Triggers for M&A

Readers of M&A Critique are always interested in the details of a transaction may it be merger, acquisition, demerger or slump sale and exchange. One always wants to know the structuring of the deal and the reasons and long-term implications of structuring. But have we ever wondered what the moment is or what are the reasons for a business owner, top management, or for that matter the CEOs and the CFOs to decide that we shall go for structuring? We shall try to articulate a generalized view irrespective of sector or business size on what are triggers for a business owner to think about expanding or exiting their business.

Types of Restructuring

There are a lot of terms which are related to restructuring like Merger, Demerger, Slump Sale, Slump Exchange, Acquisition but broadly speaking we can tag it as internal restructuring or external restructuring.

Internal Restructuring is a type of restructuring i.e. when a transaction is between a company and its related companies i.e. their subsidiaries or group companies. Reduction of capital, buyback of shares, etc. are further types of internal re-structuring which the company does within itself are all examples of internal restructuring. You can read more on the same here.

Example — Greenply demerges MDF business to embark on growth

When restructuring is between two unrelated companies it be termed as external restructuring. Mainly to pave the way for growth, optimize resources, succession planning, etc. entities pursue external re-structuring. Any proprietor, partnership, company (private or public) looking to sell or buy another business in part of full can be categorised under external restructuring.

Example — GSK giving a boost to HUL in an all equity merger!

We shall now look at the triggers which make a business owner embark on the external restructuring journey. In next issue, we will cover the distinct reasons for perceiving the internal re-structuring

Triggers for Expansion

Optimum Utilization of Internal Resources

One of the factors of a good or growing business is the accumulation of cash year on year. This surplus cash, to the extent not distributed as dividends and not required to sustain the present business, gives freedom to business owners/management to use it judiciously for the growth of the company to generate expected risk adjusted returns by its stakeholders. It becomes a trigger for the owners to begin looking out for other companies which are a good fit for them to grow but adding on to the existing business or help in vertical or horizontal integration of their business.

Example: Mastek’s acquisition of Evosys felicitous consideration structure

Expansion of Business (Human or Machine or Product)

There are times when business is running with 100% utilization of its resources or entities want to spread their wings by increasing product portfolio or geography. For a manufacturing industry utilization would be production capacity and for the services industry, it would its workforce. Rather than trying to buy new machinery or employing new people, it is easier to buy a company in its sector which has operating machinery or workforce and integrates them with existing business.

Example: GMM Pfaudler to acquire ready-made Glass Lined Equipment manufacturing capacity at Hyderabad

Need to Diversify from Current Business

An entrepreneur is always looking at opportunity to grow their business or looking for new different businesses to venture. Many times a fantastic opportunity to diversify acts a trigger for business owners to buy businesses even though in a different sector.

Example: RIL’s e-commerce push: Will Reliance Retail be the next Jio?

Increase market share/reduce competition

The need to capture market share and reducing competition is triggering for bigger companies and the management to buy in their competitors or integrate small unorganized players. Big companies are always on a lookout for inorganic growth opportunities and we see that they undergo some transaction every few years and more often for tech companies.

Example: Future-Reliance deal: The rise and fall of India’s retail maverick Kishore Biyani

Creating a complete range of product or services — Bolt-on Acquisitions

Continue to read… Triggers for M&A




M&A Critique, a monthly published magazine, gives News, Deals and Analysis of Mergers and Acquisitions, Insolvency, Restructuring, Takeovers and Joint Ventures

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M&A Critique

M&A Critique

M&A Critique, a monthly published magazine, gives News, Deals and Analysis of Mergers and Acquisitions, Insolvency, Restructuring, Takeovers and Joint Ventures

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