Sign up for Equitymaster's free daily newsletter, The 5 Minute WrapUp and get access to our latest Multibagger guide (2017 Edition) on picking money-making stocks.

This is an entirely free service. No payments are to be made.

Download Now Subscribe to our free daily e-letter, The 5 Minute WrapUp and get this complimentary report.
We hate spam as much as you do. Check out our Privacy Policy and Terms Of Use.
Mergers and Acquisition: A short primer - Views on News from Equitymaster
  • E-MAIL
  • A  A  A
  • Jan 5, 2010

    Mergers and Acquisition: A short primer

    Marico bought Code 10 from Colgate Palmolive. Surprising this acquisition was made in Malaysia. Why are we seeing a sudden spurt of acquisitions by FMCG companies? One reason is that FMCG companies are sitting on a pile of cash. And they don't want to go the whole hog in investing in new product development. Especially at a time when some well known brands are available for cheap. Not to forget the distribution infrastructure they come equipped with. This trend was started by Tata Tea with the big ticket acquisition of Tetley in 2000. Over the years, we have seen several home grown FMCG companies acquiring brands and companies overseas. In this series of articles we will explore what mergers and acquisitions (M&A) are all about.

    First what is the difference between mergers and acquisitions? Simply put, a merger happens when two companies agree to operate together under the same ownership. Ideally, both companies are of similar size. Both companies in this case surrender their shares and new shares are issued. An acquisition happens when a company takes over a company and establishes ownership over that company. Typically, the company which is acquired or the target company ceases to exist as a separate entity. An example can be Corus which ceased to exist when it was taken over by Tata Steel. Today the company operates as a 100% subsidiary of Tata Steel.

    What are the reasons for M&A?

    Economies of scale: A company can merge or acquire for achieving economies of scale. This means that a company can lower its costs by removing duplicate departments and processes used in the same product or same service. Moreover, when it comes to buying, size matters. A company placing a larger order is in a position to bargain and can negotiate lower prices for everything from stationary to new IT equipment.

    Increase revenue or market share: A company may decide to acquire a competitor company or brand. This will help increase the company's revenues and market share. An example can be Marico's acquisition of Nihar from HUL. HUL was not able to devote sufficient resources to Nihar which is a coconut oil with a strong consumer base in Bihar. Marico being weak in this region was able to acquire this brand and increase its revenue and market share while at the same time eliminating a competitor.

    Taxation: A profitable company can buy a loss maker to use the target's loss as their advantage by reducing their tax liability. In such a case when the target company is loss making, the accumulated losses get added to the acquirer's profit, resulting in lower effective tax payable.

    Geographical diversification: A company may acquire another company to grow in other regions. An eg can be Marico's takeover of Enaleni Pharmaceuticals Consumer Division (Pty) Ltd. in 2007. This company is one of the top players in the hair care segment in South Africa. By acquiring this company, Marico owns an established brand as well as a distribution network to leverage its portfolio.

    Vertical integration: Vertical integration is when a company merges or acquires a firm which is upstream or downstream to it. Such integration helps in controlling double margins. Moreover, in case either of the firms is a monopoly and controls the output at a monopolistic level, it results in deadweight loss. Once integrated, the firm's output can be set to competitive levels resulting in increase in profitability for the combined entity.

    Knowledge: Today, several products and processes are patented. However, sometimes it so happens that the company owning the patent is not able to exploit its potential as it may be unable to devote proper resources to it. As a result, this firm can be acquired or merged by a larger company which can use this patent and exploit the revenue from it. This can also take place in case of a unique asset. An example can be Tata Tea's takeover of Mount Everest Mineral Water (MEMW). MEMW had an aquifer which is a source of pristine and pure water from the Himalayas. However, they were unable to fully exploit this resource. Tata Tea acquired this company in 2007 and has been able to increase the revenue from this resource.



    Equitymaster requests your view! Post a comment on "Mergers and Acquisition: A short primer". Click here!


    More Views on News

    How to Ride Alongside India's Best Fund Managers (The 5 Minute Wrapup)

    Jun 10, 2017

    Forty Indian investing gurus, as worthy of imitation as the legendary Peter Lynch, can help you get rich in the stock market.

    Mr Trump Has Been Broken (Vivek Kaul's Diary)

    Aug 24, 2017

    Kelly, Mattis, McMaster, Cohn, and Mnuchin are in charge. But these Pentagon bureaucrats and Wall Street hustlers may be worse than a loose-cannon president.

    Were You Lured By Mr Market's Bait? (The 5 Minute Wrapup)

    Aug 23, 2017

    Mr Market lured investors into believing they'd bitten into a crash. Did you take the bait?

    Deep State First (Vivek Kaul's Diary)

    Aug 23, 2017

    Nowhere was the darkness deeper than in the nation's capital. There, no light shone. No flicker of awareness...observation...learning...or reflection appeared.

    Why Hasn't Warren Buffett Rung the Bell Yet? (The 5 Minute Wrapup)

    Aug 22, 2017

    It's surprising Warren Buffett hasn't warned investors about the expensive stock market? Let us know why.

    More Views on News

    Most Popular

    This Small Cap Can Drive Chinese Players Out of India (and Make a Fortune in the Process)(The 5 Minute Wrapup)

    Aug 17, 2017

    A small-cap Indian company with high-return potential and blue-chip-like stability is set to supplant the Chinese players in this niche segment.

    Dear PM Modi, India is Already Land of Self-Employed, and It Ain't Working(Vivek Kaul's Diary)

    Aug 21, 2017

    Most Indians who cannot find jobs, look at becoming self-employed.

    It's the Best Time to Buy IT Stocks(Daily Profit Hunter)

    Aug 16, 2017

    The IT Sector could be in an uptrend till February 2019. Are you prepared to ride the trend?

    5 Steps To Become Financially Independent(Outside View)

    Aug 16, 2017

    Ensure your financial Independence, and pledge to start the journey towards financial freedom today!

    Think Twice Before You Keep Money In A Savings Bank Account(Outside View)

    Aug 22, 2017

    Post demonetisation, a cut in bank savings deposits rates was in the offing.

    Copyright © Equitymaster Agora Research Private Limited. All rights reserved.
    Any act of copying, reproducing or distributing this newsletter whether wholly or in part, for any purpose without the permission of Equitymaster is strictly prohibited and shall be deemed to be copyright infringement.

    LEGAL DISCLAIMER: Equitymaster Agora Research Private Limited (hereinafter referred as 'Equitymaster') is an independent equity research Company. Equitymaster is not an Investment Adviser. Information herein should be regarded as a resource only and should be used at one's own risk. This is not an offer to sell or solicitation to buy any securities and Equitymaster will not be liable for any losses incurred or investment(s) made or decisions taken/or not taken based on the information provided herein. Information contained herein does not constitute investment advice or a personal recommendation or take into account the particular investment objectives, financial situations, or needs of individual subscribers. Before acting on any recommendation, subscribers should consider whether it is suitable for their particular circumstances and, if necessary, seek an independent professional advice. This is not directed for access or use by anyone in a country, especially, USA or Canada, where such use or access is unlawful or which may subject Equitymaster or its affiliates to any registration or licensing requirement. All content and information is provided on an 'As Is' basis by Equitymaster. Information herein is believed to be reliable but Equitymaster does not warrant its completeness or accuracy and expressly disclaims all warranties and conditions of any kind, whether express or implied. Equitymaster may hold shares in the company/ies discussed herein. As a condition to accessing Equitymaster content and website, you agree to our Terms and Conditions of Use, available here. The performance data quoted represents past performance and does not guarantee future results.

    SEBI (Research Analysts) Regulations 2014, Registration No. INH000000537.

    Equitymaster Agora Research Private Limited. 103, Regent Chambers, Above Status Restaurant, Nariman Point, Mumbai - 400 021. India.
    Telephone: +91-22-61434055. Fax: +91-22-22028550. Email: info@equitymaster.com. Website: www.equitymaster.com. CIN:U74999MH2007PTC175407

    Become A Smarter Investor In
    Just 5 Minutes

    Multibagger Stocks Guide 2017
    Get our special report, Multibagger Stocks Guide (2017 Edition) Now!
    We will never sell or rent your email id.
    Please read our Terms


    Aug 24, 2017 12:29 PM