Mergers & Acquisitions (M&A) are legal and financial transactions between two companies that combine their efforts and resources to achieve specific business goals.
Although these two terms are often mistaken as synonyms, there is a considerable difference between the two terms 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.
Main 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.
Benefits of M&As - Why Organizations Pursue M&A Activities
Among the benefits of M&As and reasons why many organizations pursue Mergers & Acquisitions include:
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.
Key Stages of M&As
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.
III. 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.
Mergers and acquisitions are very intricate financial and business transactions. It's even more complex in dynamic markets. Stiff competition in the market can also pose considerable challenges in framing an M&A plan and closing a deal that ensures long-term profitability.
As such, organizations may want to collaborate with strategy and management consulting firms and M&A consultants to identify the right type of M&A transaction and which M&A activity will be the most beneficial in the long run, as well as to ensure all the bases are covered for profitability and sustainable growth in the future.
When executed properly, M&As can be completely worthwhile and guarantee a company's success.