what is the time frame for moving forward.
Once the valuation and assessment has been completed, the buyer can present an offer, which may be in cash or stocks, to the shareholders of the target company. The seller would then analyze the offer and negotiate, depending on the price they feel is reasonable. This step may involve some time depending on the number of potential buyers and the prices being offered by them. It is important for the buyer to do a price study and offer a competitive price to be able to close the deal.
6. Due diligence
Due diligence is usually the most critical and time-consuming part of any M&A transaction, involving detailed examination and analysis of the target company from both internal and external sources. The objective of this exercise is to ensure that there are no discrepancies in the information provided earlier when the offer was made.
Due diligence tasks in M&A include:
- Searches: UCCs, fixture filings, federal/state tax liens, litigation (local and federal), judgment liens, bankruptcy, IP searches, etc.
- Document ordering: Charter documents (all documents on file versus restated forward), records of good standings (long and short form), “bring-down” letters (verbal status checks), credit reports, and more.
- Filings: Formation of shell/holding companies, potential qualification of an entity in multiple jurisdictions post incorporation.
7. Purchase agreement
When the buyer has performed their due diligence and is satisfied with the results, a final agreement is drafted outlining the means of payment (cash/ stock), timeline of the payment to be made etc., and is shared with the target company, which is then signed by both the entities.
8. Deal closure and integration
After finalizing the purchase agreement, both parties close the deal by signing the documents, and the buyer gains control of the target. The management teams of both the entities work together to integrate them into the merged entity.
Managing the integration of an acquired company is a full-time job wherein both parties need to work together to ensure a seamless integration.
Post-merger, it is important to continuously monitor the success of the newly established entity with periodic health checks as an additional preventive measure.
M&A process in India: Key points to remember
- The M&A process in India typically commences with the execution of a term sheet or a memorandum of understanding, which records the preliminary understanding, broad scope, and intention of the parties with respect to a proposed transaction. The term sheet is usually non-binding unless the parties specifically agree otherwise.
- Additionally, confidentiality arrangements are typically executed by the contracting parties to secure information exchanged during due diligence and negotiations. Such agreements contain standard exceptions (e.g., disclosure required by applicable law or information already in the public domain).
- In the context of a transaction involving a listed company, corporate resolutions may be required before due diligence information is shared, and a term sheet is usually non-binding to avoid triggering mandatory tender offer requirements. Under Indian takeover regulations, a mandatory tender offer is triggered if a party agrees to acquire shares/voting rights above certain thresholds or agrees to acquire control.
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