Can Frequent Mergers and Acquisitions lead to a Monopoly Market?
The Article ‘Can Frequent Mergers and Acquisitions lead to a Monopoly Market?‘ by Soubhratra Bhattacharjee is a comprehensive analysis of the impact of frequent mergers and acquisitions. The author endeavours to explain how the corporate giants are gradually entering every sector of the business industry thereby creating a monopoly. The author has also discussed mergers and acquisitions in… Read More »
The Article ‘Can Frequent Mergers and Acquisitions lead to a Monopoly Market?‘ by Soubhratra Bhattacharjee is a comprehensive analysis of the impact of frequent mergers and acquisitions. The author endeavours to explain how the corporate giants are gradually entering every sector of the business industry thereby creating a monopoly. The author has also discussed mergers and acquisitions in light of the Competition Act.
Zee Entertainment and Sony India Merger, Vodafone and Idea merger, and various other deals regarding merger have been elucidated in this article. Adani-Holcim deal is the major example that reflects the effect of mergers and acquisitions leading to monopoly in the entire business world.
Introduction: Can Frequent Mergers and Acquisitions lead to a Monopoly Market?
Mergers and Acquisitions have been quite a popular business strategy in recent years not only in India but throughout the world. There have been some famous acquisition deals in the past one or two years like the Amazon-Future deal, and the Tata-Bigbasket deal and the list continues.
The article analyses the business strategy of the corporate giants for creating a monopoly market through the process of mergers and acquisitions. Placing high emphasis on the Indian Subcontinent, the country has seen a figure of approximately 310 billion dollars between 2015 to 2019 while 60% of the amount had been generated from acquisitions and mergers between industries, telecoms, media, and energy. As a result of these, India was placed 63rd in World Banks’ Ease of Doing Business marking a significant improvement.
No matter how interesting these M&A deals get, are they a final solution to a successful business revolution, and what does the future hold if every sector of a country is controlled by two or three corporate giants? This article, thus emphasizes the relation between constant mergers and acquisitions and a monopoly market.
Definition of Mergers and Acquisitions
The terms “Mergers and Acquisitions” are often used in the same context but they still have slightly different meanings. Mergers or Acquisitions can be understood as a combination of two companies where one company is completely absorbed by the other.
While in a more specific way, a merger can be defined as the combination of two companies, approximately of the same size, to join forces as a single company rather than operating individually. For example, in the year 2018 Vodafone India and Idea Cellular merged with a deal of around 23 billion dollars and they re-branded themselves to be known as ‘VI’.
In case of an acquisition, one company acquires the other company and establishes itself as the new owner of that company. For example, In the year 2020, the food delivery app ‘Zomato’ acquired ‘Uber Eats’ for an amount of Rs 2485 Crore in return for a 10% stake in Zomato.
Competition Act and Mergers and Acquisition: Correlation
Competition in the corporate market brings about innovation, lower prices, innovative products, and many more changes. Throughout the last century, there were a huge number of competition laws being made and almost all of them had merger control provisions. The main objective behind the legislation of the Competition Act was to ensure that fair competition is maintained in the market and no one company can enjoy a monopoly throughout.
Various companies, especially the corporate giants have a desire to acquire a monopoly or substantial market power even if it is for a brief period and most of this power comes from the process of Mergers and Acquisitions (M&A). Merger and Acquisitions, on one hand, brings about development and innovation in the company resulting in better products and services, however, too much of Acquisition by a single company can lead to a monopoly situation where the company can increase prices and reduce the outputs of their products thereby forcing the consumers to buy their products at an exorbitant price. The Competition Act ensures that nothing of this sort takes place.
The International Competition Network, an association of global competition authorities had mentioned that straightforward cases should be dealt within six weeks and complex cases should be dealt within six months.
In India, the Competition Act 2002, prescribes a maximum of 210 days for the determination of combinations which includes mergers, acquisitions, amalgamations, etc. The law states that the compulsory wait period is either 210 days from the filing of the notice or order of the Commission whichever is earlier. In case the Commission approves the proposed combination on the 30th day of any month, it can take effect on the 31st day. The internal time limits within the overall gap of 210 days are proposed to be built into the regulations so that overwhelming proportions of mergers would receive approval within a shorter period.
However, all proposed combinations are not to be reported to the Commission as the law prescribes certain threshold limits which are very high compared to the limits in other countries.
Mergers and Acquisitions for Monopoly
By reading the definitions of Mergers and Acquisitions, we get an idea that the concept can lead to a monopoly if it is not kept in check. Frequent mergers and acquisitions can lead to the blockage of a new entry into the market and all the companies will have an identical price mechanism. In such cases, the merged company acts as a price-setting, multi-plant monopolist facing a residual demand function given by the market demand function less the supply function of the non-merged company remaining in the market while the non-merged company acts as price takers, producing where marginal cost equals the price set by the merged firms.
However, it is the promoter who faces the most problems as it is he who has to determine the extent of monopoly and how many companies to acquire for the purpose of wealth maximization.
The main objective of such mergers and acquisitions is to eliminate the size of the competition in the market and increase the residual demand. The ultimate result of such acquisitions is that the merged companies can now increase their prices and their operating profits will also increase. The present value of the increase in profits is the marginal benefit to the promoter of the acquisition.
In India, Reliance can be taken as a player that has entered almost every sector of the market. In recent times, the Mukesh Ambani-led company launched the Jio which changed the business policy of the entire telecom industry. The company has further entered into the agricultural sector by setting up stores such as ‘Smart Bazaars’ and in a very recent case, it has acquired the Future Group thereby getting the ownership of the ‘Big Bazaar’. The case has been discussed in detail in the next sub-topic.
Future Retail Ltd v. Amazon Com Investment Holdings LLC (2020 SCC OnLine Del 1636)
In 2019, the US e-commerce site Amazon informed the Competition Council of India that it had proposed to acquire a 49% stake in Future Coupons, owned by India’s second-largest retail group, The Future Retail. By this deal, Amazon would have a 3.58% stake in Future Retail, which Reliance Industries had planned to acquire for a sum of Rs 25,000 crores.
The dispute comprises a challenge to the sale of retail assets worth USD 3.38 billion to Reliance Industries by the Future Group. The main ground of contention for Amazon was that such a transaction was in violation of the Shareholders Agreement entered between Amazon and the promoters of the Future Retail Group.
The provisions of the Shareholders Agreement mentioned that Amazon is to secure 49% of its share capital. It further contained a list of ‘restricted persons’ with whom Future Group cannot enter into an agreement. Despite this, Future Group agreed to sell some of its assets to Mukesh Ambani-owned Reliance Group to save itself from becoming insolvent. Through this acquisition, Reliance not only acquired Future Groups assets but also its liabilities amounting approximately to Rs 12,800 crores.
To this Amazon contended that the Future Group was in violation of the Shareholders Agreement as Reliance falls under the category of restricted persons. In return, the Future Group contented that it is Amazon that stands in violation of the Foreign Exchange Management Act and the FDI Rules. It further contended that Amazon by creating protective rights is transgressing into controlling Future Retail which requires Government approval otherwise they would be in violation of the FEMA-FDI rules.
The Future Group was dissatisfied with the Emergency Arbitrator’s award and filed a petition in the Delhi High Court, where the Court was of the decision that the suit filed by the Future Group was maintainable but they were not entitled to any injunctive relief as sought by way of the suit. This decision of the Delhi High Court was a partial win for Amazon and as a result, an appeal was filed before the Division Bench by the Future Group.
The Division Bench however directed a stay on the implementation of the status quo order passed by the learned Single Judge as the bench was of the opinion that statutory bodies like NCLT, CCI, and SEBI should not be prevented from doing their statutory duties in accordance with the law.
As a result of this decision, Amazon filed a special leave petition before the Supreme Court of India. However, the Supreme Court refused to comment on the disputed transaction, and in the interim period, it directed the NCLT to continue assessing the merger but not to come to a conclusion.
The Adani-Holcim Deal
Gautam Adani, the founder of the Adani Group, has emerged to be one of the greatest businessmen of all time surpassing names like Mukesh Ambani and Warren Buffet. The Adani-Holcim deal is considered to be India’s largest merger and acquisition transaction in the infrastructure and material space.
This deal is a very important example that soundly proves how mergers and acquisitions can create a monopoly situation in the entire business world.
In this deal, the Adani Group had acquired a controlling stake in Holcim AG’s cement business in India in a 10.5 billion dollar deal (Rs 80,000 crore) making it the largest M&A deal in the country and making the Adani Group the second-largest cement producer in India.
This acquisition deal helped the Adani Group to move beyond its core business of operating ports, power plants, etc, and enter into areas like airports, material, and infrastructure space.
The two cement giant companies, Ambuja Cements, and ACC Cements had a production capacity of around 70 million tonnes of cement per annum making them the second and third largest producers of cement in the country. Through this acquisition deal, the Adani Group has now become the second-largest producer of cement in the country and is only behind Aditya Birla Group’s Ultratech Cement.
This deal proves how mergers and acquisitions help in removing competition and set up a perfect stage for monopoly. Analyzing this Adani-Holcim deal will show us how suddenly a company whose main area of business was to operate ports, became a giant in the infrastructure space by becoming the second-largest producer of cement in India.
Apart from the above two major deals, there were numerous mergers and acquisitions that took place in the past few years. Some of them have been mentioned in the next sub-topic.
Other Mergers & Acquisitions Deal in India
The acquisition of the Reliance group over the Future Group and the Adani-Holcim deal was in the limelight for a long period of time. However, there were many other M&A deals that took place which are as follows:-
1. Zee Entertainment and Sony India Merger
This merger between Zee Entertainment and Sony India is an important merger as both are the biggest media companies in India. As per the agreement, Sony India Ltd will spend around 1.575 billion dollars on the newly merged company.
2. Vodafone and Idea Merger
The merger between Vodafone and Idea was mainly influenced after Mukesh Ambani’s Jio entered the telecom industry. It is a beneficial agreement as Vodafone now owns 45% of the combined firm while Aditya Birla Group owns 26% and the rest is owned by Idea.
3. Tata Steel’s Acquisition of Corus
Tata Steel is the largest steel firm in India and Corus is Europe’s second-largest steel company. The acquisition of Corus by Tata Steel made the company the fifth-largest steel producer in the world for an amount of 12.02 billion dollars.
4. Walmart’s Acquisition of Flipkart
The acquisition of Flipkart by Walmart marked its entry into the Indian market. It paid a whopping amount of 16 billion dollars for a 77% interest in Flipkart.
5. Tata Motors Acquisition of Land Rover
Tata Motors 2008 announced that it had completed the acquisition of two British brands, Jaguar and Land Rover from Ford Motors, for 2.3 billion dollars. This helped Tata Motors to become a global player in the automobile industry.
These are some of the most important mergers and acquisitions that took place a few years back. Other than these, there are hundreds of M&A deals going on in the market led by some corporate giants, both international and national. The list continues for such deals.
With the presence of Corporate giants, new companies are not willing to or are not being able to compete irrespective of their products, prices, etc and these things result in those companies’ acquisitions or mergers. Monopoly, in general, is used when there are no competitors in the market for a particular product or service.
Take the example of Adani Group which has now entered into every industry and is now enjoying a strong power by which they are maximizing its profits and creating a sole ownership situation. The same strategy is being used by the Reliance Group and the Tata Group as well which have entered every sector of the industry.
Mergers and Acquisitions are beneficial to companies as they contribute to the further development of the company and the creation of new products. However, such frequent mergers and acquisitions especially by a select few corporate giants leave the consumers with no choice but to buy the products of their company only. The option of choice and selection will be no longer available to the consumer.
Thus frequent mergers and acquisitions will lead to a monopoly situation not only in the country but globally and the laws should be stricter in order to control or prevent such a situation.