Investment Banking Tutorials
- Mergers and Acquisitions
- What is Mergers and Acquisitions?
- Mergers vs Acquisitions
- Acquisitions Examples
- Horizontal Merger
- Vertical Merger
- Synergy in M&A
- Successful Mergers and Acquisitions
- Financing Acquisitions
- Acquisition Premium (Takeover)
- Statutory Merger
- Joint Venture
- Advantages of Joint Venture
- Types of Joint Venture
- White Knight
- Hostile Takeover
- Golden Parachute
- Poison Pills
- Killer Bees Defense Strategy
- Show Stopper in M&A
- What is Amalgamation?
- Spin off vs Split Off
- Forward Integration
- Backward Integration
- Horizontal vs Vertical Integration
- What is Divesting / Divestiture?
- Bootstrap Effect
- PAC MAN Defense
- Flip-In Poison Pill
- Flip-Over Poison Pill
- Scorched Earth Defense Policy
- Tender Offer
- Friendly Takeover
- Amalgamation vs Merger
- Lobster Trap Defense
- Asset Purchase vs Stock Purchase
- Joint Venture vs Strategic Alliance
- Greenshoe Option
- Dawn Raid Takeovers
- Crown Jewels Defense
- Best Mergers and Acquisitions Books
- What is Asset Restructuring?
- Investment Banking Basics (44+)
- Investment Banking Careers (24+)
- Investment Banking Firms (27+)
- Top Banks (42+)
- Cryptocurrency Basics (10+)
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
Types of Mergers and Acquisitions with Examples
There are different types of Mergers and Acquisitions with examples, which are as follows:-
- Horizontal Mergers
- Vertical Mergers
- Concentric Mergers
- Conglomerate Mergers
#1 – Horizontal Mergers
Horizontal mergers happen when one company merges or takes over another company that has similar products and services, which means that both the companies are in the same industry. In this case, mostly the companies are direct competitors. For example, if a company manufacturing two-wheelers merges with another company in the same industry that manufacturing two-wheelers, this would be termed as a horizontal merger. The synergy of this kind of merger is that it dissolves the competition, which benefits the company to increase its market share, revenues and profits. Moreover, it also offers benefits of economies of scale due to increase in size and decline in the average cost of production. For Example, HDFC Bank acquired Times Bank.
#2 – Vertical Mergers
In the vertical merger, there is a combination of two companies that are in the same business of producing the same goods and services, but the only difference is the stage of production at which they are operating are different. For example, if a shoes manufacturing company takes over a leather manufacturing company, this would be termed as a vertical merger, since the leather producing company is used by shoes manufacturing company. These kinds of the merger are usually undertaken to secure supply of essential goods, and avoid disruption in supply since, in the case of our example, the shoe manufacturer would rest assured that the leather will be provided by the leather company. Vertical mergers result in cost saving and a higher margin of profit since intermediary cost is eliminated. For example, In Nov 2015 Apple buys Star Wars motion-capture company Faceshift, Reliance and FLAG Telecom group.
#3 – Concentric Mergers
Concentric mergers are between firms that serve the same customers in a particular industry, but the products and services offered are different. Their products may be complements. For example, if a company that produces Computer systems mergers with a company that produces UPS, this would be termed as a concentric merger. For example, Coke’s acquisitions of Vitamin Water, Honest Tea, Fuze Beverage and Core Power.
#4 – Conglomerate Mergers
When two companies that operate in a completely different industry merger together to form a new company it is known as a conglomerate merger. This is usually done to diversify into other industries, which helps reduce risks. For example, L&T merger with Voltas Ltd.
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
- 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.|
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 types of mergers and acquisitions (horizontal, vertical, concentric and conglomerate). We also discuss the stages and processes involved in M&A. You may learn more about M&A from the following articles –