What are Mergers and Acquisitions?
A merger and acquisitions (M&A) 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 valueShareholder ValueShareholder's value is the value that company shareholders receive as dividends and stock price appreciation due to better decision-making by the management that ultimately results in a company's growth in sales and profit. etc.
M&A is defined as a combination of companies. When two companies combine to form one company, it is termed as Merger of companies. At the same time, acquisitions are where the company takes over one company.
- In the case of a 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 the Acquisition, one business/organization buys the other business/organization.
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, a detailed analysis of that company is done. It 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 agree to a negotiated merger. It will result in a 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.
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, which 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 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. It is the best-suited scenario 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 2007, the world’s largest revenue earning Telecom Company, Vodafone, made a major strike into the Indian telecom market by purchasing a 52 percent stake in Hutchison Essar Ltd. Essar group still holds 32% in the Joint ventureJoint VentureA joint venture is a commercial arrangement between two or more parties in which the parties pool their assets with the goal of performing a specific task, and each party has joint ownership of the entity and is accountable for the costs, losses, or profits that arise out of the 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 the 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.
How Can M&A Take Place?
- by purchasing assets
- by purchasing common shares
- by the 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 (M&A) Infographics
Here are the top 5 differences between Mergers and Acquisitions
This article 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 –