When acquisition and mergers happen in an organization, it follows such a strategy by and large. This is mostly when companies want to increase their geographical reach or add to market shares and the efficiency associated with it.
Most commonly, M&A activity describes the combination of companies or assets through the various forms of financial transactions. In theory, mergers and acquisitions look very similar, but in reality, they are very different in form, approach, and impact.
This article discusses M&A in an elaborate way that includes types of mergers and acquisitions, the process involved, advantages and disadvantages, structures, valuation, financing methods, impact on shareholders as well as outstanding M&A deals.
1. Types of Mergers and Acquisitions
Whether merger or acquisition, both academized lives have their own categories; the dominant ones being:
1.1 Mergers
- A merger takes place when two companies merge and form a new entity, most of the times sharing the same vision, goals, and operations. Involving two companies that have relatively equal bargaining power, they both agree to form a new company representing both parties.
- Types of Mergers:
- Horizontal Merger: This is a process whereby two firms that operate in the same industry or sector merge. It usually achieves economies of scale, lowers competition, and raises market share. For instance, pharmaceutical companies can obtain a higher variety of products and delivery channels by acquiring two such firms.
- Vertical Merger: This is the merger of companies that are at different levels of the production process, including the supplier and customer. This is done to streamline operations or cut costs in the supply chain or even combine better at the production process level. For example: an automobile manufacturer merging with a company that manufactures tires for automobiles.
- Conglomerate Merger: This is the fusion of two companies operating in different industries. Normally, it is done to raise portfolios while eliminating risks. For example, one company dealing with food merges with another company dealing with technology.
1.2 Acquisition
- This is an acquisition process that happens when a company buys another through the purchase of either majority shareholding or acquisition of assets from the latter. In acquisition, it is really one way: the acquiring company acquires the acquired company. Such an acquired company may then be absorbed into the bigger entity or may be allowed to continue as a subsidiary.
- Types of Acquisitions:
- Friendly Acquisition: This is a process in which the acquiring company is said to have a friendly agreement with the target firm. The process is negotiated between both parties, and this usually takes place in a smoother process because they both agree on terms.
- Hostile Acquisition: This is an act when an acquirer forces his target company by controlling over without gaining an agreeable word of its owners. This type normally involves direct tender to target’s shareholder.
1.3 Takeovers
- Takeover refers to a general term that describes the process through which one company acquires another. Sometimes it is friendly, sometimes hostile. Takeover in general refers to the acquisition where the target company becomes a subsidiary under the parent company.
2. The M&A Process
The M&A process may be complex with its various stages. Here’s step by step:
2.1 Pre-M&A Planning and Strategy Formulation
A company establishes its goals like increasing its market share, acquiring a new technology, or entering into new markets before entering into the M&A process. It then develops a strategic approach to determine the targeted acquirer or the target in the transaction and determines its goals for the transaction.
2.2 Target Identification and Due Diligence
- After setting the strategic objectives, the parent company decides which companies to buy. The process of identifying these companies involves research and analysis of various firms that can help in attaining the strategic objectives. Due diligence is a part of this step in which the acquiring company examines the financial condition, legal complexities, market position, and efficiency on the operational level of the acquired company in search of numerous risks or liabilities.
2.3 Valuation
- The valuation process is what determines the price of the target company. It involves multiple approaches, which include DCF, market comps (comparable company analysis), and precedent transactions.
2.4 Negotiation
- Once the objective is selected, the acquiring company begins to negotiate the terms of the transaction. This includes the purchase price, finance, and form of transaction. The discussions may also involve the considerations related to the future management structure, role of employees, and integration in the process of negotiation
2.5 Closing a deal
- Letter of intent, LOI, or MOU following negotiation. All the major terms are agreed upon by both sides. This is a formative signing of the agreed deal for a merger or an acquisition. Subsequent regulatory approval is sought and received, if necessary, to close the deal.
2.6 Post Merger Integration
- Once the deal is closed, the companies need to merge their operations, cultures, and systems. This integration is the most important phase to realize the synergies that are expected to occur during the merger or acquisition. It may pose problems like corporate culture alignment, operation streamlining, and employee transition.
3. Advantages and Disadvantages of M&A
3.1 Advantages
- Fast Expansions through Market, Clients, and Products: Expansion in M&A is also found through acquiring new markets and clients without having to go through the process of new buildup as if it were a freshly started company.
- Synergy: Mergers and Acquisitions can combine many strengths, for example, cost-cutting, operating economies, or innovation. For example, a horizontal merger will result in cheaper operating expenses using the economy of scale because of its size.
- Access to New Technologies and Resources: A company with advanced technology or specialized knowledge can be acquired to give a competitive edge and speed up innovation.
- Diversification: M&A can be an outlet that provides diversified products or services, diversifying risk by venturing into other sectors or industries.
- Improved Market Power: Combined forces can enhance the merged firm’s market share, thus reducing competition and increasing the pricing powers.
3.2 Negative Points
- Cultural Conflicts: There is a possibility that conflicts and low morale among workers might arise from differences in corporate culture of both organizations. Integration often happens to be the most challenging stage in the process.
- Expensive and Debt: M&As are capital intensive especially when funded through debt. The target company may incur substantive debts which can drag its financial condition if the acquired venture fails to give results as desired.
- Antitrust Issues: Huge M&As particularly within concentrated industries often attract some scrutiny due to the spectre of competition reduction and a probable monopoly.
- Integration Risks: No matter how financially beneficial a merger or acquisition may seem, the practical integration challenges of systems, processes, and teams can delay or lessen the potential benefits.
4. M&A Structures
M&A transactions can be structured differently depending on the type of M&A transactions can have different structures depending on what kind of deal is required and what the goals of both parties are. The most common structures include:
- Asset Purchase: This is where an acquirer acquires the assets, and these are owned by the target: for example, its equipment, inventory, and intangible property. At this type of structure, it will most probably occur once the acquiree does not want to pay the liabilities of the acquirer.
- Stock or Share Purchase: In a stock purchase, the acquiring firm buys the stocks of the target company, bringing along all liabilities.
- This is more direct in cases where one buys the entire business.
- Merger of Equals: Here the two firms combine to make a new firm where none takes dominance over the other, normally observed in horizontal merger.
- Leveraged Buyout (LBO): This takes place when a firm acquires another company with high degrees of borrowed money. This, by itself, implies that the assets of the acquired firms are normally put up as collaterals to secure the debts so that the parent firm must be able to raise sufficient cash from cash flows generated in the target company.
5. Valuation in M&A
One of the major steps of an M and A process involves Appraisal or Valuation. Quite a few techniques would result in value derivation, through which one could come to the value of the target company, and would differ based on the nature of transaction as well as that of information available.
- DCF Analysis: This is a prediction of future cash flows from a target company, discounted to their present value using a discount rate that reflects the risk associated with the investment.
- Comps or Comparative Company Analysis: Under this method, a comparable is taken of the target company and others that are publicly traded in the same industry. In estimating value in this method, key financial metrics such as P/E ratio, P/S ratio and EV/EBITDA multiple are applied.
- Precedent Transaction Analysis: This method uses precedent deals conducted within the same industry for estimating a fair value to the target company.
6. Financing an M&A Deal
M&As can be financed in many ways. Among some of them include:
- Cash: In this case, the acquiring firm will pay the target company in cash. The method is rather straightforward and avoids the intricacies of issuance of stock.
- Stock-for-Stock: This would be in the format whereby the acquirer company would provide their shares to the shareholders of target company for theirs. Outflow of cash is thus avoided, and it is likely to be preferred where shares held by the acquiring company are of high value.
- Debt Financing: The firm will use debt in funding the transaction by accessing bank loans or bond issuance. This strategy is mainly practiced in the leveraged buyouts, but it augments the financial leverage of the buying firm.
- Hybrid Financing: Hybrid financing employs a combination of cash and equity with debt financing by the deal. This technique will help the buyer strike an optimal balance between liquidity and leverage.
7. Impact on Shareholders
Shareholder considerations heavily rely on the M& A structure. Ordinarily, shareholders in the target company would reap a premium for shares, resulting in short-term income. In the case of stock-for-stock transactions, shareholders from the acquiring firms would experience equity dilution. The variation of shareholder wealth with time would be based on the success of the merger or acquisition as well as the firm’s ability to capture synergies and enhance operating performance while delivering shareholder returns.
- For Target Company Shareholders: In general, a premium paid is in shares of the Target Company. That premium then represents dollars and cents the acquiring firm is willing to pay for the control of the Target Company.
- To Acquiring Company Shareholders: The shareholders might get diluted in the event that the deal is funded through stocks issuance. Still, in case the merger or acquisition eventually goes through successfully, this will translate to a better market share, higher profitability, and hence a better value to the shareholders.
8. M&A Differences: Merger vs. Acquisition
It is essentially the fact that the merger and acquisition are different from each other on certain parameters:
- Structure: Most mergers occur between two companies of similar status so as to form a new firm while acquisition usually involves just one rather than two firms taking over another.
- Ownership: In a merger, shareholders of both organizations own shares of the newly created entity. In contrast, in acquisition, shareholders of the acquired firm are bought out typically.
- Management Control: Usually, a merger has joint management control, and an acquisition takes the management completely from the acquirer.
9.Notable Mergers and Acquisitions Examples Disney and Pixar (2006):
Disney purchased Pixar for $7.4 billion. The purchase would help strengthen the strength in animation and intellectual property assets. This allowed Disney, in the future years ahead, to use the technology and innovation from Pixar, where the commercial performance was successful.
- Microsoft and LinkedIn (2016): Microsoft bought LinkedIn back in 2016 for an amount of $26.2 billion. This was one way that Microsoft could add professional networking to the portfolios of productivity and cloud service that it could offer others. Doing so enabled Microsoft to enhance its appeal to all professionals and corporations to increase usage.
- Exxon and Mobil (1999): Merging officially with Mobil, Exxon became one of the largest oil companies globally. Such horizontal merger brought cost efficiencies to both companies while simultaneously achieving a higher operational efficiency due to the increased market power.
Conclusion
Mergers and acquisitions are very potent instruments a firm uses in seeking to drive growth, innovation, and expansion in marketplace. However, M&A deals are complex deals which demand careful planning, thus, due diligence, valuation, and integration.
Despite considerable benefits such as synergies and market power, such M and A transactions often have risks related to clashes in culture, financial burden, and regulatory challenges.
Such forms, structures of valuations techniques and most likely effects on the shareholders are some of the most prominent types of M& A transactions that help improve chances for survival and businesses at long term.
Frequently Asked Questions (FAQs)
1. What is the Meaning of Mergers and Acquisitions (M&A)?
This M&A approach involved joining the various resources, operations, and assets of the companies to improve their competitive edge or efficiency. In a merger, both companies form a new entity while an acquisition is defined as one company purchasing or consummating the entire stake from the other. There are also many other transactions that would carry a set of other goals: gain market share; new technology; improve operation, among others. Thus M&A is an essential piece of corporate strategy which, will impact the industries the market, and the affected parties involved
2. What is the Merger & Acquisition (M&A) Model?
M &A model refers to describe a structure of firms used to process guiding their merger or acquisition activity. These include strategy, valuation, structure, and financing of the transaction. The model describes the M&A transaction process including identify target company, doing the due diligence, valuation business, negotiating terms, and integration of entities. This also entails recognition of the synergies to be gained from the amalgamation of the companies involved that may include cost-cutting, market expansion, as well as innovation. This can be achieved by many M&A models. Based on the strategic needs for the company, mergers can be horizontal, vertical, or conglomerate M&As.
3. What is the M&A Process?
The process of M&A involves activities for example but not limited to the following
- Strategy and Planning: Acquisition Company identifies its objectives for its growth. It determines whether this growth would be a case of a merger or an acquisition.
- Identification and Due Diligence: The Acquisition company identifies actual targets from the due diligence conducted in association with their target based on research relating to its financial standing, its operations and legal compliance, and any kind of regulatory threat.
- Valuation: That involves the process of determining at what price to pay for the target company. That can be done using some or all of the following methods among others, which include; DCF, comparable company analysis, or precedent transactions.
- Negotiation: Once a target is identified normally, there are negotiations between the parties concerning the terms of a deal that may include matters such as price, structure, and the future running of the combined entity.
- Deal Closes: Once the terms are agreed upon, then the deal is closed by legal agreements such as the LOI and signing of the acquisition or merger agreement.
- Integration: This is the final stage wherein operations, culture, and systems of both companies are merged together. This is the most crucial stage in actualizing the synergies and benefits that have been contemplated with the transaction.
4. What is an M&A Example?
The most popular M & A was when Disney merged with Pixar or rather purchased it in the year 2006. It was an all-stock deal through which it acquired Pixar for $7.4 billion. That indeed set down Disney as the giant in the field of animation and would most definitely reap maximum benefit from the high-end technology Pixar boasts, since the whole content would be of a creative nature and will weave itself into the brand name of Disney, which has already made a fortune with some of the productions emerging out of Pixar. Disney has opened up great avenues for synergistic co-production, content distribution, and technology.
5. What Are the Three Types of Mergers?
The three main types of mergers include the following:
- Horizontal Merger: The two firms belong to the same industry, have the same level of production, and merge horizontally. This is usually done with respect to achieving market shares and diminishing rivalry or increasing scales of economy. Examples would include a merger of automobile producers.
- Vertical Merger: This refers to the merger of firms across different levels in the supply chain.. The manufacturer may merge with suppliers or distributors. Vertical mergers cut down on costs while ensuring efficiency and control of supply chain operations. For instance, the refiner could combine operations with a drilling company to facilitate the sourcing of crude oils.
- Conglomerate Merger: It involves the merging of two firms in two different markets. Most are done to diversify risks in other markets. An example is a food firm and technology company.