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Mergers and Acquisitions (M&A) refer to
transactions where two companies come together in some way. These transactions include, for example, mergers, acquisitions, consolidations, tender offers, and management takeovers. The term M&A also encompasses the divisions within financial institutions dealing with such activities.
"Merger" and "Acquisition" carry different legal implications. A merger typically involves two companies of similar size coming together to form a new entity. Conversely, an acquisition occurs when a larger company purchases a smaller one, absorbing its business. Acquisitions can be either friendly or hostile, depending on whether the target company's board agrees.
The following are explanations of some transactions that fall under the term M&A.
Mergers
Mergers involve a decision by the board to combine companies, requiring shareholder approval. Typically, merging companies are of similar sizes, forming a new entity and issuing new shares. Essentially, a merger is an agreement uniting two existing companies into one new entity. These transactions are often conducted to expand a company's reach, enter new segments, or gain market shares, all aimed at enhancing the company's value.
Example: Daimler-Benz and Chrysler ceased to exist when they merged, forming a new entity, DaimlerChrysler. Both companies' stocks were surrendered, and new corporate stocks were issued in their place.
Acquisitions/Takeovers
An acquisition occurs when one company purchases most or all shares of another to gain control. Acquiring over 50% of a target company's shares and assets allows the acquirer to make decisions without other shareholders' consent. Acquisitions can happen with or without the target company's agreement. In agreed acquisitions, there is often a no-shop clause during the process, restricting the seller from seeking offers from other parties.
Consolidations
Consolidation involves merging essential operations to form a new entity while discarding previous corporate frameworks. Shareholder approval from both companies is necessary for the consolidation, with shareholders receiving common shares in the new entity once approved.
Tender Offers
A tender offer is a proposal to purchase some or all shares of a company. It is usually publicly announced, inviting shareholders to sell their shares at a specified price and within a defined time frame. The offered price typically exceeds the market price and often depends on a minimum or maximum number of shares sold.
Management Buyouts (MBO)
In an MBO, a company's management team acquires its assets and operations. This transaction appeals to professional managers, offering greater opportunities and control as owners than as employees.
Asset Acquisition
In an asset acquisition approach, a company obtains another entity's assets instead of its stocks. Approval from the shareholders of the entity being acquired is necessary for this transaction. Asset acquisitions are often prevalent in bankruptcy proceedings, where multiple companies compete for various assets of the bankrupt entity. Subsequently, once the assets are transferred to the acquiring entities, the bankrupt entity undergoes liquidation.
Mergers can be structured in various ways, depending on the relationship between the involved companies:
Horizontal Merger
Occurs between two companies operating in similar industries. These companies might be competitors, but not necessarily.
Vertical Merger
Takes place between a company and its supplier or customer along its supply chain. The company aims to move up or down its supply chain to strengthen its position in the industry.
Congeneric Merger
A Congeneric Merger refers to the union of two companies within the same industry that cater to the same customer base but through distinct approaches. For example, imagine the merger of a smartphone manufacturer and a mobile network operator. Both operate within the telecommunications industry, yet each offers different services or products targeted at the same consumer base.
Conglomerate
Unlike the congeneric merger, in a conglomerate, the two companies have dissimilar business activities. Theoretically, these companies have no overlaps and do not compete. However, they may share commonalities in technology, production, or research.
Market Extension Merger
Involves two companies selling the same products in different markets.
Product Extension Merger
Involves two companies selling different yet related products in the same market.
Mergers and acquisitions (M&A) can occur for various reasons, such as:
Synergies
The merged entity holds more value than the sum of the two individual companies. Synergies can be achieved through cost reductions or increased revenues. Cost synergies arise from economies of scale, while revenue synergies usually come from cross-selling, increased market share, or higher prices.
Growth
Expansion via M&A, known as inorganic growth, often enables a company to achieve higher revenue levels more swiftly than through organic growth. Acquiring or merging with a company that possesses advanced capabilities offers the advantage of reaping benefits without the inherent risks associated with internal development.
Market Power and Competition
Horizontal mergers provide the resultant entity with an expanded market share and the ability to impact pricing. Similarly, vertical mergers enhance market power by affording the company greater control over its supply chain, thereby reducing vulnerability to external supply disturbances.
Diversification
Firms within cyclical sectors aim to diversify their cash flows to mitigate significant losses during industry downturns. Acquiring a business within a non-cyclical industry enables diversification.
Tax Benefits
Tax advantages come into play when a company with substantial taxable income merges with another holding tax loss carryforwards. The acquiring company can leverage these losses to minimize its tax obligations. Nonetheless, mergers are usually not solely orchestrated for tax avoidance purposes.
Payment methods in mergers and acquisitions vary between stocks and cash, often combining both in a mixed offer. Under a stock offer, the acquirer issues new shares to the target company's shareholders, with the number of shares determined by a preset exchange ratio, accounting for stock price fluctuations. Alternatively, in a cash offer, the acquirer directly pays cash to acquire the shares of the target company.
Another form of acquisition, known as a reverse merger, allows a private company to go public relatively quickly. Reverse mergers occur when a private company, having good prospects and seeking funding, acquires a publicly traded shell company with no legitimate business operations and limited assets. The private company merges with the publicly traded company, collectively forming an entirely new publicly traded entity with tradable shares.
Typically, shareholders of the acquiring company may notice a temporary decline in stock value in the days leading up to a merger or acquisition. Simultaneously, the stock value of the target company usually increases. This trend often stems from the fact that the acquiring company needs to deploy capital to acquire the target company at a premium to its stock prices prior to the acquisition. Once a merger or acquisition becomes official, the stock price usually surpasses the value of the respective company in the pre-acquisition phase. Under favorable economic conditions, shareholders of the merged company generally benefit from favorable long-term performance and dividends.
It's important to note that due to the increased number of shares released during the merger process, shareholders of both companies may experience a dilution of their voting rights. This phenomenon occurs primarily in stock mergers, where the new company offers its shares in exchange for shares of the target company at an agreed-upon exchange rate. Shareholders of the acquiring company only experience a minor loss in voting rights, while shareholders of a smaller target company may face a significant erosion of their voting rights within the relatively larger pool of stakeholders.
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