A merger and acquisitions refers to the agreement that between the two existing companies to convert into the new company, or purchasing of the one company by another etc which are done generally in order to take the benefit of the synergy between the companies, expanding the research capacity, expand operations into the new segments and to increase shareholder value etc.
What are Mergers and Acquisitions?
Mergers and acquisitions (M&A) are defined as a combination of companies. When two companies combine together to form one company, it is termed as Merger of companies. While acquisitions are where one company is taken over by the company.
- In the case of Merger, the acquired company ends to exist and becomes part of the acquiring company.
- In the case of Acquisition, the acquiring company takes over the majority stake in the acquired company, and the acquiring company continues to be In existence. In short one in acquisition one business/organization buys the other business/organization.
Mergers and Acquisitions (M&A) Infographics
Here are the top 5 differences between Mergers and Acquisitions
How Can Mergers & Acquisitions Take Place?
- by purchasing assets
- by purchasing common shares
- by exchange of shares for assets
- by exchanging shares for shares
Reasons for M&A
- Mergers and Acquisitions (M&A) improves the quality of companies performance by reducing the redundant cost of operations
- Removes Excess capacity
- Accelerate growth
- Acquire skills and technology
Mergers and Acquisitions Process
Let’s discuss the following process.
- Phase 1: Pre-acquisition review: In this phase, the self-assessment of the acquiring company with reference to the need of Mergers and Acquisitions (M&A) is done and a strategy for growth plan through the target is done.
- Phase 2: Search and screen targets: In this stage, possible takeover candidates (Companies) are identified. This process is mainly to identify a good strategy for the acquiring company.
- Phase 3: Investigate and valuation of the target: Once the appropriate company is identified through screening, detailed analysis of that company is done. This is termed as due diligence.
- Phase 4: Acquire the target through negotiations: Once the target company is selected, the next step is to start negotiations to come to an agreement for a negotiated merger. This will result into deal getting executed.
- Phase 5: Post-merger integration: If all the above steps are successfully completed, then there is a formal announcement of the agreement of merger by both the participating companies.
Difference between Mergers & Acquisition (M&A)
|Definition||When two companies combine together to form one company, it is termed as Merger of companies. The two companies end to exists and the new company is formed||In case of Acquisition, the acquiring company takes over the majority stake in the acquired company, and acquiring company continues to be in existence.|
|Companies||The companies of the same size are combined together.||The larger companies acquire smaller companies.|
|Challenges||The two companies of the same size combine to increase their potential strength and financial profits along with breaking the trade barriers.||The two companies of different sizes come together to conquer the challenges of the decline of business.|
|Agreement||A buyout agreement is known as a merger when both owners mutually decide to combine their business in the best interest of their firms.||A buyout agreement is known as an acquisition when the agreement is aggressive, or when the target firm is unwilling to be bought.|
|Examples||Disney and Pixar merged together to collaborate easily and freely.||Google acquired Android for $50 million in August 2005.|
Benefits of Mergers and Acquisitions
#1 – Betterment of the Company and Company Results
- The prime aim of mergers and acquisitions is to bring about a synergetic growth for both the companies involved and improve the performance of the companies. Thus, value generation can be said as one of the key aims for every mergers and acquisition.
- The greater market share which is generally a cause of M&A leads to the generation of more profits and revenues. The profit from the operation can also be enhanced if the new management efficiently handles the waste or unproductive activities and gets it eliminated from the operations.
#2 – Elimination of Excess Capacity
- When industries have grown to an extent a point of excess capacity tends to happen. When more and more companies enter the same industry, the supply continues to rise, and this further brings down the prices. With new companies entering the market, the supply-demand graph of the existing companies gets disrupted which leads to a decline in prices.
- Thus, companies merge or acquire to get rid of the excess supply in the market and to rectify the declining prices because if the price keeps on declining at a certain point it becomes impossible for many companies to survive in the market.
#3 – Growth Acceleration
M&A is majorly down keeping in mind the growth generation factor. Merger and acquisition increase market shares and brings about more profit and revenues. When a target company has absorbed the sales and customers of it are also taken over and as a result, it brings more sales, more revenues, and more profit.
#4 – Skills and Technology Know-How
- Companies generally got for mergers and acquisitions to imbibe the modern technology and skills of the target company. Usually few companies exclusively hold the rights to certain technologies and building these technologies from very scratch is more expensive and tough.
- Thus, companies prefer merging or acquiring such companies to get a hold of technology too in the process. Also, M&A provides a scope of technology and skill sharing of both the companies which can bring about synergetic growth and enhanced vision sharing.
#5 – Strategies to Roll Up
Some firms are very small to operate in the market and face a higher cost of production to facilitate their sales. Their operations are not feasible, and they do not enjoy economies of scale too. This is best-suited scenarios to get acquired as an acquisition can prove to be a benefit for the target company as it would help the company survive in the market and enjoy at times economies of scale with the help of a target seeking company.
Top 3 M&A Deals in India
- Vodafone-Hutchison: In the year 2007, the world’s largest revenue earning Telecom Company, Vodafone made a major strike into the Indian telecom market by purchasing 52 percent stake in Hutchison Essar Ltd. Essar group still holds 32% in the Joint venture.
- Hindalco-Novelis: The Hindalco Company took over the Canadian company Novelis for $6 billion, this Mergers and Acquisitions (M&A) benefited the company to become world’s largest rolled-aluminum Novelis operates as a subsidiary of Hindalco.
- Mahindra and Mahindra-Schoneweiss: Mahindra & Mahindra acquired 90 percent of Schoneweiss, a leading company in the forging sector in Germany in 2007, and consolidated Mahindra’s position in the global market.
This has been a guide to what are Mergers and Acquisitions, its definition along with practical examples. Here we discuss the process of mergers and acquisitions and its various stages. You may learn more about M&A from the following articles –