Mergers & Acquisitions Surge During COVID: Types and Stages You Should Know

Mergers & Acquisitions (M&A) are legal and financial transactions between two companies that combine their efforts and resources to achieve specific business goals.

According to a study by Gartner Inc, mergers and acquisitions will hit record high next year due to economic uncertainty resulting from the COVID-19 pandemic, which is the main driving force that’s compelling enterprises to make some “tough decisions”, particularly in the technology business sphere.

“Market conditions for deal making will continue to improve as volatility stemming from COVID-19 subsides,” said Max Azaham, senior research director at Gartner. “Tech CEOs pursuing acquisitions should anticipate increased competition for targets and take steps to gain advantages over other acquirers to earn seller acceptance.”

Although these two terms are mistaken as synonyms in most cases, there is a considerable difference between them with respect to their application.

Merger: Merger refers to the process of combining the forces of two companies under one corporate name such that both the firms come to exist as a new entity.

Acquisition: On the contrary, acquisition refers to the act of completely taking over a firm by another organization such that it gains absolute control over it.

As you might expect there are different types of mergers and acquisitions that exist:

 

Types of Mergers & Acquisitions

 

M&A transactions can be largely divided into four types:

i. Horizontal - A horizontal merger occurs between two companies that belong to the same industry and trade on the same products and services. A horizontal merger essentially helps to expand the supply chain and establish a dominant presence in the market.

ii. Vertical - Vertical mergers occur between two firms that belong to the same industry but trade on distinct products and services. Vertical merger helps to expand resources and workforces and become more vertically integrated.

iii. Conglomerate - Conglomerate mergers occur between two companies that belong to completely different industries and have a distinct customer base. Conglomerate merger primarily helps with increasing the customer base and minimizing investment risks.

iv. Concentric - Concentric mergers take place when two firms have a similar customer base but belong to two distinct industries. This helps to maximize the product and supply range and offers a competitive edge.

To identify which M&A activity will prove beneficial in the long run, organizations may need to actively collaborate with strategy and management consulting firms and M&A consultants to ensure all the bases are covered for profitability and sustainable growth in the future.

 

Why Organizations May Need to Pursue M&As

 

Mergers & Acquisition activity helps in various ways, including:

 

1. Achieve higher growth

 

M&A activity can help to achieve higher and faster growth inorganically.

It can bring in much more revenue than what a company could have achieved in a new market on its own if it chose to grow organically.

 

2. Unlock existing synergies

 

This is perhaps the most important reason for investing in an M&A activity.

M&A helps to create synergies in which the new company is worth much more than the combining companies did individually.

It reduces competition and also helps with cost reduction, and ensures higher revenue.

 

3. Product diversification

 

M&A activity helps to improve the supply chain, and therefore, ensure improved profitability.

Combining firms are able to diversify their range of products and services, and therefore, can capture a wide customer base.

 

4. Stronger position in the market

 

M&A improves the market share of the combining companies. With an enormous market share, these firms can consolidate their position in the market and influence prices.

 

Stages of M&A

 

Having learned about the different types and importance of M&A, now let's take a look at the stages of M&A activity itself.

The stages of closing an M&A deal typically consist of four main parts:

 

I. Deal preparation

 

At this stage, parties have to identify and shortlist the target firm they wish to merge with. This involves undertaking thorough research to learn more about the targeted company.

It’s basically target profiling and framing an adequate deal at this stage.

 

II. Structuring and negotiation

 

At this stage, an organization has to frame a deal strategy, negotiate the deal amount with the target firm with a detailed SWOT analysis.

At the stage of negotiation, both parties must agree to the deal terms equally.

 

3. Performing due diligence

 

The next step involves performing all due diligence tasks, which entails re-checking the information provided by the target company to ensure there are no discrepancies.

After this, comes the process of seeking regulatory approval and drafting the final legal agreement.

 

IV. Integration process

 

Finally, you have the integration process that ensures smooth operations post-acquisition. It involves undertaking proper restructuring and staffing, taking up proper HR management, financial planning, and more.

 

In conclusion

 

Mergers and acquisitions are extremely intricate financial and business transactions. It becomes even more complicated in complex and dynamic markets.

Furthermore, the immense growth in market competition also poses considerable challenges in framing the correct M&A plan that can ensure long term profitability.

Nonetheless, when executed properly, M&As can be totally worthwhile.