Within the corporate finance world, ‘mergers and acquisitions’ (M&A) are an extremely pivotal area and often occur within the business world. But what are mergers and acquisitions? And why are they so important?
Ultimately these terms refer to the consolidation of companies. This means that M&A within businesses will result in some sort of combining of companies, however, there are various amount of ways that this can take place. This can be easily understood by looking at the differing definitions of each term:
This refers to the combination of two companies to form one company. The firms that agree to merge are often (but not always) roughly equal in terms of size, customers and scale of operations, therefore resulting in many benefits from merging. For instance, they can gain market share, reduce costs of operations, expanding new territories, unite common products, grow revenues, and increase profits— which in turn also benefit the firms’ shareholders.
There are various types mergers that can take place such as conglomerate, congeneric, market extension, horizontal and vertical. The main differences between these types of mergers are the type of market and industries that they are involved with. For example, a horizontal merger often consists of consolidation between two or more companies within the same industry. Whereas a vertical merger refers to when companies at different levels of a supply chain combine their operations. Overall mergers may occur through different forms depending on whether it is classified from an economic perspective, business combinations or whether it is from a legal perspective.
This refers to when one company purchases most or all of another company’s shares to gain control of that company. Purchasing more than 50% of a target firm’s stock allows the acquirer to make decisions about the acquired asset without the approval of the company’s shareholders. It’s important to note that acquisitions may occur either with or without the approval of the shareholders depending on the company’s position. If it is with approval, a ‘no shop clause’ is often involved within the deal, which essentially restricts the company or seller from soliciting competing bids from other potential buyers. There are various reasons as to why acquisitions would be beneficial for companies, for example, increased synergy which arises in a merger or acquisition when the combined value of the two firms is higher than the pre merger value of both firms combined.
It can also lead to cost reductions and greater market share – acquisitions are a common way to also break into a foreign market as they can purchase an existing company within the foreign market they wish to enter.
In basic terms there are varying nuances in which M&As can take place, for instance, acquisitions are often seen as an amicable transaction, where both firms cooperate whereas “takeover” suggests that the company being taken over resists/strongly opposes the purchase. The term “merger” is used when the purchasing and target companies mutually combine to form a completely new entity. When a company gets involved within M&A, there are also important stages that have to take place, for instance, pre-acquisition reviews, screen targets and valuations. The various stages into acquiring a target company is essential and pivotal to ensure the M&A is successful.
M&A can take place:
- by purchasing assets
- by exchange of shares for assets
- by exchanging shares for shares
- by purchasing common shares
There is various reasoning behind M&A as previously mentioned therefore the potential benefits could be:
- Financial synergies
- Enhances company’s performance by accelerating growth
- Diversification for higher growth products or markets
- To increase market share and positioning – giving broader market access
Here are some famous examples of M&A which emphasises the importance of this sort of transaction within the business sector:
- Disney & 20th Century Fox in 2019: $71.3 billion (£56.1bn)
- Royal Dutch Shell & BG Group in 2015: $74 billion (£55.43bn)
- AOL & Time Warner in 2000: $240.07 billion (£179.84bn)
- Vodafone Group & Mannesmann in 1999: $303.78 billion (£227.57bn)
- Disney and Pixar / Marvel Acquisition in 2006 : $7.4 billion
- Google and Android Acquisition in 2005 : $50 million
- Pfizer and Warner-Lambert Acquisition in 2000 : $90 billion
- Takeda Pharmaceutical & Shire in 2018: $62 billion (£46.45bn)
M&A are a vital part within many company’s business strategy as the benefits can provide heightened strength to a company’s assets. In order for an M&A to be successful, the various stages to acquire must be done properly and with great care. It is extremely relevant within the commercial field as companies around the world have used M&A to grow. Within the legal sector, taking part and aiding within M&As is common for corporate lawyers.
Muntaha Rahman – Swansea University
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