Impact of Mergers and Acquisitions on market competition

Bhavana Kakad Agnels School of Law, Vashi

Introduction

Mergers and Acquisitions (M&A) are the most important events in the business world that really affect business competition on a large scale. These are basically transactions that involve companies integrating their resources, and operations, meaning one company takes over the other. Such as every coin has two sides so M & A can have beneficial and detrimental effects. It can enhance market competition through innovation and efficiency. When companies merge they usually pool their technologies, finances, and human resources. This merger leads to scale in economies, cost cutting, and increased productivity. They benefit consumers with low pricing and better quality products/services.

On the other side M & A can also reduce market competition by getting rid of competitors. If through any merger a dominant player is created it leads to barriers to entry for new firms and limits the choices of products/services available to consumers. Government regulatory bodies often check M&A transactions to ensure they do not oppress competition. Antitrust laws and regulations are in place in many countries to prevent monopolies and promote fair competition. Regulatory approval is typically required for mergers that could significantly reduce competition in a market.

Meaning of M&A

M & A are the terms used interchangeably but also have different definitions; they both terms refer to the amalgamation of businesses. The annotation of the word merger is the joining of two or more companies to create a larger business. While the Competition Act of 2002’s Section 2(a) defines acquisitions as either directly or indirectly purchasing or agreeing to buy (a) any enterprise’s shares, voting rights, or assets, or (b) any enterprise’s who controls management or control over its assets.

The term “M & A” refers to the area of corporate finance, management, and corporate strategy that normally deals with the buying, selling, and combining of different companies that can finance, assist, or help an enlarging entity in a given industry to grow rapidly without the need to create any other business entity. It is recurrently noted that mergers and acquisitions are the only corporate competitive strategy to continue a company in the market.

A smaller firm’s business is taken up when a giant corporation acquires a smaller company, this process is known as an acquisition. On the other hand, a merger combines two firms of roughly the same size to continue ahead as one new organization rather than continuing to be owned and run independently.

The economic outlook of M&A

When two massive organizations merge, one of two things happens:

 either the competition is eliminated, or it is marginalized to the point where it soon goes out of business or drops into a lower rung of the competition due to the integrating strength of the two companies’ innovation, client bases, wealth, etc. This market monopolization has several additional effects as well. Once a monopoly-like scenario is created, the market will likely include price markups, price manipulation, total control over output and supply, and a lack of replacements.

Even if the company and its shareholders may benefit, the customer has to pay the price for these arrangements in most cases. Because the whole client base depends on the amalgamated new business, it can hike prices and continue supply and demand. However, a monopoly resulting from a merger can also benefit the expenses and finances the prior firms depended on. Monopolies may produce goods or services at equitable costs if the government controls them through the brace and, at the same time, confining legislation, which is an important element in increasing a nation’s economy.

Reasons for doing M&A

Mergers and acquisitions (M&A) are strategic business activities undertaken by companies for various reasons, which can be categorized into several key motivations:

1. Strategic Expansion: Companies often pursue M&A to expand their market presence or geographic footprint. By acquiring another company, they can quickly gain access to new markets, customers, distribution channels, or technologies that complement their existing operations.
2. Economies of Scale: M&A can lead to economies of scale, allowing companies to reduce costs by increasing their production capacity or spreading fixed costs over a larger revenue base. This effective improvement can enhance monetary and competitiveness.
3. Synergy Realization: Synergies refer to the combined value that two companies can create together that is greater than the sum of their individual parts. M&A activities aim to capitalize on synergies in areas such as operations, technology, marketing, or distribution, which can drive revenue growth and cost savings.
4. Diversification: Companies may seek to diversify their business through M&A to reduce risk and enhance stability. Diversification can involve entering new industries or markets that are less cyclical or have different growth dynamics compared to their current business.
5. Access to Talent and Expertise: Acquiring a company can provide access to skilled employees, managerial talent, or specialized knowledge that is difficult to develop internally. 
6. Vertical Integration: M&A can facilitate vertical integration, where a company acquires or merges with suppliers or distributors along its supply chain. 
7. Financial Reasons: M&A can be driven by financial considerations such as achieving tax efficiencies, accessing capital markets more effectively, leveraging financial synergies, or optimizing capital structure.
8. Market Positioning and Competitive Advantage: Acquiring a competitor or complementary business can enhance a company’s market position and competitive advantage.
9. Response to Industry Trends: In rapidly evolving industries, companies may use M&A as a strategic response to industry trends such as technological advancements, changing consumer preferences, regulatory shifts, or disruptive competitive threats.
10. Unlocking Shareholder Value: M&A activities are often driven by the goal of enhancing shareholder value. By executing strategic transactions that generate growth, improve profitability, or increase market valuation.

Positive and Negative effects of M&A 

When considering the impact of mergers and acquisitions (M&A) on market competition specifically, the effects can be nuanced and have implications for consumers, competitors, and the overall market dynamics. Here are the positive and negative impacts on market competition:

Positive Impacts on Market Competition:

1. Enhanced Efficiency and Innovation: M&A can lead to improved efficiencies through economies of scale, better resource allocation, and streamlined operations. This can result in lower costs and prices for consumers, driving competitive pressures on other market participants to innovate and improve efficiency.
2. Expansion of Product Offerings and Services: M&A often enables companies to broaden their product offerings or service capabilities. This expanded portfolio can provide consumers with more choices and improved quality, stimulating competition through enhanced differentiation and innovation.
3. Market Entry Barriers and New Entrants: In some cases, M&A can reduce barriers to market entry for new competitors. For example, divestitures or regulatory conditions imposed on mergers may create opportunities for new entrants to enter previously concentrated markets, fostering competition.

Negative Impacts on Market Competition:

1. Reduced Number of Competitors: M&A transactions can reduce the number of independent competitors in a market, leading to increased concentration and potentially reducing competitive pressures. This may result in higher prices, reduced incentives for innovation, and diminished consumer choice.
2. Increased Market Power: Consolidation through M&A can create dominant market players with significant market power. This may allow them to influence pricing, terms of trade with suppliers, and access to distribution channels, potentially reducing competitiveness and harming smaller competitors.
3. Barriers to Innovation and Disruption: Highly consolidated markets resulting from M&A may discourage innovation and disruptiveness. Larger firms may be less inclined to take risks or invest in disruptive technologies or business models, limiting the pace of technological advancement and market innovation.
4. Regulatory and Legal Challenges: Mergers that significantly reduce competition may face scrutiny from regulatory authorities. Antitrust concerns may lead to conditions being imposed on the merger or even block it altogether to preserve competitive market conditions.

Benefits of M&A

• Future market share growth
• Increase in profit and innovation
• Fresh asset and human capital of rival company
• Brand image
• Goodwill

RECENT M&A IN INDIA

As of my last update in January 2022, several significant mergers and acquisitions (M&A) have taken place in India across various industries. Here are a few case laws from recent years:

1. Reliance Industries Limited (RIL) and Future Group: One of the most talked-about deals was RIL’s acquisition of Future Group’s retail, logistics, and warehousing assets. This acquisition was part of RIL’s strategy to strengthen its position in the retail sector.
2. Tata Group and BigBasket: Tata Digital, a subsidiary of Tata Sons, acquired a majority stake in BigBasket, one of India’s largest online grocery platforms. This move was aimed at expanding Tata Group’s presence in the e-commerce and grocery delivery space.
3. Clix Capital and CG Power: Clix Capital acquired a majority stake in CG Power and Industrial Solutions Ltd. This acquisition was significant in the power transmission and distribution sector, aiming to consolidate operations and improve financial health.
4. Piramal Enterprises and DHFL: Piramal Enterprises acquired Dewan Housing Finance Corporation Limited (DHFL) through the bankruptcy process. This acquisition was crucial in the financial services sector, addressing issues related to non-performing assets and enhancing Piramal’s presence in housing finance.
5. Zomato and Uber Eats India: Zomato acquired Uber Eats India to strengthen its position in the online food delivery market. This acquisition consolidated Zomato’s market share and expanded its customer base and restaurant partner network.