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Definition of Mergers and Acquisitions

In an M&A transaction, the valuation process is conducted by the acquirer, as well as the target. The acquirer will want to purchase the target at the lowest price, while the target will want the highest price. Understanding which types of merger or acquisition will best support your long term strategy requires a careful look at the pros and cons of each type, and the support of an expert advisor for guidance. According to Beinsure Media, there are a number of different types of mergers and acquisitions, including vertical, horizontal, congeneric, market-extension, product-extension, and conglomerate. Most often, win-win deal structures are more likely to lead to a sealed merger or acquisition deal and may even reduce the time required to complete the M&A process. The most difference between M&A - a merger and an acquisition relates to the size of the companies involved. In an ‘unfriendly’ deal (or hostile takeover), a target company does not wish to be purchased, but may do so out of necessity. In these instances, it is always considered an acquisition.

Definition of Mergers and Acquisitions

Mergers and acquisitions are a type of business reorganization in which companies pool their capital. In other words, this is an accession to another legal entity.

In international transactions, this process is called "Mergers and Acquisitions", or M&A. Merger just means “merger”, and acquisition means “acquisition”.

"Where is the takeover then?" - you ask. And here lies a little secret, and we will talk about it a little lower.

It would seem that mergers and acquisitions are close in importance. But, as always, everything is decided by the details: these processes have significant differences.

Merger types

A merger is a voluntary association of two or more companies to create a new economic unit.

It can happen in different ways.

• Merging forms - all participating companies cease to exist independently and create a new legal entity that will be a full-fledged "heir" of rights, obligations and capital.
• Asset merger - the participating companies continue to operate independently, but transfer exclusive rights to the new one, for example, to production or capital.

There are many types of mergers. It all depends on how we want to separate them.

For example, by type of activity of companies:

• Horizontal. The companies are direct competitors to each other. They work in the same field and produce the same product. The main goal is to strengthen the company and reduce competition. Such association contributes to the creation of a monopoly.
• Vertical. The companies are united according to the supplier-manufacturer principle. That is, the manufacturer is merging with the supplier. The purpose of such an alliance is to simplify production processes and reduce production costs. The company will thus be able to release the finished product immediately, without resorting to third parties for various improvements.
• Parallel (or generic). Two companies that produce related products enter into an alliance. For example, a manufacturer of smartphones and a company that makes screens for them. As a result, one company is responsible for the process, which improves performance and quality.
• Circular (or conglomerate). The union of two organizations that are not connected in any way with either production or a related field. They never interacted with each other and were not competitors. For example, a clothing manufacturer teams up with a grocery company. This is mainly done to expand the market and increase sales, but in fact, the true reasons depend on many factors.
• Reorganization. A combination of two completely different companies. Motives for this may vary. For example, the bankruptcy of one of them.

By nationality":

• Domestic - takes place on the territory of one country.
• Imported - rights to foreign companies are acquired.
• Export - the company transfers the rights of an organization located in another state.
• Mixed - the participants in the merger are located on the territory of different states.

On a territorial basis:

• Local – takes place in one city/town.
• Regional - does not go beyond the territory, region, republic.
• National - in the territory of one country.
• Transnational - several countries participate.

There are also two more types of merging: friendly and unfriendly. But this brings us to the fine line where the concepts of "merger", "acquisition" and "accession" collide.

From the name you can already guess that a friendly takeover is in the format of an agreement. That is, the owners of the two organizations discussed all the terms of the transaction in advance and signed the contract.

In the case of a hostile or aggressive takeover, the process takes place without the consent of one of the participants. Naturally, no interests of the acquired company are observed. Sometimes one of the parties uses such active and violent methods that it turns into a raider seizure and falls under the Criminal Code.

How mergers are conducted 

Merger deals are a well-established algorithm, the purpose of which is to create the most transparent and comfortable conditions for both parties. Everything happens in several stages.

1. First of all, you need to predict how the merger will affect the organization. It is necessary to understand exactly that the whole undertaking will bring only positive results.
2. Search for a future company to merge. Usually it is selected according to such criteria as: industry, geographical location, debts, current position of the legal entity, capital, period of its existence, etc. There may be more selection conditions, it all depends on the goals.
3. After a suitable legal entity is found, an analysis of its activities is carried out. At this stage, it is important to understand how much profit the candidate will bring.
4. At this stage, the parties discuss the terms of the merger with the candidate company. 
5. Conclusion of an agreement. The parties sign an agreement and carry out all organizational work related to the formation of a new legal entity: the announcement of a responsible person, the distribution of responsibility, the formation of a new package of documents, etc.
6. After some time, they check the effectiveness of how the results of the merger / acquisition coincided with the real picture.

As a rule, the transaction must meet several requirements:

• participants should not hide problems with the law;
• the transaction should not be carried out according to a fraudulent scheme;
• the possibility of terminating the contract in case of violation of the conditions, as well as payment of compensation to the injured party, should be provided.

Of course, in reality there can be many nuances that can make changes to the standard set of stages. This is especially true for international transactions, when the national aspect plays an important role.

Motives for Mergers and Acquisitions

Of course, the first thing that comes to mind is the economic benefit. An M&A deal is a good way to raise capital by merging two or more companies.

But in reality, there can be a lot of reasons for a merger or acquisition. And it is not only the "acquirer" of fundamental rights who benefits from this. The acquired company may also pursue its own motives. Let's consider the main ones:

• Business growth. Sometimes going off the beaten path and merging with a company is much easier than creating a division from scratch.
• Increase in efficiency. By teaming up, companies create a better product or service that outperforms the competition.
• Reducing production costs.
• Expansion of influence. After the merger, the market share increases, as well as competitiveness.
• Monopoly. Reducing competition makes it possible to dictate their terms and prices in the market for certain services.
• Business diversification. The legal entity can now create new products and thereby diversify the business.
• Synergy. Joint work of several companies always brings more results than working separately.
• Acquisition of knowledge and technology. After the merger, the companies get mutual experience from each other. This is expressed both in knowledge and in technological capabilities.

Reasons for the company to be taken over:

• Technical development. This is especially true when small companies become part of large organizations.
• Preservation of jobs or part of them.
• Getting rid of debt.

So, the motives for the merger can come from both sides. Although, of course, as a result, the absorbing company always gets more.

In addition, there can be many more reasons, and they can sometimes be very unpredictable, because everything depends on individual characteristics.

by Andrea Wilkinson on 2023-09-07 09:41:11