Mergers And Acquisitions- An Overview
Meaning Of M & A:
Mergers and acquisitions (M&A) deals in which two or more companies merge in some way. Although the terms mergers and acquisitions (M&A) are sometimes used interchangeably, they have distinct legal meanings. Two companies of similar size merge to establish a new single entity.
An acquisition, on the other hand, occurs when a larger organization purchases a smaller company and absorbs its operations. Depending on the target company's board of directors' approval, M&A agreements can be friendly or hostile.
Types Of M & A Transactions:
Horizontal, vertical, concentric, and conglomerate mergers and acquisitions are examples of distinct types of mergers and acquisitions.
When a company merges or acquires another company that delivers the same service or product to ultimate customers, this is known as a horizontal merger. Both businesses are in the same industry, serve the same clients, and are in the same stage of development.
A vertical merger is similar to a horizontal merger, except that the companies are at different phases of production. A vertical merger would occur, for example, if a car manufacturer purchased a company that supplied seat belts for the cars. Both businesses are in the same industry, but they are at different stages of the manufacturing process.
A concentric merger is another sort of M&A. This occurs when two businesses in the same industry have the same clients but offer distinct products and services. The products or services must complement one other for a merger to be termed concentric. A cell phone firm merging with a cell phone case company is an example of a concentric merger.
A conglomerate merger occurs when two completely different businesses unite. This form of merger and acquisition is commonly used to grow into new industries.
M & A Example
Google and Android Acquisition - Google purchased Android for an estimated $50 million in 2005. Android was a relatively unknown mobile startup company at the time of the transaction. Google was now able to compete in a market dominated by Microsoft's Windows Mobile and Apple's iPhone.
As of May 2018, 54.5 percent of U.S. smartphone subscribers used a Google Android device, indicating that the acquisition was a success.
Reasons Behind M & A Activity
Mergers and acquisitions (M&A) can occur for a variety of reasons, including:
Identifying and exploiting synergies:
Mergers and acquisitions (M&A) are commonly used to produce synergies that make the merged firm worth more than the two enterprises separately. Synergies might emerge as a result of cost-cutting or increased revenue. Cost synergies are achieved through economies of scale, whereas revenue synergies are achieved through cross-selling, expanding market share, or boosting prices. Cost synergies are the easier to quantify and calculate of the two.
When opposed to organic growth, inorganic growth through mergers and acquisitions (M&A) is usually a speedier technique for a firm to obtain bigger sales. Rather than risk creating those talents internally, a company can gain from acquiring or merging with a company that has cutting-edge capabilities.
Increased market dominance:
A horizontal merger will give a new organization a larger market share and the ability to influence prices. Vertical mergers also provide a company with more market power since it has more control over its supply chain and can avoid supply disruptions from other sources.
The ability to diversify:
Companies in cyclical industries feel compelled to diversify their cash flows to avoid severe losses during a downturn. By acquiring a target in a non-cyclical industry, a company can diversify and reduce market risk.
When one company has a lot of taxable income and another has a lot of tax loss carryforwards, the tax benefits are investigated. The acquirer can use the tax losses to reduce its tax liability by acquiring the company with the tax losses. Mergers, on the other hand, are rarely carried out only to save money on taxes.
Advantages Of M & A
Some of the advantages of M&A agreements are related to efficiencies, while others are related to capabilities, such as:
Economies of scale have improved. Costs can be decreased, for example, by being able to purchase raw materials in larger quantities.
Market share has increased. If the two businesses are in the same industry, pooling their resources could result in a higher market share.
Distribution capacities have been improved. Companies may be able to expand their geographic service area or add to their distribution network by growing geographically.
Labor costs are lower. Getting rid of redundant employees can help you save money.
Talented workforce. Expanding the labor pool from which the new, larger company can draw can help the new, larger company grow and thrive.
Financial resources have been increased. Two companies' financial resources are typically bigger than one company's alone, allowing for further investments.
Disadvantages Of M & A
Although mergers and acquisitions are costly endeavors, they can yield significant benefits.
There are also drawbacks, or reasons not to buy an acquisition, such as:
Buying a firm comes with a lot of costs, especially if the company doesn't want to be bought
Higher legal fees might be prohibitively expensive if a company refuses to be acquired.
The expense of foregoing other agreements to concentrate on bringing two companies together.
The probability of a negative reaction to a merger or acquisition, resulting in a drop in the stock price of the company.
Transactions involving mergers and acquisitions are becoming more common. M&A opens up doors that might otherwise be closed to you.
M&A is a common expansion strategy used by businesses to quickly expand their size, service area, talent pool, client base, and resources. However, because the procedure is pricey, firms must be certain that the benefit achieved is significant.