Types & Structures of Mergers and Acquisitions (M&A)

 Introduction

The combination of two like entities into one is known as a merger, while the takeover or acquisition of one business entity by another is called an acquisition .

There are many types of mergers , including horizontal, vertical, conglomerate, and market-extension mergers, each serving specific business purposes, such as scaling up market reach or streamlining operations.

Proper selection of the structure and approach to valuation is necessary because these factors dictate or affect the success of the transaction and its integration, shaping the future growth and positioning of the company.

Mergers and acquisitions are strategic business tools that help businesses enhance growth, diversification, and gain an edge over the competition.

Mergers and Acquisition (M&A)

Mergers and Acquisitions (M&A) is the strategy where one company merges with another; that is, two companies merge into one. Or, one company acquires another. Their primary goals are to create more value, extend market space, acquire new technologies, enhance efficiency, or reduce competition.

Mergers: A merger is the combination of two firms of similar size and scope into a new firm. For example, a technology company that only owns complementary products can merge with another company in this sector , allowing both companies to add customers and resources under one roof.

Acquisition: An acquisition occurs when one firm, the acquirer, buys the majority or 100 percent of the shares of the target company to assume control. The acquired firm may continue as a subsidiary, while another acquirer absorbs the entire firm.

Types of Mergers and Acquisition

1. Types of Mergers

1. Horizontal Merger: It is the combination of the same-industry or sector companies that are direct competitors. In the modern business world, such mergers are aimed at increasing market share alongside decreasing competition.

2. Vertical Merger: This type occurs between firms on the same supply chain of suppliers and customers, helping to simplify processes , cut costs , and secure supply chains .

3. Conglomerate Merger: This involves firms in unrelated ventures , as the companies seek to expand and subsequently reduce risk.

4. Market-Extension Merger: Companies that sell the same products merge in other markets , thereby expanding their reach .

5. Product-Extension Merger: This occurs between companies with complementary products, thus enhancing cross-selling opportunities.

2. Types of Acquisition

1. Friendly Acquisition: This is an acquisition where the target company agrees to be acquired based on shared strategic goals and financial incentives.

2. Hostile Acquisition: Most often , a private company acquires a public one with the intent of avoiding the lengthy process of going public through an IPO, thereby becoming conveniently publicly listed.

3. Reverse Acquisition: A private company acquires a public one to avoid the lengthy process of completing an IPO; they can become listed on the public market almost immediately.

Structure of Merger and Acquisition

Transaction form Influence on legal and tax effects, liabilities and ease of integration common forms include:

• Asset Purchase: Here, the acquirer buys individual assets-specific with sometimes associated liabilities of the target company. Such structure is widely adopted when not all of the business or only specific assets are needed.

• Stock Purchase: The acquirer will buy the shares of the target; this means the acquiring now owns all the assets and liabilities attached to the acquired company.

• Merger: The acquiring firm takes over the acquiring one and thus makes the latter cease to exist as an independent entity.

• Consolidation: The two firms combine, and a new company emerges. In this case, both the earlier units will be dissolved.

• Tender Offer: The Acquirer makes an offer to acquire the existing shareholder’s shares at a higher price than the existing market price as a premium.

Valuation Techniques of Mergers and Acquisition

Valuation is an important element in any transaction. There are various methods, depending on the nature of companies involved, which might be slightly different as follows:

1. Comparable Company Analysis

• Comparison of financial metrics of the target company with other firms similar to it.

• It generally uses multiples such as Price-to-Earnings (P/E), Enterprise Value-to-EBITDA, etc. to arrive at an estimated value. 

2. Precedent Transaction Analysis

• Studies previous M&A transactions of such companies to arrive at an appropriate valuation.

• This will help in understanding the market trend and the premium that is normally paid for acquisitions of similar scale.

3. Discounted Cash Flow (DCF) Analysis

• It projects the future cash flows that the target is likely to generate and then reflects them in discounting at present value, characterizing the risk profile of the company and the market conditions.

• It is very often used because it does generate a rather detailed approach but is sensitive to assumptions.

4. Leveraged Buyout (LBO) Analysis

• Commonly used in debt financing acquisitions; it is predominantly associated private equity.

• It values the company on the possible return after debt leverage and improvement of operational efficiencies.

5. Net Asset Value

• This is a common technique used for asset-heavy companies where the target is valued mainly on its net assets, that is, assets minus liabilities.

• This approach is useful when the assets have more value to an organization than their earning power.

Conclusion

Mergers and acquisitions represent a strategic and transformative way in which companies can evolve . M&A transactions enable companies to grow and strengthen their market presence when properly planned , valued, and strategically aligned . Therefore, succeeding in M&A depends on preparation and integration , which cover new business opportunities while improving efficiency and providing long-term advantages.