Mergers and acquisitions (M&A) and other restructurings have existed since businesses started. Mergers happen when similar sized companies or businesses combine with each other. Acquisitions happen when a larger company takes over a relatively smaller company. Of course, strictly speaking, it is not necessary that a bigger entity acquire a smaller entity. In rare cases, a smaller company can acquire a bigger company. There is a legal difference between M&A as well. When a merger occurs, both the companies combine to form a new entity. On the other hand, when an acquisition occurs, the company that gets taken over by the parent company ceases to exist legally. M&A are key drivers of providing growth and value to both large and small corporations alike. The definition of mergers and acquisitions, although not directly stated, often incorporates divestitures and other restructurings as well.
Types of Mergers
M&A can be hostile or friendly. When both the entities are willing to combine, the resulting process is called friendly takeover. In such a takeover, the shareholders and the board of directors are amenable to the deal. If the target company is coerced to accede control, the process is called a hostile takeover. In hostile M&A’s, the board of directors of the target company is typically ousted. Such hostile takeovers are infrequent in the business world, as it can create complex lawsuits and or acrimony between the two companies. Whether a M&A was friendly or hostile, it is necessary for consultants to first evaluate the economic implications of the deal.
Mergers can also be classified on the basis of the nature of business.
Horizontal Mergers: these type of M&A’s happen between competing companies. Most of the times, it means buying or merging with your rivals. However, it can also happen between two (or more) companies that operate in similar industries that may not be direct competitors.
Vertical Mergers: A vertical merger is a merger between two or more companies involved at different stages in the supply chain process for a common good or service. Unlike a conglomerate merger, vertical M&A mergers take place between companies that produce separate services or products along a similar value chain. The main aim of such an M&A is to move up the value chain, consolidating the company’s position.
Conglomerate Mergers: Conglomerate mergers involve a merger between two businesses that are not related to each other. The two companies are in completely different industries or in different geographical areas. A conglomerate merger is helpful for companies to extend their corporate territories, to gain synergy, expand their product range, etc. It is also termed as Conglomerate Integration.
An acquisition is a process in which one corporate entity acquires the assets or shares of another company. The acquisition can be partial or complete. Post acquisition, the ‘target’ company ceases to exist. There are various ways companies go about acquisitions:
Acquisition of assets: this is the purchase of an asset or group of assets, and the direct liabilities associated with those assets.
Acquisition of equity: An acquisition of equity is the purchase of equity interest in a business entity. The differences between an acquisition of assets and an acquisition of equity are important from a legal, regulatory, accounting, and modeling perspective.
Leveraged buyout: A leveraged buyout is an acquisition using a significant amount of debt to meet the cost of acquisition.
Management buyout: A management buyout is a form of acquisition where a company’s existing managers acquire a large part or all of the business entity.
Depending upon the intentions, an acquisition can be termed friendly or hostile.
Before getting into M&A analysis, it is important to give a brief overview of the six major statements in a standard financial operating model and how they work together:
M&A consultants need to undertake a due diligence of these statements in order to proceed ahead.
Whether a company wants to go for merger or for an acquisition, it is important to understand the ramifications. Not only from a business perspective, but from a legal perspective as well. Due diligence is an evaluation process for exercising abundant caution and conducting reasonable investigation in order to evaluate attributes and risks associated with what is being purchased or sold. As we have seen. M&A can take different forms, depending upon the needs of a company. Before an M&A happens, it is imperative to determine the impact of the purchase, combination, divestiture, or other restructurings on the financial entities involved. This analysis is important for establishing post transaction value and helping to determine if the transaction is potentially worth the efforts. Due diligence is what helps determine whether an M&A is worthwhile for all the entities involved.
The most important consideration in an M&A is synergy. A properly implemented M&A improves the target company’s performance, consolidates and removes excess capacity from industry, acquires skills or technologies faster or at lower cost than they can be built and exploits a business’s industry-specific scalability. However, it is not an easy task to assess the feasibility of an M&A if you do not have the expertise. This is especially true as the size of companies grow. It takes a dedicated team to evaluate the pros and cons of an M&A, and a battery of experts to analyze the data. This is where competent M&A consultants play an important role. The M&A team understands the management’s objectives, and undertake due diligence to ascertain the companies’ financials. The M&A consultants will also suggest cost effective options that will help the management take an informed decision about how to proceed. M&A involves a whole gamut of business aspects – right from finance to IT infrastructure, and from tax liabilities to legal implications. A well qualified M&A consultant will be of immense help in assimilating the deal. In India, large cities like Mumbai, Pune, Ahmendabad, etc. have competent M&A consultants.