Mergers & Acquisitions

What is ‘Mergers and Acquisitions – M&A’

Mergers and acquisitions (M&A) is a general term that refers to the consolidation of companies or assets through various types of financial transactions. M&A can include a number of different transactions, such as mergers, acquisitions, consolidations, tender offers, purchase of assets and management acquisitions.

Merger: In a merger the boards of directors for two companies approve the combination and seek shareholders’ approval. After the merger, the acquired company ceases to exist and becomes part of the acquiring company.

Acquisition: In a simple acquisition, the acquiring company obtains the majority stake in the acquired firm, which does not change its name or legal structure.

Consolidation: A consolidation creates a new company. Stockholders of both companies must approve the consolidation, and subsequent to the approval, they receive common equity shares in the new firm.

Tender Offer: In tender offer, one company offers to purchase the outstanding stock of the other firm at a specific price. The acquiring company communicates the offer directly to the other company’s shareholders, bypassing the management and board of directors.

Acquisition of Assets: In a purchase of assets, one company acquires the assets of another company. The company whose assets are being acquired must obtain approval from its shareholders. The purchase of assets is typical during bankruptcy proceedings, where other companies bid for various assets of the bankrupt company, which is liquidated upon the final transfer of assets to the acquiring firm(s).

Management Acquisition: In a management acquisition, also known as a Management Lead Buyout (MBO), the executives of a company purchase a controlling stake in a company, making it private. Often, these former executives partner with a financier or former corporate officers in order to help fund a transaction. Such an M&A transaction is typically financed disproportionately with debt, and the majority of shareholders must approve it.

Reasons for Mergers and Acquisitions:

  • Financial synergy for lower cost of capital
  • Improving company’s performance and accelerate growth
  • Economies of scale
  • Diversification for higher growth products or markets
  • To increase market share and positioning giving broader market access
  • Strategic realignment and technological change
  • Tax considerations
  • Undervalued target
  • Diversification of risk

Principle behind any M&A is 2+2=5

There is always synergy value created by the joining or merger of two companies. The synergy value can be seen either through the Revenues (higher revenues), Expenses (lowering of expenses) or the cost of capital (lowering of overall cost of capital).

Three important considerations should be taken into account:

  • The company must be willing to take the risk and vigilantly make investments to benefit fully from the merger as the competitors and the industry take heed quickly
  • To reduce and diversify risk, multiple bets must be made, in order to narrow down to the one that will prove fruitful
  • The management of the acquiring firm must learn to be resilient, patient and be able to adopt to the change owing to ever-changing business dynamics in the industry

Stages involved in any M&A:

Phase 1: Pre-acquisition review: this would include self-assessment of the acquiring company with regards to the need for M&A, ascertain the valuation (undervalued is the key) and chalk out the growth plan through the target.

Phase 2: Search and screen targets: This would include searching for the possible apt takeover candidates. This process is mainly to scan for a good strategic fit for the acquiring company.

Phase 3: Investigate and valuation of the target: Once the appropriate company is shortlisted through primary screening, detailed analysis of the target company has to be done. This is also referred to as due diligence.

Phase 4: Acquire the target through negotiations: Once the target company is selected, the next step is to start negotiations to come to consensus for a negotiated merger or a bear hug. This brings both the companies to agree mutually to the deal for the long term working of the M&A.

Phase 5: Post merger integration: If all the above steps fall in place, there is a formal announcement of the agreement of merger by both the participating companies.

Reasons for the failure of M&A – Analysed during the stages of M&A:

Poor strategic fit: Wide difference in objectives and strategies of the company

Poorly managed Integration: Integration is often poorly managed without planning and design. This leads to failure of implementation

Incomplete due diligence: Inadequate due diligence can lead to failure of M&A as it is the crux of the entire strategy

Overly optimistic: Too optimistic projections about the target company leads to bad decisions and failure of the M&A