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When an Indian company is merged into a foreign company, the former loses its identity and its shareholders obtain automatic right to the foreign company's shares. The idea is that every Indian shareholder would receive Indian Depository Receipts or foreign securities in lieu of his shares. In the former case,
the Indian shareholder becomes a member of the foreign company. As for the latter, he becomes a holder of security with a trading right in India.

Decision to Mergers

In order to assess the right time to merge, each company must identify its strategic direction after thoroughly analyzing its strength, weaknesses, opportunities, and threats (SWOT). The process contains the following elements:

The Right Merger Partner

Within the context of a strategic plan, the right merger partner will offer one or more of the following attributes:

1. Product diversification
2. Cost reductions on a per - dollar - of- assets basis
3. Geographic expansion
4. Expertise in an area of service that has been targeted through the strategic plan.

Reasons Supporting Merger

1. Economies of scale: When two or more firms combine, certain economies are realized due to the larger volume of operations of the combined entity.

2. Strategic Benefit: While opting for expansion, it would be better to acquire a firm already engaged in that industry rather than internal expansion as it offers an edge over the competitor gives a special timing advantage and involves lesser risk and cost.

3. Complementary Resources: If two firms have complementary resources, it may make sense for them to merge. This would enhance their standing in the market.

4. Utilization of Surplus funds: A firm may generate a lot of cash but may not have the opportunity for profitable investment. Such a firm must distribute generous dividends and in some cases even buy back its shares. But mostly management has the tendency to invest further even where it is not profitable. Here, a merger with another firm involving cash compensation is a good option.

5. Tax benefit: It helps to use the losses as a tax write-off to offset the profits, while expanding the corporation as a whole.

6. Reducing Operation Cost: Major manufacturers buying out a warehousing chain in order to save on warehousing costs, as well as making a profit directly from the purchased business. Pay Pal's merger with eBay is a good example, as it allowed eBay to avoid fees they had been paying, while tying two complementary products together.

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* Contributed by: -
Prof. M. Guruprasad is Senior Faculty for Economics, Finance and Research, with AICAR Business School Raigad / Mumbai. He has more than 15 years of experience in research and educating / training management students. He was research scholar with the University of Mumbai. Worked as Executive in the Marketing research industry. Also Conducted Workshops and Training programmes. He has published articles in various industry magazines, newspapers and has initiated many discussions on academics.