Mergers and Acquisitions deals in Indonesia are an alternative venture for foreign investors through PT Penanaman Modal Asing (PT PMA). Before conducting M&A deals, foreign companies and investors must stay updated on Indonesia’s Positive Investment List, which outlines eligible business sectors and sets limits on foreign ownership.
What is Mergers and Acquisitions?
According to UU No.40/2007, a merger is a legal action taken by one or more companies to merge with another existing company. Doing a merger means the merging company’s assets and liabilities are transferred by law to the surviving company and subsequently the legal entity status of the merging Company is terminated by law.
Acquisition is a legal action carried out by a legal entity or individual to acquire a company’s shares, resulting in the transfer of the company’s management. In simpler words, a merger is when two or more companies combine to form a new single entity, while acquisition is when a larger company acquires a smaller company.
What is the Difference between Mergers and Acquisitions?
There are differences between mergers and acquisitions, even though both are business transactions that involve the process of combining companies, they differ in these specific aspects:
1. Parties’ scale
- Mergers: two or more companies of similar size and stature come together to form a new entity.
- Acquisitions: a larger company acquires and absorbs a smaller company
2. Decision and agreement
- Mergers: both companies negotiate and agree on the terms of the merger.
- Acquisitions: the acquiring company dictates the terms of the deal and the target typically receives compensation in exchange for their shares.
3. Post mergers/acquisitions
- Mergers: the new entity adopts a new name and brand identity, distinct from the original companies.
- Acquisitions: The target company ceases to exist as a separate entity.
Here are mergers and acquisitions example to make a better understanding of the difference between them:
- A merger happens between Company A and Company B, both are in the same industry and same scale of business. After the merger happens, both dissolve their individual identities and form a new, unified entity called Company C.
- An acquisition occurs, and Company A acquires Company B. Company B ceases to exist as a separate legal entity and becomes a part of Company A. Company A assumes control of the management and resources of Company B.
What is the Purpose of Mergers and Acquisitions?
Mergers and acquisitions are one of the business strategies to increase the value or accelerate growth of the acquiring company. Most of the company’s goals in doing mergers and acquisitions are to enhance the company’s overall position in the market.
Types of Mergers and Acquisitions Transaction
1. Horizontal M&A
This type of merger happens between two or more companies in the same industry and could be a direct competitor.
2. Vertical M&A
Vertical merger happens between a company and its business pipeline such as suppliers or customers.
3. Conglomerate M&A
This type of transaction happens between a company running in unrelated industries and is usually done for diversification.
Mergers and Acquisitions Forms of Integration
1. Statutory
2. Subsidiary
In this form of integration, the merger target becomes a subsidiary company of the acquirer and continues to maintain its business operations.
3. Consolidation
In this form of integration, both companies cease to exist after the deal and form a completely new entity.
Reasons for Mergers and Acquisitions
The reasons why mergers and acquisitions strategies implementations could be covered by many, such as:
1. Growth
- Increasing market share and gaining a stronger foothold in the market.
- Providing a faster track for a company to enter new markets compared to organic growth strategies.
- Allowing expansion of the company’s portfolio and reaching new customer segments.
2. Synergies
- Achieving cost savings through economies of scale, such as streamlining operations, reducing duplicate resources, and leveraging purchase power.
- Increasing revenue opportunities through cross-selling, upselling, and improving market reach.
3. Other reasons
- Acquiring another company to access its skilled workforce, intellectual property, or technological know-how.
- Pursuing vertical integration, involves companies in different parts of the supply chain to gain greater control over costs and improve efficiency.
- Making the company less attractive to a potential acquirer as a defense against a hostile takeover.
Valuation Methods of Mergers and Acquisitions
The valuation process is conducted by both of the parties involved. The acquirer aims to deal at the lowest price possible while the target aims to deal at the highest price. Here are three major methods of valuation for mergers and acquisitions:
- Discounted cash flow (DCF): valuation is calculated on its future cash flows.
- Comparable company analysis: comparing the target company with relative valuation metrics for public companies.
- Comparable transaction analysis: comparing the target company with valuation metrics for past comparable transactions in the same industry.
Types of Mergers & Acquisition Transactions
Merger in Indonesia
All assets and liabilities are legally transferred to the acquired entity. The remaining firms are legally liquidated.
Consolidations in Indonesia
All entities are legally liquidated, all assets and liabilities are legally transferred to a newly formed entity.
Share or Asset Acquisitions in Indonesia
A legal entity acquires shares of assets in a company resulting in a change of control in the acquired entity. There are strict procedures under the Indonesian Company Law, such as a Public Acquisition Announcement, Sale and Purchase agreement, and Deed of Transfer.
Mergers and Acquisitions: Transaction Process
| No | Procedures |
|---|---|
| 1 | The acquirer and the target company prepare an M&A proposal for newspapers. |
| 2 | The target company conducts an extraordinary general meeting of shareholders with at least 75% of shareholders. |
| 3 | Creditors approve the proposed M&A transaction. |
| 4 | Determine the fair market value of the merger shares conversion formula by valuing shares. |
| 5 | Third parties (as required by law and agreements) approve. |
| 6 | Relevant agencies (BKPM, OJK, and Ministry of Law and Human Rights) approve the merging or acquiring of companies. |
| 7 | Any relevant industry regulator gives approval (depending on the business nature of the target company). |
The process of closing a company can take between 1 to 1.5 years to complete. According to Act Number 40 of 2007 concerning Limited Liability Company, the steps to dissolve a company are as follows:
Mergers and Acquisitions: Requirements
A merger plan
Announcement
A deed of merger
Shareholders register
A certificate of collective shares
Approval from the Ministry of Law and Human Rights or other relevant agencies
Business Identification Number
Announcement
GMS resolutions
A sale and purchase agreement
A deed of transfer
Shareholders register
A certificate of collective shares
Approval from the Ministry of Law and Human Rights or other relevant agencies
Business Identification Number
