Mergers and Acquisitions (M&A)

It is difficult for small firms to compete with large companies that have long occupied a niche in their industry. A successful start in business requires impressive capital and resources, which not all entrepreneurs have. In such situations, mergers and acquisitions (M&A) can be a great solution. These are the types of reorganization of commercial organizations made in order to connect two or more business entities and merge their capital. M&A deals offer opportunities for increasing capital, resources and other important business performance indicators.

Mergers and Acquisitions Goals

The main goal of mergers and acquisitions is to increase profits. The main motive of most M&A transactions is the synergistic effect. This is a complementary cooperation of two or more companies, as a result of which it is predicted that a better result will be achieved and more profit will be made.

In addition, there are other motives.

• The possibility of obtaining additional discounts from suppliers for raw materials and other resources due to increased volumes of purchases;
• Joint activities in the field of new developments requiring the integration of financial and intellectual resources;
• Reduction of tax costs due to benefits. For example, firm A has high profits and is subject to impressive taxes. Firm B receives significantly less revenue but has significant tax benefits. When firm A buys firm B, it will have the opportunity to use them in the new combined corporation. In some cases, when a company is reorganized after bankruptcy, it has the right to transfer losses to deferred profit taxable. However, this is not always possible to use. For example, US tax authorities classify transactions with the purpose only to transfer losses as doubtful and often override this right;
• Mergers and acquisitions of companies can be aimed at improving performance due to the presence of two or more companies complementary resources. Together, these companies are more expensive than individually, and after the merger, each of them receives the missing resources.
• Obtaining privileges in the capital market in the form of access to the most favorable credit conditions. These benefits are available to the largest corporations that are considered first-class borrowers.

Motives are not always explained by direct money savings. In some cases, they pursue the following:

• The ability to demonstrate high performance of the company, for example, increase in the value of shares, growth in the volume of manufactured products, increase in capital;
• Increasing the image of the company in connection with the growth of its scale and increasing the level of incentives for managers;
• Striving for such a company size when it becomes an additional guarantee of stability.

Thus, the number of motives due to financial savings and not related to direct monetary benefits can be very large – they all depend on specific situations.

Mergers and Acquisitions: Concept Differences

Often the concepts of mergers and acquisitions are considered equivalent, but this is not so.

Acquisition is a process that results in the establishment of complete control of one company over another. It occurs through the redemption of part of the authorized capital of the acquired company, the size of which should be at least 30%. For example, a certain company is rapidly decreasing its growth rate and is no longer meeting the requirements of the modern market. In this case, the value of the company’s shares is reduced, and it becomes a profitable object for absorption. Depending on the interests of the participants in the process, two main absorption groups can be distinguished:

• friendly – occur by agreement of shareholders and managers of the acquired company;
• aggressive – occur against the will of the company, which is subject to absorption. Sometimes the acquired company is not even aware of the actions of the “swallower”.

Merger is a process that results in the merger of two or more companies with the receipt of a new organization. The merger process is divided into the following types:

• Merger of forms is a union, as a result of which previously independent companies cease to exist, and the newly created legal entity is vested with all the assets, rights and obligations of the previous ones;
• Merger of assets is an association characterized by the transfer by companies of exclusive rights to a new legal entity, while they continue their activities;
• Joining is a merger of companies without the formation of a new economic unit. In this case, one of the companies continues its activity, while others are liquidated. Their rights are transferred to the remaining company.

Mergers and Acquisitions: Types and Features

There are the following types of mergers and acquisitions.

• Horizontal – a combination of companies with the same type of activity. They are implemented to increase opportunities for development and reduce competition with large companies;
• Vertical – a combination of companies with different types of activities. For example, one is a supplier of raw materials, and the second is a producer. The increase in profit with this type of merger is due to a decrease in cost;
• Parallel – a combination of companies with interconnected products. For example, a computer manufacturer merges with a manufacturer of operating systems. Such collaboration reduces costs and improves product quality;
• Circular – an association of companies whose activities were not previously associated in any way. None of them was a supplier of raw materials, a transporter for the products of the other, and they were not competitors;
• Reorganization – companies with different lines of business are connected.

The merger of companies and their types are divided according to national indicators:

• domestic – are committed in one country;
• export – provide for the transfer of rights to foreign organizations;
• import – provide for the acquisition of rights of foreign companies;
• mixed – parties to the transaction may be companies whose assets are located in different states.

In addition, M&A transactions are classified by geographic location: transnational, international, national, regional and local.

Advantages and disadvantages of M&A deals

M&A deals have both advantages and disadvantages. Let’s consider the main ones.

M&A advantages:

• weakened competition;
• a high probability of achieving good performance in a short period of time due to the efforts of both parties;
• the ability to purchase undervalued assets;
• acquisition of a well-established sales system;
• the ability of the company to enter new geographic markets.

M&A cons:

• a large share of the risk of an incorrect assessment of the company;
• significant financial costs associated with the payment of bonuses to shareholders;
• complex integration with the mismatch of areas of activity of companies;
• the risk of cultural incompatibility with cross-border unification;
• possible problems with the personnel of the acquired organization.

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Tags: acquisition, Business, finance, merger