2015 saw a slew of mergers and acquisitions (M&A) worldwide. Corporates announced deals worth $4.86 trillion globally. While healthcare ($708.7 billion) and technology ($697.4 billion) sectors dominated this global trend, major small-scale takeovers cemented 2015’s place as a record year for M&A. While, Asia Pacific contributed a record 24% share ($1.16 trillion) to this global hike, India’s M&A dipped to $25.65 billion from $26.90 billion an year ago. Reasons such as fall in deal value, lesser number of domestic deals, stretched corporate balance sheets, costlier foreign assets and depreciating rupee were primarily attributed to this fall. Furthermore, with the apprehension of a sudden tax demand and the uncertainties involved in availability of tax treaty benefits surmounting every transaction, companies have been much more cautious, which has further led to the reduction in the M&A activity in the country.
India enacted the Competition Act, 2002 (the Act) “….to prevent practices having adverse effect on competition, to promote and sustain competition in markets, to protect the interests of consumers and to ensure freedom of trade carried on by other participants in markets, in India”. Even though M&A are seen as a legitimate means to grow economies, unregulated M&A can use business strategies to eliminate competition and may further have an adverse impact, or anti-competitive effect, or be detrimental to already existing competition in a particular market. Therefore, before an M&A transaction can be completed, it is important to ascertain its compliance with the Competition Law of any jurisdiction.
Through this article, we shall discuss the M&A, its types, its effects on competition and how competition law regulates M&A in India while understanding the implementation of these regulations by CCI through case study.
Explanation (i) to Section 232 of the Companies Act, 2013 explains the concept of mergers by stating that:
“(i) in a scheme involving a merger, where under the scheme the undertaking, property and liabilities of one or more companies, including the company in respect of which the compromise or arrangement is proposed, are to be transferred to another existing company, it is a merger by absorption, or where the undertaking, property and liabilities of two or more companies, including the company in respect of which the compromise or arrangement is proposed, are to be transferred to a new company, whether or not a public company, it is a merger by formation of a new company”
Furthermore, Section 2(1)(B) of the Income Tax Act, 1961 defines the term ‘amalgamation’ corresponding to Mergers as:
“(1B) "amalgamation", in relation to companies, means the merger of one or more companies with another company or the merger of two or more companies to form one company (the company or companies which so merge being referred to as the amalgamating company or companies and the company with which they merge or which is formed as a result of the merger, as the amalgamated company) in such a manner that—
(i) all the property of the amalgamating company or companies immediately before the amalgamation becomes the property of the amalgamated company by virtue of the amalgamation ;
(ii) all the liabilities of the amalgamating company or companies immediately before the amalgamation become the liabilities of the amalgamated company by virtue of the amalgamation ;
(iii) shareholders holding not less than three-fourths in value of the shares in the amalgamating company or companies (other than shares already held therein immediately before the amalgamation by, or by a nominee for, the amalgamated company or its subsidiary) become shareholders of the amalgamated company by virtue of the amalgamation,
otherwise than as a result of the acquisition of the property of one company by another company pursuant to the purchase of such property by the other company or as a result of the distribution of such property to the other company after the winding up of the first-mentioned company;”
Through mergers two companies consolidate into a single company. A consolidation however, differs from a merger to the extent that consolidated companies may or may not result in a new entity, whereas in a merger one company absorbs the other, while remaining in existence. Further, consolidation also confines to “M&A of smaller companies into larger companies”. Mergers extinguish the merged corporation and forwards all the rights, duties, privileges and liabilities to the surviving merged corporation.While, mergers and acquisitions are both, “methods by which corporations legally unify ownership of assets formerly subject to separate controls”, and are often uttered in the same breath, an acquisition may or may not lead to a Merger. In layman terms, when a company does not want to be purchased, it is regarded as an acquisition. An acquisition implies takeover of one entity by another. Since a takeover has a negative connotation affixed to it, entities involved in acquisition usually like to refer to it as a merger. M&A facilitate access to new markets and established customer bases, technology access and sharing, brand equity and diversification, acquisition of suppliers, synergy and economies of scale. Different organizations employ different types of M&A depending on their requirements. We shall now discuss these types.
TYPES OF M&A
Horizontal mergers occur when two or more competitors in the same industry, engaged in same kind of manufacturing and sales process merge with each other. Such mergers enable reduction in market competition and seek to acquire more market share through a larger organization. Joint venture agreements may be an exception to horizontal agreements provided they “increase efficiency in production, supply, distribution, storage acquisition or control of goods or provisions of services.” Horizontal mergers when given effect to create problems for the markets such as, eliminating competition, absorbing economic power, bring the merged entity closer to a monopoly and effect price rise. This is the prime reason why Competition Commission of India (CCI) is comprehensively vigilant of such mergers.
Prime Examples: Brook Bond with Lipton India, Bank of Mathura with ICICI Bank, Bombay Suburban Electric Supply Ltd. with Orissa Power Supply Company, Tata Motors and Jaguar Land Rover and Associated Cement Companies with Damodar Cement.
2. Vertical Merger
Vertical mergers represent a ‘combination of firms’ at different stages of the same industry that merge operations, to increase efficiency by reducing production and transaction costs. In such a merger, an organization either buys customers (forward supply) or the suppliers (backward supply) of another organization.
Prime Examples: Tata Motors Ltd and Trilix Suri, Reliance and FLAG Telecom Group etc.
3. Conglomerate Mergers
Conglomerate mergers are given effect to between unrelated companies, who have no related products or markets. The rationale behind such mergers is diversification of risk and operations.Such mergers constitute:
(a) Pure conglomerate merger: involves mergers where two completely unrelated businesses get together, and
(b) Mixed conglomerate merger: mergers to facilitate wider market access, increased client base and enlarged range of products and services.
Prime Examples: Philip Morris and Miller Brewing Company, ITT, Avis Rent–a-Car, Sheraton Hotels and Continental Banking, GE and Honeywell, Larsen & Toubro Limited and Voltas Limited etc.
4. Reverse Mergers
In a reverse merger, a private company acquires the majority shares in a public company, and is then converted into a public company. Prime reason for undertaking such merger is to fathom the benefits of a public company while avoiding the costs of listing themselves in the stock exchanges. It facilitates greater liquidity and additional capital and stock and is a less time and money consuming alternative to conventional IPO. However, managers need to be experienced in the regulatory and compliance requirements of a public company.
Prime Examples: ICICI by ICICI Bank, New York Stock exchange by Achipelago Holdings to form NYSE group, etc.
An acquisition may be by way of ‘share acquisition’ (buyer buys the shares of the target company) or by ‘asset purchase’ (buyer buys the assets of an organization).
Prime Examples: Tata group acquires Corus, Bharti Airtel acquiring Zain Africa, Hindalco Industries acquiring Novelis etc.
In terms of Section 5 of the Act, combination means acquisition of control, shares, voting rights or assets, acquisition of control by a person over an enterprise engaged in competing businesses, and mergers and amalgamations between or amongst enterprises when the combining parties exceed the thresholds set in the Act.
These thresholds are enumerated herein below through a chart:
(A) Any acquistion where:
(B) Acquiring control by a person over an enterprise when such person has already direct or indirect control over another enterprise engaged in production, distribution or trading of a similar identical or substantial goods or provision of a similar or identical or substitutable service, if:
(C) Any merger or amalgamation in which:
EFFECTS OF M&A ON COMPETITION
As regards to competition, it is highly likely that M&A may lead to lesser competition in the market. For understanding the impact of M&A on competition, it is important to understand the relation between concentration and competition in a market. The bigger the merger or acquisition, the greater monopoly would the existing or new entity, as the case may be, is likely to have upon the market competition. This is because a merger or an acquisition takes over the business of the merged or acquired entity too and as such acquires the customers simultaneously. Yes, M&A have different impact as far as market competitions are concerned but this does not sideline the fact that a greater market share employs greater concentration. The most common impacts of M&A on competition are enumerated in two broad categories:
Unilateral Effects: Unilateral effects occurs when the merged enterprise/group is able to gain considerable market power sufficient enough for it to act independent of market forces and profitably reduce value for money, choice for innovation through its own acts without the need for a co-operative response from competitors.
Coordinated Effects: Coordinated effects transpire from a collusive behavior either due to cartels or tacit coordination. A merger in a concentrated market makes coordination effect easier because it may significantly hamper effective competition, through creation or strengthening of a collective dominant position, because it increases the likelihood of organizations able to coordinate their behavior and raise prices even without entering into an agreement.
Therefore, M&A require a system of stringent and constant scrutiny based upon a system of proper checks and balances. However, assessment of M&A impact on competition is a complex procedure. This is because such evaluation involves complete scrutiny of the economic implications of every M&A at every stage. Moreover, different industries have different levels of competition. Therefore, regulatory measures require evidence, as they cannot be enforced on mere speculations. Sufficient jurisprudence is available in the developed jurisdictions on the same and India is not far behind. Let us take a look at how the Act regulates M&A in India.
The objective of any competition law is to ensure that persons or enterprises obtaining the independence through merger or acquisition do not damage the structure of competition. This therefore fuels the demand for employing effective competition laws to regulate such a setup. The Act seeks to regulate M&A by addressing its fundamental effects on competition. These include:
Section 3 (1) of the Act prohibits any agreements (entered into by enterprise, or its association, person or association of persons) with regard to (production, supply, distribution, storage, acquisition or control of goods or provision of services) which causes or is likely to cause an ‘appreciable adverse effect on competition’ within India.
Section 19(3) of the Act classifies the factors to be considered while determining whether an agreement has an appreciable adverse effect on competition under Section 3: