Mergers and acquisitions (M&A) are transactions where two or more companies combine to form a new entity or where one company acquires another. These transactions are a common strategy for companies to grow, expand their market share, increase profitability, or reduce competition. In this article we will explore what mergers and acquisitions are, their types, and how they work.
What are mergers and acquisitions?
Mergers and acquisitions are two types of business transactions that involve the consolidation of two or more companies. Mergers occur when two or more companies combine to form a new entity, while acquisitions happen when one company acquires another.
Mergers can be classified into different types depending on the degree of integration between the companies involved. The most common types of mergers are horizontal, vertical, and conglomerate mergers.
Types of mergers:
Horizontal mergers occur when two companies in the same industry merge to form a larger entity. For example, the merger between Marriott International and Starwood Hotels and Resorts Worldwide in 2016 created the world’s largest hotel company.
Vertical mergers, on the other hand, involve the consolidation of companies in different stages of the production process. For instance, a manufacturer may merge with a supplier to reduce costs or increase efficiency.
Conglomerate mergers occur when two companies in unrelated industries merge to form a new entity. This type of merger is usually done to diversify the portfolio of the new company and reduce the risk of depending on a single industry.
Acquisitions can also be classified into different types depending on the way they are executed. The most common types of acquisitions are friendly and hostile takeovers.
Friendly takeovers occur when the target company agrees to be acquired by the acquiring company. In contrast, hostile takeovers happen when the acquiring company makes a bid for the target company without its consent.
How do mergers and acquisitions work?
Mergers and acquisitions involve a complex process that usually starts with the identification of potential targets or partners. This stage requires extensive research and analysis to determine the compatibility of the companies involved, their financial health, and their potential synergies.
Once a target or partner is identified, the acquiring company may make an offer to purchase the target’s shares or propose a merger. The target company’s board of directors and shareholders will then evaluate the offer and decide whether to accept or reject it.
If the offer is accepted, the acquiring company will typically conduct due diligence to verify the accuracy of the information provided by the target company. This stage involves a thorough review of the target’s financial statements, operations, legal and regulatory compliance, and other relevant aspects.
After due diligence is completed, the two companies will negotiate the terms of the transaction, including the purchase price, payment structure, and other conditions. The transaction will then be approved by the relevant regulatory authorities, if any, and the two companies will complete the transaction.
Mergers and acquisitions are complex business transactions that require careful planning, analysis, and execution. They can help companies achieve their strategic objectives, such as expanding their market share, diversifying their portfolio, or increasing efficiency. However, these transactions also involve risks, such as cultural clashes, financial uncertainties, and regulatory challenges. Therefore, it is crucial for companies to seek the advice of experienced strategic advisory professionals.