Will A Merger Create Wealth For You? Here's How To Tell

The announcement of the merger between HDFC and HDFC Bank and a slew of other mergers and acquisitions in recent times have put spotlight on this space. In this cover story, we explain to you why mergers and acquisitions happen, how key M&As in the past have fared and how you can evaluate a merger. After reading this story, you will be able to understand the complexity of this process and decide what to do should your portfolio stock goes through a similar event.

- Arul Selvan, Karthik Anand Vijay and Udhayaprakash

Understanding M&As

Here is a set of FAQs that will help you understand the why and the how of mergers and acquisitions

What are M&As?

Mergers and acquisitions (M&As) refer to various corporate actions wherein an entity (called the acquirer) purchases another entity (acquiree/target). Although the terms ‘merger’ and ‘acquisition’ are used interchangeably, they actually mean different things. In the case of an acquisition, the acquirer purchases the target but continues to keep the target as a separate legal unit. On the other hand, in the case of a merger, one entity is merged into another entity.

What are the motives behind M&As?

Companies go for mergers and acquisitions due to a number of factors, some of which are as follows:

SECURING RAW MATERIALS: Most companies need some form of raw materials for the smooth functioning of their operations. These raw materials are not only crucial but could also be scarce and sold by a very few entities. Therefore, some companies choose to execute an outright purchase of their suppliers to ensure uninterrupted access to raw materials. This form of M&A is known as ‘backward integration.’ For example, Hindalco acquired Ryker Base in 2021 for ₹323 crore to strengthen its copper-rod manufacturing capacity.