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Mergers and acquisitions: an overview

We will continue the Financial Advisory Series by talking about Mergers and Acquisitions.

Mergers and Acquisitions (M&A) is a broad phrase that refers to a variety of financial transactions that combine firms or assets, such as mergers, acquisitions, consolidations, tender offers, asset purchases, and management acquisitions.

What are mergers and acquisitions?

M&A are deals in which two or more firms merge in some way. Mergers and Acquisitions are phrases that are sometimes used interchangeably, yet they have significantly distinct legal meanings. An acquisition occurs when a larger corporation buys a smaller company and absorbs the smaller company's operations. A merger, on the other hand, is when two companies of similar size join forces to move ahead as a single new organisation rather than being individually owned and run. A merger of equals is the term for this action.

M&A deals can be friendly or hostile, depending on the target company's board of directors' consent.

Types of M&A

Mergers can take a variety of forms depending on the relationship between the two firms participating in the transaction.

  • Horizontal merger - A horizontal merger occurs when two firms are in direct rivalry and have similar product lines and markets. A horizontal merger occurs when two organiszations in comparable sectors join, whether they are direct rivals or not.

  • Vertical merger – It is when a client and a firm or a supplier and a company merge vertically. Along the supply chain, a vertical merger occurs between a corporation and its supplier or client. The corporation wants to consolidate its position in the sector by moving up or down its supply chain.

  • Congeneric merger – When two organisations serving the same customer base in different ways merge, they form a congeneric merger.

  • Market-extension merger - A merger that allows two firms to offer the same items in separate markets.

  • Product-extension merger - Two firms in the same market providing distinct but related items unite.

  • Conglomeration - When two firms have no common business sectors, they form a conglomeration. This sort of transaction is frequently done for the purpose of diversification and involves firms from different industries.

Forms of integration in M&A

  • Statutory - A statutory merger occurs when the acquirer is much larger than the target firm and purchases the target firm's assets and liabilities. The target firm ceases to exist as a distinct entity when the purchase is completed.

  • Subsidiary - In a subsidiary merger, the target company becomes a subsidiary of the acquirer while maintaining its operations.

  • Consolidation - After the transaction, both firms involved in the transaction cease to exist, and a new company is established.

Reasons for M&A

M&A can occur for a variety of reasons, including:

  • Identifying and exploiting synergies - M&A are commonly used to produce synergies that make the merged firm worth more than the two enterprises separately. Synergies can occur as a result of cost savings or increased income. Cost synergies are achieved through economies of scale, whereas revenue synergies are achieved by cross-selling, expanding market share, or boosting pricing. Cost synergies are the easier to quantify and calculate of the two.

  • Increased growth - Opposed to organic growth, inorganic growth through M&A is typically a speedier technique for a firm to obtain bigger sales. A corporation can benefit from purchasing or merging with a company that has cutting-edge capabilities rather than risk developing those skills internally.

  • Increased market dominance - A horizontal merger will provide the new organization a larger market share and the ability to influence prices. Vertical mergers also provide a corporation more market power since it has more control over its supply chain and can prevent external supply disruptions.

  • Diversification - Companies in cyclical sectors feel compelled to diversify their cash flows in order to prevent severe losses during a downturn. A corporation can diversify and decrease market risk by acquiring a target in a non-cyclical industry.

  • Tax benefits - When one firm has a lot of taxable income and another has a lot of tax loss carryforwards, the tax benefits are looked into. The acquirer can use the tax losses to reduce its tax burden by acquiring the firm with the tax losses. Mergers, on the other hand, are rarely done only to save money on taxes.

Forms of acquisitions

There are two basic forms of M&A:

  • Stock acquisition - In a stock buy, the acquirer pays cash and/or shares to the target company's shareholders in return for the target company's stock. The target's shareholders, not the target, get compensated in this case.

  • Asset acquisition - In an asset purchase, the acquirer buys the assets of the target company and pays them straight to the target company.

Mergers and acquisitions aren't always easy to pull off. In reality, these sophisticated transactions can take a long time to complete and typically necessitate a lot of back and forth between the buyer and seller. Companies may fail to disclose key facts that might eventually impact a buyer's choice to proceed with a purchase if due diligence is not performed.

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