Mergers take place when two existing businesses bond to form one new organization. There are several reasons why companies choose to merge. Most do it to expand into uncharted market segments, boost their reach, or gain a larger share of the market. The main purpose of this type of transaction, however, is to increase the value of the company and satisfy shareholders.
Types of Mergers
Conglomerate mergers: when the merging companies deal with different products
Vertical mergers: when two firms that manufacture parts/components for a finished product merge
Horizontal: when the merging firms are in the same business/industry
Product Extension: companies combine products that go together
Market Extension: when both companies create and sell similar products but vie or participate in different markets
Benefits of Mergers
The appeal of a merger depends on the capacity of economies of scale, market competitiveness, and the chances of a significant decline in competition. Some of the benefits of mergers include:
- Increased production leading to a boost in revenues
- Ability to compete on a global scale
- Greater business efficiency
- Ability to invest more in growth
- Ability to invest more in risk management
- Greater protection from bankruptcy and liquidation
- Greater ability to share knowledge and to diversify
A Breakdown of M&A
M&A can include several different types of transactions, such as tender offers, mergers, consolidations, business acquisitions, executive acquisitions, and purchase of assets. However, two companies are involved in all these cases.
In a merger, both companies’ boards of directors seek out their shareholders’ approval in order to go through with the deal. After the deal, the firm acquired becomes part of the purchasing firm. An acquisition, on the other hand, happens when the purchasing firm gains the controlling stake in the acquired company, which retains its legal makeup and name.
A consolidation leads to the creation of a new organization. Shareholders of both organizations must approve the deal, and following the endorsement, they are given equity shares in the new corporation. In a tender offer, the purchasing firm bids for the outstanding stock of the selling company at a set price. The buyer deals with the other firm’s stockholders directly, sidestepping its board of directors and management.
In a deal involving the acquisition of assets, one firm buys the assets of another business, which must seek consent from its stockholders. This usually happens during bankruptcy proceedings. The acquired business is then shut down following the final asset transfer. Finally, a management acquisition, also referred to as a management-led takeover, happens when the managers of a firm attain a controlling interest in a company, transforming it into a private business.
Are M&As Good for Everyone Involved?
To the stock market, a merger is comparable to catnip, since it typically comes with a significant increase to investors’ stock portfolios. Newspapers and financial publications often venerate the deals with awesome accounts of how they were orchestrated, complete with photos of jovial executives posing and shaking hands.
On the other hand, for all the profits they seem to promise, such deals may have a gloomy side. Research suggests that deals made during buyout floods are more likely to result in failure. In addition, when one firm uses its stock to purchase another firm’s stock, its shareholders’ stakes usually decline. Even more troubling, a few aggressive companies tend to use such deals to hide declining fiscal health and to garner huge executive bonuses.
Valuation Issues
Generally, both companies involved in an M&A deal have different viewpoints about each other. The purchaser, for example, will bargain for the lowest price, while the seller will try to bring in the highest price possible. However, there are several valid valuation techniques, the most common of which is to look at other similar firms in the same industry. Deal makers can also employ a wide range of techniques when evaluating the target business. Some of them include:
How an Online Data Room Benefits a Merger
Online data rooms refer to online storehouses of important documents about an organization. Typically, business use virtual data rooms during merger deals to facilitate the due diligence carried out by buyers. Businesses fill virtual data rooms with the key documents, including intellectual property, business contracts, capitalization data, financial data, employee data, and much more. Essentially, they help expedite the merger process.
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