What are Mergers?
Mergers are a type of corporate action wherein two or more companies join together to become one. Generally, mergers aim to further business interests, reduce costs, and increase operational efficiency. In a merger, the resources of both companies—assets and liabilities—are combined.
For Example-
Recent mergers in India include Tata Group and Air India, Zomato and Blinkit, PVR and Inox, among others.
The goal of a merger is to create a larger company by combining the resources of the smaller companies that can benefit from joint operations and economies of scale.
Disclosure of Mergers.
Mergers significantly impact the companies involved, the public, and share prices, which is why market regulators have implemented disclosure requirements. This ensures that all participants have easy access to the complete details of the merger, aiding informed decisions.
Under the SEBI (Listing Obligations and Disclosure Requirements) Regulations 2015, companies must disclose basic information regarding the merger, including the size and turnover of the relevant parties, the relevant business or industry, the transaction objective, the nature and amount of consideration, and any involvement of related parties.
Such details can be found on the BSE and NSE websites under the announcements or corporate disclosures section. Additionally, the company's official website and press releases generally contain all required information.
Effect of Mergers:
Mergers often have a noticeable impact on the share prices of the companies involved. By understanding the reasons behind the merger, one can reasonably estimate its effect on share prices. For instance, if a major conglomerate is acquiring a growing startup, the startup's stock may rise due to the merger being strategically beneficial.
Conversely, it can be challenging to determine the impact on the acquiring company's share price due to mixed reactions from investors. If the merger is viewed as risky or non-beneficial, it may negatively affect the share prices of both companies.
Also Learn: Stock Delisting Explained: Implications for Shareholders and How to Cope
Taxation of Merger:
The tax treatment of mergers can significantly influence the financial outcomes for shareholders. Gains made during mergers are subject to capital gains tax. For shares sold within 12 months, short-term capital gains tax (STCG) applies at a rate of 15% for listed equity shares. Conversely, shares held for over 12 months fall under long-term capital gains tax (LTCG), levied at 10% if the gains exceed ₹1 lakh in a financial year.
However, certain scenarios may allow for tax liability to be avoided. Under Section 47 of the Income Tax Act, specific mergers qualify for exemptions if conditions are met, such as when shares are swapped for shares in the merged entity, providing a favorable outcome for shareholders without triggering capital gains tax.
Merger Jargons:
Below are some key terms related to mergers:
Announcement Date:
The date when the companies publicly announce the merger agreement, including details like the purchase price and terms of the deal. This serves as the official communication about the merger.
Effective Date:
The day the merger is officially completed, and the two companies start operating as a single entity. On this date, the target company’s stock may stop trading, and shareholders receive compensation as per the merger agreement.
Exchange Ratio:
In mergers involving stock swaps, this ratio determines how many shares of the acquiring company's stock the target company's shareholders will receive for each share they own. It plays a key role in the valuation of the merger.
Mergers vs Acquisitions
Investors might find it difficult to distinguish between mergers and acquisitions. Here is a table distinguishing the same for better clarity:
| Mergers | Acquisitions |
| It involves the combination of two companies to form a single new entity. | Involves one company purchasing and taking control of another. |
| Typically occurs between companies of similar size aiming to create synergy and increase market share. | Often involves a larger company acquiring a smaller company to expand its business or eliminate competition. |
| The resulting company shares a new name or identity that reflects the merged entities. | The acquired company may retain its original name or be absorbed into the acquiring company's branding. |
| Seen as a strategic move to achieve mutual benefits and share resources. | Considered a strategic way to gain new assets, technology, or market access. |
| Example: Vodafone India and Idea Cellular merger to form Vodafone Idea Limited (2018). | Example: Tata Motors acquiring Jaguar Land Rover (JLR) from Ford (2008). |
Conclusion
Understanding the merger process is crucial for stakeholders seeking to enhance their competitive edge. Mergers signal a company’s intent to improve market position and operational efficiency through resource sharing. Staying up to date is essential for planning your investment strategy to maximize potential returns.
Also Read: What Does Gamma Mean in Options Trading? Explanation and Examples
