M&A is an important element of corporate strategy for expansion and growth. The word ‘merger’ means two organizations coming together as one. An acquisition means to takeover or procure something. Merger or acquisition is a process where two firms either collaborate or operate as a single company. In business world, mergers and acquisitions are often known as M & A. Both terms are used loosely to mean the same thing but they are different in meaning. Mergers and acquisitions (M & A) are referred as a business transaction where one company acquires another company.
An acquisition is a legal act where one company takes over the other company, and becomes its new owner. In acquisition both companies may continue to exist but as per law, the acquired company will cease to exist.
A merger is a legal act where two firms come together forming a new company and still continue operating as two individual companies but as per law both the companies dissolve and form another new company.
Types of Acquisitions
- Asset Acquisition: The acquiring company buys the assets of the acquired company.
- Stock Acquisition: The acquiring company buys the stock of the acquired firm.
Types of Mergers
- Horizontal Merger: Two companies agree to merge with similar products/and services and such mergers are often used for a company to increase its market share by merging with competing company.
- Vertical Merger: Two companies are merged along the value chain e.g. a manufacturer merging with a supplier.
- Conglomeration Merger: Two firms in completely different industries merge e.g. a gas pipeline firm merging with a high technology firm. Such mergers take place to diversify the business, smooth out earning fluctuations and achieving consistency in long term growth.
Reasons for M&A
Every merger has its own reasons for combining of the two firms is good business decision. The underlying principle of mergers and acquisitions (M & A) is 2 plus 2 equals 5. The merger of two firms creates additional value which is called ‘Synergy’ value and can take three forms:
- Revenues: Realization of higher revenues than the two companies operate separately.
- Expenses: Realization of lower expenses than two companies operate separately.
- Cost of Capital: Experience a lower overall cost of capital.
Lowering expenses is generally the big reason of business mergers e.g. cost reduction in human resources, accounting, information technology etc. There are strategic reasons for best mergers that include:
- Positioning: Position to take maximum advantage of the new emerging trends in the market place.
- Gap Filling: Fill in strategic gaps due to weaknesses of one company by strengths of the other company for long-term survival in competitive market.
- Organizational Competencies: Improving human and intellectual resources within the company.
- Broader Market Access: Acquire broader market access in the emerging global market
Additional basic reasons for mergers:
- Bargain Purchase: Acquire another company with unused facilities than to invest internally to create new ones.
- Diversification: Diversify products/services through merger to stabilize earnings and growth.
- Short Term Growth: Action from management to improve poor performance through merger and acquisition.
- Undervalued Target: Make good investment by availing opportunity of undervaluing target company.
Five Phases of Merger & Acquisition (M&A)
- Pre-Acquisition Review
- Search & Screen Target
- Investigate & Value the Target
- Acquire through Negotiation
- Post Merger Integration