Mergers and acquisitions, commonly referred to as M&As, serve as primary strategies for corporate growth. If you are looking for a way to reduce competition, increase market share, break into new markets, or increase overall sales revenue, these are excellent options.
However, mergers and acquisitions are complex. So, here in this article, we will explore everything you need to know when it comes to mergers and acquisitions.
What Are Mergers And Acquisitions (M&As)?
Mergers and acquisitions are when two or more companies consolidate or one company acquires another one. They are strategic initiatives where two companies combine forces in order to create a stronger and more competitive entity.
By combining the operations of previously separate companies, substantial operational advantages can be achieved as the risks are diversified and the access to resources is improved.
M&As can also result in competitive advantages, cost savings and the opportunity to generate additional value. This can improve shareholder value over the long term, which is the goal of most merger and acquisition transactions.
Takeovers are similar to mergers and acquisitions in a way, as they both involve the combination of two previously separate companies. However, takeovers are generally characterised by the acquisition of a smaller company by a larger one.
Takeovers, just like acquisitions, can be either friendly or hostile. The difference will depend on how the deal is communicated to stakeholders such as employees, investors, and the board or the target company.
Corporation law plays a crucial role in overseeing takeovers on the Australian Securities Exchange (ASX). This regulatory framework aims to foster efficient, well-informed, and competitive takeover processes. It ensures that all investors in the target company are treated equitably and are provided with a reasonable timeframe to evaluate takeover proposals.
Although mergers and acquisitions are functionally similar, there are some technical as well as legal distinctions between the two that are worth noting.
Types of M&A transactions
Let’s look at different M&A transactions:
Mergers
When two companies with similar size and value merge into a single entity, it is termed a merger. Generally, the new identity formed takes on a new name during the process. Along with this, the shares of the old companies are reissued under the new name.
In mergers, both parties enjoy substantial benefits such as streamlining operations, helping cut costs and, as a result, providing more value to shareholders.
Acquisitions
Business acquisition occurs between companies of different sizes. The larger company acquires the smaller company. Acquisition also results in a similar outcome, i.e., one entity.
Consolidations
Under consolidation, a new company is created by combining core businesses and abandoning the old corporate structures.
It refers to the process of merging two or more companies into a unified entity, seamlessly integrating their operations, assets, and resources. This strategic move aims to bring together the businesses of these companies, fostering a more streamlined and efficient organisational structure.
Tender offer
A tender offer is a public proposition extended by one company, often referred to as the acquiring company or tender offeror, to buy the shares of another company – known as the target company or offeree – directly from its investors.
Typically, this offer is presented at a specified price and is open for acceptance for a limited duration.
Divestment
Divestment involves a company strategically opting to sell, spin off, or dispose of a subsidiary, business unit, or non-core asset. This deliberate action entails reducing or eliminating a segment of the company’s operations or portfolio.
Through divestitures, companies can trim non-core aspects, allowing them to concentrate on their core strengths and generate capital for future reinvestment.
Types Of Mergers
Mergers can be classified into several types based on the nature of the combining entities and their strategic objectives. Here are the main types of mergers:
Horizontal Merger
A horizontal merger occurs when two companies operating in the same industry and at the same stage of the production process decide to merge. The goal is often to achieve synergies, increase market share, and reduce competition.
Vertical Merger
A vertical merger involves the combination of two companies in the same industry but at different stages of the production or supply chain. This type of merger aims to streamline operations, improve efficiency, and reduce costs by integrating different parts of the production process.
Conglomerate Merger
A conglomerate merger takes place between companies that operate in unrelated industries. The goal is often to diversify the business and reduce risk by entering new markets that may have different economic cycles.
Market-Extension Merger
A market-extension merger occurs when two companies selling similar products or services but in different geographic markets decide to merge. The aim is to expand the market reach and increase the customer base.
Product Extension
A product extension merger involves the combination of companies that sell different yet related products in the same market. This type of merger allows the combined entity to offer a range of products to its customers.
Congeneric Merger
A congeneric merger involves companies that serve the same customer base with different products or services. The products or services are related in some way, creating opportunities for cross-selling and bundling.
These types of mergers serve different strategic objectives and are driven by factors such as market conditions, industry dynamics, and the desire to achieve synergies. The success of a merger often depends on how well the companies involved can integrate their operations, capitalise on synergies, and create value for shareholders and stakeholders.
Types Of Acquisitions
Acquisitions can take multiple forms, depending on the nature of the transaction and the strategic objectives of the acquiring company. Here are the different types of acquisitions:
Friendly Acquisition
A friendly acquisition occurs when both the Board of Directors and shareholders of a company consent to the acquisition.
In other words, friendly acquisition occurs when the acquiring company and the target company agree to the terms and conditions of the acquisition willingly. The process involves mutual discussions, often leading to a formal agreement.
This collaborative approach allows for smoother integration and alignment of interests, with both boards and shareholders approving the deal.
Hostile acquisition
In a hostile takeover, the acquiring company seeks to gain control of the target company against its wishes. This is typically achieved by directly approaching the target company’s shareholders with a tender offer to purchase their shares.
Hostile takeovers can result in a contentious battle between the acquiring and target companies.
Reverse Takeover
A reverse acquisition, also known as a reverse merger or reverse takeover (RTO), is a transaction in which a private company acquires a public company.
In this process, the private company becomes the controlling entity, and the publicly traded company is effectively taken over. This approach allows the private company to go public without undergoing the traditional initial public offering (IPO) process.
Asset Purchase
An asset purchase involves acquiring specific assets and liabilities of a company rather than the entire business. In this, the acquirer purchases the assets of the target company and pays the target directly.
This form of acquisition allows for more flexibility and selectivity, as the acquiring company can choose the assets it wants to acquire while leaving behind those it does not wish to take on.
The following are some specific aspects that one needs to consider in an asset purchase.
- The acquiring company generally doesn’t assume all of the liabilities of the target company. Instead, it can choose to select the liabilities it is willing to take on as part of the acquisition.
- Conducting thorough due diligence is essential in an asset purchase. The acquiring company needs to assess the value and condition of the assets it intends to acquire and evaluate any potential liabilities that may come with them.
- The details of the asset purchase are typically outlined in a purchase agreement. This agreement specifies the assets being acquired, the purchase price, any assumed liabilities, and other terms and conditions of the transaction.
Asset purchases are commonly used when a buyer is interested in specific components of a business, such as intellectual property, customer relationships, or specific product lines, without assuming all of the target company’s obligations.
Stock Purchase
A stock purchase is a type of acquisition in which one company acquires a controlling interest in another company by purchasing the target company’s outstanding shares of stock. This type of acquisition results in the acquiring company gaining ownership and control of the entire business.
In a stock purchase, the acquiring company aims to acquire enough shares in order to gain a controlling interest in the target company. This often involves purchasing a majority of the outstanding shares, typically more than 50%.
The acquisition may require approval from the target company’s shareholders. Shareholders may vote on whether to accept the offer, and a certain percentage (as defined by corporate bylaws or applicable laws) may be needed for the acquisition to proceed.
Before finalising the stock purchase, the acquiring company conducts due diligence to assess the target company’s financial, legal, operational, and regulatory aspects. This thorough examination helps the buyer understand the risks and opportunities associated with the acquisition.
Before finalising the stock purchase, the acquiring company conducts due diligence to assess the target company’s financial, legal, operational, and regulatory aspects. This thorough examination helps the buyer understand the risks and opportunities associated with the acquisition.
Mergers and Acquisitions – Forms of Integration
Another breakdown of types of mergers and acquisitions is based on the way two companies choose to integrate.
Statutory
In a statutory merger, a larger company acquires the assets and liabilities of the target company to liquidate them. It then either incorporates the acquired company into the existing business or dismantles it.
Subsidiary
When the acquired company becomes a subsidiary of the new parent company, it is considered a subsidiary merger. Unlike the previous kind, the subsidiary maintains its existing business and also continues to operate.
Consolidation
In a consolidation, both companies join forces and cease to exist, followed by the formation of a completely new company that combines the two original businesses.
Advantages
Let’s look at some of the major reasons why a company purchases or merges with another one.
Eliminate competition
Removing competitors is the main reason why a lot of companies join forces. Most of the time, both of the businesses benefit from such arrangements.
Create synergies
Suppose one company has a logistical advantage. Another company may have a product that could benefit from this logistical advantage. So, in this case, mergers and acquisitions may be beneficial for both companies.
So, mergers and acquisitions (M&A) are often pursued with the aim of creating synergies, which are the benefits and efficiencies that result from the combination of two companies. Synergies can contribute to increased value, improved operational performance, and enhanced competitive advantages.
Achieve economies of scale
Mergers frequently lead to enhanced operational efficiency, enabling companies to operate more cost-effectively and attain economies of scale. This can empower organisations to trim expenses, boost access to capital, and ultimately strengthen their financial position.
Acquire talent
One of the biggest advantages of mergers and acquisitions is the opportunity to acquire top talent. Through this, the company can easily get the right employees, which, in the long run, makes the most difference.
Diversify revenue streams
Diversification is another key benefit of mergers and acquisitions that attracts a lot of attention. Acquiring companies in a wide range of markets can result in stabilising revenues, especially for those companies that are in a highly cyclic industry.
Access new markets
One of the biggest challenges most companies face is entering a completely new market. With the strategic acquisition, the company will not have to start from scratch.
Increase market share
Increasing market share is another pro of mergers and acquisitions. In mature markets with established players, expanding market share organically can be really difficult. Through smart mergers and acquisitions, both companies may continue to grow.
Avoid but not evade taxes
Finally, M&As usually result in significant tax benefits. It may also be a huge reason why companies choose to go through the process.
FAQs
What is the difference between mergers and acquisitions in Australia?
The merger is when shareholders in two different firms become the shareholders of the new fusion company. The transaction takes place if a firm buys or sells a stake in another business.
What is the main purpose of mergers and acquisitions?
M&A activities aim to increase or accelerate the growth of a product and services business. Both mergers and acquisitions allow a firm to grow in ways impossible through organic development. The benefit of mergers and acquisitions includes the ability to acquire new products.
What Is A Merger And Acquisition Process?
A merger and acquisition (M&A) process involves integrating various businesses or assets through several financial transactions. The acquisitions and mergers processes cover the whole process from merger to acquisition. These involve planning, research, due diligence, closing or implementing activities.
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