Mergers and Acquisitions (M&A) Understanding

Mergers and Acquisitions, or M&A, probably represent the most important strategic decision a firm may ever make. The terms get used loosely these days, but there are really different kinds of corporate actions each playing a distinct role in the world of business. In some ways, firms use M&A activities in trying to expand, diversify, or streamline operations with effects that can dramatically change the directions of involved companies, employees, customers, and industries.

This paper will attempt to discern what mergers and acquisitions are, types of M&A transactions, why companies do it, processes involved, and benefits and challenges of doing M&A activities.

What is a Merger?

It's really just the output of two companies that join together to become a new firm. Usually, two firms about the same size are involved, and often the deal is couched as a "merger of equals." Actually, that's not so very often, but that doesn't matter; in a merger, shareholders in each firm exchange their shares for shares in the new merged firm and their ownership structure is altered.

There are three categories of mergers:

• Horizontal Merger: This is the kind of merger between two companies that are on the same line of business or providing similar goods and services. Usually, the intent is on market share, cutting competition, or achieving economies of scale. Examples include two companies in the telecommunications line of business coming together to gain competitive pricing and wider geographic areas.
• Vertical Merger: These are firms that fall within the same supply chain. Here, one is a supplier, while the other is a customer. This will therefore lead to cost-cutting, efficiency in production made streamlined. For example, an automobile manufacturer merges with a supplier of automobile parts.
• A Conglomerate Merger: This is when two companies that operate in different types of industries. This type of merger is mainly diversification, which means to spread the risk across several market segments. For example, a consumer goods company merging with a technology firm.

What is an Acquisition?

Acquisitions are when one company purchases another. Once a company has acquired the stocks or assets belonging to another, it is said that an acquisition has taken place; one party overruns the other. This may be as an associate or becomes part of the acquiring company.

Acquisitions fall into two broad categories:

• Amiable takeover: In this takeover, the deal is to the advantage of both parties. Management and the board of the target company usually do approve the acquiring company's takeover, after the negotiation process to the advantage of both companies in an amiable takeover.
• Hostile Acquisition: A hostile acquisition takes place when the acquirer of an acquired company goes in without its management first accepting to allow such a thing. Sometimes, it simply occurs after its management declines its offer; another approach would involve moving directly against the shareholders and replacing the existing board of directors.

Transactions might be classified further depending on some features of an acquisition:

• Asset Acquisition: Under this acquisition, the acquirer acquires particular assets of the target company, including intellectual property, equipment, or real estate instead of buying its shares.
• Stock (Share) Acquisition: The acquirer, in this case, buys the target company's shares outright and therefore takes over control of the said company.

Comparison Between Mergers and Acquisitions

Even though mergers and acquisitions tend to result in the merging of businesses, both are highly disparate in terms

• Structural Difference: A merger often results in the birth of a new company, whereas with an acquisition, one company swallows another.
• Control: In the merger, management control and decision are shared by two companies, and in acquisition the acquiring company stays in control of the management decision. The company that is the target might go on as the subsidiary or would be integrated fully into the greater organization.
• Public Perception: The merger is perceived to be highly cooperative and synergistic. Acquisitions, especially hostile acquisitions, are likely to have a more negative perception or even react more resistively by the management or employees of the acquired firm.

Why Do Companies Merge and Acquire

Companies merge and acquire for a plethora of strategic, financial, or operational reasons. Some of the most common reasons are

• Growth and Expansion: Growth is perhaps the most visible reason to merge or acquire. Through buying or merging with another company, businesses can gain market share, customers, and geography quickly. This is highly useful for firms in competitive industries where organic growth is slow or limited.

• Synergies: Synergies are the cost savings or performance improvements attained through combining two companies. They include economies of scale that may involve lower production costs; removing redundancies; streamlining operations and pooling of resources in research and development.

• Diversification: A merger or acquisition may also offer an organization the opportunity to diversify its activities or operations while mitigating risks the organization may otherwise be vulnerable to. Diversification limits declines in core areas of business operation; an acquiring firm may reduce its portfolio imbalance by taking control of an entirely different industry-related business operation.

• Access to New Technology or Expertise: M&A can also open the doors to new technologies, intellectual property, or special expertise. A firm can acquire a smaller company with new technologies or knowledge developed through years of in-house research and development.

• Competitive Advantage: Probably the single most common reason for M&A to be done is the competitive advantage it presents when the market becomes dynamic. Buy a competitor, or acquire an organization whose offerings are complimentary. 

• Tax benefits: Mergers and acquisitions may sometimes be tax advantageous. For that reason, a firm that has high taxes payable may be able to purchase another which has large tax losses to balance its future income.

• Operating Efficiency: Companies acquire and become involved in mergers to assist in improving operations, reduce overhead, and increase profitability. A company may desire to acquire another firm to improve its supply chain, to decrease the price of labor, or to increase output.

• Exit Route: M&A also offers an exit route for a few companies. It is very often the case with private equity and venture capital-backed companies who build the portfolio companies for a few years and divest them in a profitable position.

Mergers and Acquisition Process

Merger or acquiring another company forms a rather involved process comprising the following:

• Strategy Formulation: The process would start by articulation of strategic objectives for the deal. It may then consist of identification of which kind of business may strategically match up with that of the acquirer to deliver horizontal integration, vertical integration, or diversification, respectively.

• Target Identification and Due Diligence: After identifying a target, the acquirer conducts detailed due diligence on the financial health, operations, and legal status of the target company. It includes analysis of financial statements, legal contracts, intellectual property, management, market position, and potential risks.

• Valuation and Negotiation: It is a very critical step of the M&A process. Fair value of the target may be calculated on any of the DCF analysis, comparable company analysis, or precedent transactions of the target company and then negotiations follow so as to fix up the terms and conditions upon price of the deal.

• Financing the Deal: The last, but obviously no less vital step, of the process will be financing of the deal. Financing can consist of cash and/or stock along with debt - any combination and a mix-up thereof. Financings too may have very material effects upon the structure of and terms relating to the proposed acquisition.

• Approval of the Deal: Most M&A deals are usually brought under the approval of the regulatory authorities if the parties are large corporations or if the transaction is cross-border. 

• Integration: Once the deal is closed, the acquirer has to look to the integration of the two firms. That part of the deal is usually the most difficult since it deals with the integration of corporate cultures, systems, and operations. 

Advantages and Disadvantages of M&A

Advantages:

• Higher Market Share: M&A can give companies quick growth, thus enabling them to command a higher market share that will eventually be translated into more revenues and profits.
• Reduce Cost: Companies can cut redundant operations and achieve economies of scale, thus reducing costs.
• Diversify: M&A help companies by diversifying the product range, penetration of new markets or acquiring new technology.
• Increased Capabilities: Companies expand their capacities by buying firms that have complementary strengths.

Problems:

• Cultural Clash: The merging of the two corporate cultures is very challenging when companies have unique values, practices, or management styles.
• Integration: The integration process is expensive and complicated with problems in IT system alignment, supply chain integration, and business process.
• Regulatory Barriers: There may be an issue of antitrust concern when there are mergers or acquisitions with large-scale transactions.
• Employee Displacement: Most mergers result in layoffs. The problems lie here not only at the level of morale disruption as well as operations being changed in a company .
• Overpay or Poor Implementation: In M&A, there is a likelihood that the house gets overpaid or if implemented ineptly results in losing moolah too while no synergies materialized from this M&A deal.

Conclusion:

Mergers and acquisitions are very powerful weapons for corporate growth, innovation, and competitiveness. Companies can rapidly expand, cut costs, and penetrate new markets by taking advantage of the M&A route. However, this requirement stresses the complexity of the process, the risks in integration, and possible cultural shocks; therefore, it becomes mandatory to plan and exercise due diligence and strategic foresight for success in M&A operations.