Introduction to M&A

Definition: The combination of one or more corporations, or other business entities into a single business entity; the joining of two or more companies to achieve greater efficiencies of scale and productivity.

Mergers come into play in the world of business for two very different reasons:

• The first is when you’ve decided it makes sense to join forces with another company to reap the rewards that come from your combined strengths.

A smart business merger can help you enter a new market, reach more customers, freeze out a competitor or fill a gap in your company’s abilities. Mergers can get you on the fast track to become more competitive. With a complementary partner, your business can acquire products, distribution channels, technical knowledge, infrastructure or cash to propel you to a new level of success. The flexibility and power boost they provide can be a key strategic tool for today’s entrepreneurs. And the best part is that they can go wherever your ideas take them.

For those business owners who dream of building an even more successful company, merging with another company can present terrific opportunities. The key is doing your homework, knowing what the other business is worth, finding the right company to acquire company, and working with competent professionals (lawyer, accountant, business broker). Ask tough questions and get to know the other company on all levels.

• The second reason you’d plan for a merger is when you’ve decided you want to sell your company and another, existing business decides it would be in its best interest to acquire your firm. As a rule, businesses have deeper pockets and borrowing power than individuals, and they may be willing to pay more than individuals. Businesses also tend to be more savvy buyers than individuals, increasing the chances your business will survive, albeit perhaps as a division or subsidiary of another company. However, businesses can’t move as fast as individuals. It may take you a year or more to get your company ready to be merged or acquired. You’ll need to:
  • Clean up the balance sheet.
  • Drop poorly performing products.
  • Terminate insider deals, such as property the company is renting from you or family members.
  • Trim excessive fringe benefits.
  • Make sure you’re paid up on all taxes.
  • Have at least two years’ worth of audited financial statements.

The best candidate for a merger is a company that sees yours as a strategic fit with their own firm. If you have something they want and can’t find elsewhere, such as a unique product or distribution channel, they may be willing to pay a premium price. A competitor who only wants to put you out of business is usually a poor merger prospect, however. This buyer is motivated only by price and probably isn’t interested in preserving the business.

Definition: An acquisition is a corporate action in which a company buys most, if not all, of another firm’s ownership stakes to assume control of it.

Securing is the buy of one organization by another, through either by buy of offers, or the buy of its advantages.

There’s just a single genuine approach to accomplish monstrous development actually overnight, and that is by purchasing another person’s organization. Securing has turned out to be a standout amongst the most prevalent approaches to develop today. Since 1990, the yearly number of mergers and acquisitions has multiplied, implying this is the most well-known period ever for development by securing.

How does it work?

An obtaining is a corporate action in which a company buys most, if not all, of another association’s possession stakes to accept control of it. A procurement happens when a purchasing organization acquires over half proprietorship in a target organization. As a component of the trade, the procuring organization frequently buys the objective organization’s stock and different resources, which permits the getting organization to settle on choices in regards to the recently obtained resources without the endorsement of the objective organization’s investors. Acquisitions can be paid for in real money, in the getting organization’s stock or a blend of both.

Why it matters?

Organizations perform acquisitions for different reasons. They might try to achieve economies of scale, greater market share, increased synergy, cost decreases, or new specialty offerings. On the off chance that they wish to extend their tasks to another nation, purchasing a current organization might be the main suitable approach to enter an outside market, or possibly the most effortless way: The bought business will as of now have its own staff (both work and administration), a brand name and other intangible resources, guaranteeing that the procuring organization will begin off with a decent client base.

Acquisitions are frequently made as a major aspect of an organization’s development methodology when it is more valuable to assume control over a current association’s activities than it is to developing its own. Vast organizations in the long run think that it’s hard to continue developing without losing effectiveness. Regardless of whether on the grounds that the organization is winding up excessively bureaucratic or it keeps running into physical or calculated asset imperatives, inevitably its marginal productivity peaks. To discover higher development and new profits, the vast firm may search for promising youthful organizations to secure and join into its income stream.

When one company takes over another and clearly establishes itself as the new owner of the company, the purchase is called an acquisition. A ‘merger’ happens when two firms, often about the same size, agree to operate and go forward as a single company, are said to merge together.

Mergers and acquisitions happen when companies merge with other companies creating a bigger business or to buy another business/company. Businesses do this as a mean to gain a competitive advantage over their competitors. The difference lies in how the purchase is communicated to and received by the target company’s board of directors, employees and shareholders. Although they are often used as though they were synonymous, the terms merger and acquisition are slightly different.

Merger is considered to be a process when two or more companies come together to expand their business operations. In such cases, the deal is finalized on friendly terms, both the companies are treated as equal and share the profits equally in the newly created entity. The companies join forces in order to increase the strength of their assets, have a higher market value and consumer base, and ultimately make higher profits. The corporations are jointly owned and are registered as a new legal and different entity.

An ‘acquisition’ occurs when one company or corporation takes control of another company and rules all its business operations. In this process of restructuring, one company overpowers the other company and the decision is mainly taken during downturns in the economy or during declining profit margins. Among the two, the one that is financially stronger and bigger in all ways ‘establishes its power’. The combined operations then run under the name of the powerful entity who also takes over the existing stocks of the other company.

Acquisitions are actions through which companies seek economies of scale, efficiencies and enhanced market visibility. However, they are often congenial, as all the parties are satisfied with the deal. Other times, the acquisitions are more hostile. Another type of acquisition is a reverse merger, a deal which enables a private company to get listed as a public company with tradable shares in a relatively short period of time.

Comparison between Merger and Acquisition:

Horizontal Mergers

Horizontal mergers happen when a company merges or takes over another company that offers the same or similar product lines and services to the final consumers, which means that it is in the same industry and at the same stage of production. Companies, in this case, are usually direct competitors. For example, if a company producing cell phones merges with another company in the industry that produces cell phones, this would be termed as horizontal merger. The benefit of this kind of merger is that it eliminates competition, which helps the company to increase its market share, revenues and profits. Moreover, it also offers economies of scale due to increase in size as average cost decline due to higher production volume. These kinds of merger also encourage cost efficiency, since redundant and wasteful activities are removed from the operations i.e. various administrative departments or departments such as advertising, purchasing and marketing.

Vertical Mergers

A vertical merger is done with an aim to combine two companies that are in the same value chain of producing the same good and service, but the only difference is the stage of production at which they are operating. For example, if a clothing store takes over a textile factory, this would be termed as vertical merger, since the industry is same, i.e. clothing, but the stage of production is different: one firm is works in territory sector, while the other works in secondary sector. These kinds of merger are usually undertaken to secure supply of essential goods, and avoid disruption in supply, since in the case of our example, the clothing store would be rest assured that clothes will be provided by the textile factory. It is also done to restrict supply to competitors, hence a greater market share, revenues and profits. Vertical mergers also offer cost saving and a higher margin of profit, since manufacturer’s share is eliminated.

Concentric Mergers     

Concentric mergers take place between firms that serve the same customers in a particular industry, but they don’t offer the same products and services. Their products may be complements, product which go together, but technically not the same products. For example, if a company that produces DVDs mergers with a company that produces DVD players, this would be termed as concentric merger, since DVD players and DVDs are complements products, which are usually purchased together. These are usually undertaken to facilitate consumers, since it would be easier to sell these products together. Also, this would help the company diversify, hence higher profits. Selling one of the products will also encourage the sale of the other, hence more revenues for the company if it manages to increase the sale of one of its product. This would enable business to offer one-stop shopping, and therefore, convenience for consumers. The two companies in this case are associated in some way or the other. Usually they have the production process, business markets or the basic technology in common. It also includes extension of certain product lines. These kinds of mergers offer opportunities for businesses to venture into other areas of the industry reduce risk and provide access to resources and markets unavailable previously.

Conglomerate Merger

When two companies that operates in completely different industry, regardless of the stage of production, a merger between both companies is known as conglomerate merger. This is usually done to diversify into other industries, which helps reduce risks.

A business combination can be effected as either an asset acquisition or a stock acquisition.

Stock acquisition: The acquirer buys the target’s stock of from the selling shareholders.

Asset acquisition: The acquirer buys some or all of the target’s assets/liabilities directly from the seller. If all assets are acquired, the target is liquidated.

In a stock sale, the sellers are the target’s shareholders (which may be a corporate entity). In an asset sale, the seller is a corporate entity. So, the type of acquisition will determine who pays taxes on the transaction and the amount of taxes to be paid based on the tax rate applicable to the seller.

Do not confuse the type of acquisition with the form of consideration. A buyer may use either cash or stock (or a combination thereof) as consideration in exchange for the assets or stock of the target.

Asset Acquisitions

In an asset sale, individually identified assets and liabilities of the seller are sold to the acquirer. The acquirer can choose (“cherry pick”) which specific assets and liabilities it wants to purchase, avoiding unwanted assets and liabilities for which it does not want to assume responsibility. The asset purchase agreement between the buyer and seller will list or describe and assign values to each asset (or liability) to be acquired, including every asset from office supplies to goodwill. Determining the fair value of each asset (or liability) acquired can be mechanically complex and expensive; tedious valuations are costly and title transfer taxes must be paid on each asset transferred. Also, some assets, such as government contracts, may be difficult to transfer without the consent of business partners or regulators.

If the assets to be acquired are not held in a separate legal entity, they must be purchased in an asset sale, rather than a stock sale, unless they can be organized into a separate legal entity prior to sale. Subsidiaries of consolidated companies are often organized as separate legal entities, whereas operating divisions are usually not.

Stock Acquisitions

In a stock purchase, all of the assets and liabilities of the seller are sold upon transfer of the seller’s stock to the acquirer. As such, no tedious valuation of the seller’s individual assets and liabilities is required and the transaction is mechanically simple. The acquirer does not receive a stepped-up tax basis in the acquired net assets but, rather, a carryover basis. Any goodwill created in a stock acquisition is not tax-deductible.

Although the buyer acquires all assets and liabilities in a stock purchase, it may contractually allocate unwanted liabilities to the seller by selling them back to the seller.

• Merger is the combination of one or more corporations, or other business entities into a single business entity; the joining of two or more companies to achieve greater efficiencies of scale and productivity

• An acquisition is a corporate action in which a company buys most, if not all, of another firm’s ownership stakes to assume control of it.

• The different types of Mergers are: Horizontal Merger, Vertical Merger, concentric Merger and Conglomerate Merger

• The two different types of Acquisitions are Stock Acquisition and Asset Acquisition