What exactly are Mergers and Acquisitions (M&A)?

The term “mergers” and “acquisitions” (M&A) are transactions between two companies that are combining in a particular way. While the terms mergers or the acquisition of (M&A) are often used interchangeably, they have distinct legal definitions. In an M&A, two companies that are similar in size merge to create a single entity.

On the other the other hand, an acquisition occurs when a bigger company buys an smaller one, thus infusing the operations of the smaller. M&A transactions can be either positive or negative, based on approval from the target’s board.

Summary

  • M&A or Mergers and Acquisitions (M&A) refers to deals between two businesses which are merged in some way.
  • M&A transactions are classified by the type (horizontal or vertical conglomerate) or by type (statutory subsidiary, consolidation,).
  • Valuation is a major element in M&A which is also a significant topic of discussion between buyers and the sellers.

Mergers and Acquisition (M&A) Transactions Types

1. Horizontal

A horizontal merger occurs between two companies in similar industries , which may or not be directly competing.

2. Vertical

Vertical mergers occur between a company and a suppliers or customers along the supply chain. The goal of the company is to expand or decrease through its supply chain thus consolidating its position within the market.

3. Conglomerate

This kind of deal is often used to diversify the business and involves companies from non-related sectors.

Mergers and Acquisitions (M&A) Forms of Integration

1. Statutory

The majority of statutory mergers occur when the buyer is bigger than the target and takes over the target’s assets and liabilities. Following the merger the target’s business disappears as an independent entity.

2. Subsidiary

A subsidiary merger is when the acquirer is transformed into a subsidiary of the buyer, while maintaining its operations.

3. Consolidation

In a merger two companies, the deal end up being inactive following the merger is completed, and a new entity is created.

Motives behind Mergers as well acquisitions (M&A) Activity

M&A or mergers (M&A) may occur for a variety of reasons, like:

1. unlocking synergies

The most common reason for the mergers and acquisitions (M&A) can be to generate synergies, in which the combined business is more valuable than the two businesses individually. Synergies could be due to lower costs or increased revenues.

Cost synergies can be derived through economies of scale, whereas revenue synergies are generally generated by cross-selling, a rise in market share, or by increasing prices. Of both Cost synergies, they can be easily calculated and quantified.

2. Growth that is higher

Inorganic growth via the use of mergers and acquisitions (M&A) is typically an effective method for companies to generate higher profits as when compared to growing organically. Companies can benefit through acquiring or merging with an organization with the most recent capabilities without taking risks of designing similar capabilities internally.

3. Stronger market power

When a horizontal merger is completed the resultant entity will gain a greater market share and be able to control the prices. Vertical mergers can also result in more market power since the company will be aware of the supply chain and thus, avoiding external disturbances to supply.

4. Diversification

Companies operating in cyclical industries are aware of the necessity of diversifying their cash flows in order to protect themselves from significant losses during the time of a downturn in their business. Achieving a target in an uncyclical sector allows companies to diversify their portfolio and lower its risk of being a market participant.

5. Tax benefits

Tax benefits are considered when one business earns substantial tax-deductible income, while another company incurs carrying forward tax-loss carryforwards. The acquisition of the company that has tax losses allows the buyer to make use of the tax losses to reduce its tax burden. But, mergers aren’t generally done solely to reduce taxation.

Merger vs Acquisition
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