Why Merger and Acquisition is a failure in India?

Merger and acquisition are increasing constantly both nationally as well as internationally. It has tremendously increased competition in the market and prompted companies to go for mergers and acquisitions as they increase competencies on a larger scale. Along with globalization, merger and acquisition is not only seen as a method of corporate growth but also a strategic choice to enhance and strengthen the core competencies of a firm.

 

Mergers and acquisitions are two words which create a lot of confusion when it comes to business deals. Both of them are generally considered to be used interchangeably as both of these words refer to the combining of two business entities, but there are slight differences which cannot be neglected and which makes the two words totally different from each other.

 

A merger occurs when two different business entities joined together to create a new joint organization, whereas, on the other hand acquisition refers to the takeover of the business entity by another business entity. In the process of acquisition, the smaller entity is taken by the bigger entity and increases the shareholder in market game of the bigger entity.

 

This concept of merger and acquisition was not very appealing in India until 1988. Indian industries faced a lot of challenges both nationally as well as internationally after the economic reforms of 1991[1]. There are various factors which affect mergers and acquisitions in India today. These factors include government policies residence in economy com liquidity in the corporate sector. With increase in the number of mergers and acquisition dealings in India today, the legal department are becoming more refined as merger and acquisition forms a vital part of the Indian economy.

 

With increase in the number of mergers and acquisition dealings in India today, the legal department are becoming more refined as merger and acquisition forms a vital part of the Indian economy. But there are few factors which are responsible for the failures which the Indian corporate sector is facing when it comes to mergers and acquisitions. Everyone talks about those mergers or acquisitions which were successful but no one talks about the reasons behind an unsuccessful one.  Everyone knows about the Vodafone idea merger, Walmart acquisition of Flipkart because these were some of successful mergers and acquisitions taking place in India but no one knows about or no one knows the reason behind why RCOM and Aircel merger or Snapdeal and Flipkart merger or HDFC and Max life merger are a failure. The reason behind failure of merger and acquisitions is discussed below

 

Reasons behind the failure of mergers and acquisitions in India

1.      Working in global environment: – Nowadays a lot of foreign companies are expanding its business and are merging with Indian companies which are involved in telecommunication sector, pharmaceutical sector, Banking sector. These foreign companies have their headquarters situated in different countries and because of this it complicates the processes involved in merging or acquiring another company. Managers tend to forget that the performance drivers vary from culture to culture and because of this difficult for the managers to bring out a successful deal.It often becomes very tough to integrate the cultures of two different companies, who often have been the competitors[2]. The mismatch of culture leads to deterring working environment, which in turn ensure the downturn of the organization[3].

 

2.      Language barrier: – Communication is seen as the biggest reason behind a failure in Merger and acquisition. Merged companies are from different countries speaking different languages and when these countries have to interact language becomes a barrier because of which the companies are not able to communicate properly which results in miscommunication or misunderstanding between the companies.

 

3.      Overestimating the value of the target company: – the basic aim of every company involved in merger and acquisition is to benefit the shareholders and maximize its profit but in reality, most of these companies are not able to do so. According to a survey conducted by McKinsey and Company[4]many parent companies often overestimate the value of the target company due to lack of duty diligence and because of this a successful merger or acquisition is not achieved.

 

4.      High-cost debt: – Most of these mergers and acquisitions are financed by uncensored debt which are chargeable at a very high rate of interest and because of these high-cost debt the prices in the stock market specially of the parent company starts to dip and it eventually hampers the finances of the company which leads to an unsuccessful merger or acquisition.

 

Conclusion

Mergers and acquisition play a very crucial role in the industrial as well as the corporate sector. A company merges or acquires another company so that it can restructure itself which will eventually contribute in the growth of the company. So, to make a merger and acquisition successful pre-merger planning which includes conducting appropriate due diligence proper communication, estimating the actual value of the target company and not overestimating its value are few important steps which should be kept in mind before involving in the process off merger and acquisition. 61% of the mergers and acquisitions are not successful because it lacks a premature planning. Before the parent company takes the final decision of getting involved in a merger and acquisition it should Prepare a report on these pre-merger steps and on the basis of that report make a final decision whether to get involved in the merger and acquisition of the target company or not.

 

“This article is authored by Kavya Jain, student of UPES, Dehradun”