The rapid course to be adopted by SSIs to become big is through mergers and acquisitions. The recent case in sight is that of the JVG Group, the leader amongst the latest corporate raiders. JVG's sole proprietor V K Sharma, a material supplier to Swadeshi Polytex Ltd. till 1979, started a small company JVG Finance Ltd. in 1989. It assumed control over 3,000 small firms with only two limited companies initially. It went on a take-over spree in 1992 with the acquisition of San Tosha Resorts (Meerut) and in 1993, India Caro Oil, an oil extraction unit from Dalmias and two newspapers based in Patna. It has plans to acquire a DMT unit from Orkay Industries, hotels from JP Industries, etc. To enlarge its base, it has diversified into various other activities by promoting new companies and starting new businesses.

Thus, within less than a decade, a small set-up with a total worth of Rs 3 crore has turned into a banyan tree primarily through the route of business combination i.e. take-overs and acquisitions. We have in sight big groups like the RPG Group, Manu Chhabria-SWC Group etc. which started small but registered rapid growth and expanded business only on the strength of take-overs and acquisitions.

Having been inspired by the growth of these enterprises, how can the SSIs benefit from mergers or acquisitions? SSIs can avoid sickness on account of resource constraint, plan their survival and growth through combined efforts if they pool their financial and other resources together. Their growth could be horizontal, vertical, circular or conglomerate depending upon their need to expand and the favourable opportunities available at their command for their expansion and growth. In each of these four types of combinations, the combining firms obtain different advantages and strategic positions.

Through vertical combination, a firm is benefited when the merger is motivated to expand espousing backward integration to assimilate the sources of supply of input material and/ or forward integration towards market outlets. In other words, in vertical combination, the merging undertaking would be either a supplier or a buyer using its product as intermediary material for the final production. This type of combination should be adopted to gain a strong position when the company faces an imperfect market for the intermediary products, scarcity of resources and input material.

In the horizontal combination, the merging firms are producing competitive goods and may be having similar production processes i.e. both the acquiring firm and the target company belong to the same industry. The main purpose of such acquisition is to obtain economies of scale in production by eliminating duplication of facilities and operations and broadening the product line, reduction in working capital investment, elimination of competition, avoiding concentration in product, reduction of advertising costs, increase in market segments and exercise of better control on market. Many of these factors may contribute to sickness in the firm which could be avoided through merging firms.

Companies under the circular combination are those producing distinct products but in the absence of distribution channels may face threat of closure. Amalgamation provides opportunity to them to share common distribution and research facilities to obtain economies by eliminating cost on duplication and promoting market enlargement. The acquiring company obtains benefits in the form of economies of resource sharing and diversification.

In the conglomerate combination type of amalgamation, two companies engaged in unrelated industries combine to make full utilisation of financial resources and enlarge debt capacity through reorganising their financial structure so as to enhance the earnings and lower the average cost of capital. Merger enhances the overall stability of the combined acquirer company and creates balance in the company's total portfolio of diverse products and production processes.

Thus, the financial position of small firms is strengthened through mergers and the proprietors of amalgamating companies are benefited through pooled mobilisation of resources and resultant enhanced performance and profitability. On merger, the proprietors of the merging firms can continue in business in the reorganised firm to share the profit in proportion of their contribution in the form of assets of firms.

What are the different steps needed in arranging mergers or take-overs in the case of small-scale enterprises? Different steps for accomplishing merger or acquisitions by the SSIs/SSEs are planned depending upon their organisational constitution—whether the SSIs/SSEs are sole proprietorship or partnership firms or limited companies. Most SSIs/SSEs are organised in the form of sole proprietorship or partnership firms.

Merger of sole proprietorship firms is the easiest. Like-minded proprietors can through written agreement combine their assets after valuation and fix-up their ownership interest in the business in proportion of their contribution in terms of tangible and intangible assets on the basis of valuation arrived at through mutual consent. They can turn sole proprietorship firms into a single partnership firm by entering into a partnership deed and getting the firm registered with the Registrar of Partnering Firms under the Indian Partnership Act, 1934, or by incorporating a private limited or public limited company under the Companies Act, 1956, seeking the help of the chartered accountants. On amalgamation, the name of the firm may or may not change, but it should seek re-registration with the local authorities under the Shop & Establishment Act, Factory Act, Weight and Measure Act, Sales Tax/Excise authorities etc.

Similarly, two or more partnership firms can combine their resources, assets and liabilities, on the basis of their values arrived at with mutual consent to make a big partnership firm or can incorporate a company under the Companies Act, 1956, as aforesaid. Each partner will be a shareholder in the newly incorporated company and shall hold equity shares in terms of their contribution in the form of assets of the merging partnerships firms. Their assets should be valued through a reputed firm of chartered accountants and such valuation acceptable to all the partners of the combining firms.

Action under the local Act as indicated above is warranted and should be taken as per requirement of the laws. Depending upon the mutual agreement the merging sole proprietorship or partnership firm can have their works at different locations under the name of the new firms or surviving firm.

Lastly, amalgamation of listed companies is done as per the provisions of the Companies Act, 1956, and the same can be done under the expert guidance of financial consultants. The other course open for companies is through acquisition of substantial shares and control; this can be done through negotiations (mutual consent) or without consent through market purchases following the provisions of Acquisition of Substantial Shares and Take-over Regulation, 1997, familiarly known as the SEBI Takeover Code, 1997, under the expert guidance of SEBI authorised Merchant Banker, Category-I. In the case of companies, the amalgamated company loses its existence.

Copyright © 1997 Indian Express Newspapers (Bombay) Ltd.