Profitable growth is one of the prime objectives for any corporation. Profitable growth can be achieved â€˜internallyâ€™ either by introducing new products or by developing the existing product or by expanding the capacity or by modernization of technology. Alternatively the profitable growth of the project can be achieved â€˜externallyâ€™ by acquisitions of existing firm(s).
The term Corporate Restructuring is used to describe any significant change in the capital structure, in the operations and in the ownership of a firm which is outside the ordinary course of its business. The various forms of corporate restructuring are mergers, acquisitions, spin offs, divestitures, takeovers, leveraged buyouts, privatization, rehabilitation etc.
Merger is a combination of two or more companies into one company. Mergers are in the form of either absorption or consolidation. In absorption one of the companies loses its identity and the assets and the liabilities of this company are taken over by other. For example, consider two companies A and B. In absorption of company B by A and all the assets and liabilities of company B will be taken over by company A. Thus company B will lose its identity.
A merger in which all the participating companies lose their identity and form a new company is referred to as consolidation. Considering the earlier example of A and B companies, by consolidation, A and B companies will be merged and a new company C will be formed. Thus companies A and B will lose their identity.
Mergers can be classified as:
1. Horizontal Merger.
2. Vertical Merger.
3. Conglomerate Merger.
Horizontal merger takes place between the two firms operating and competing in the same industry. Mergers that take place between the firms operating in the different stages of the manufacturing process in an industry are referred to as vertical mergers. A conglomerate merger is the combination of firms engaged in unrelated types of business activity.
The merger of TOMCO and HLL is horizontal merger as two companies are engaged in the business of manufacturing soaps and detergents. The merger of Gujarat Godrej innovative Chemical Limited and Godrej Soaps limited is a conglomerate merger as one is involved in production of soaps and the other in the production of chemicals. The merger of RPPL, RPEL and Reliance Industries Limited is a vertical merger, where the finished product of RPPL and RPEL is one of the input materials for Reliance Industries limited.
The major economic advantages of merger are as follows:
With increased size of the operation and with effective utilization of production capacities the average cost of production can be lowered. Merger gives the effect of synergy and increases the sources of finance.
Merger enables the firms to grow at a faster rate than the growth under internal expansion. Internal expansion is time consuming and involves delays, in building a new plant and establishing a new line of product. Diversification is yet another major advantage of merger, especially in conglomerate merger. The diversifications in a merger will reduce the risk.