Merger and Acquisition: Types, Benefits and Strategies

Merger and Acquisition(M&A) has been defined as the combining of companies. It is a general term that is used to refer to the consolidation of different companies to form one company. M&A include some financial transactions such as asset purchase, acquisition management and tender offers. M&A is a way through which companies restructure themselves.

Merger and acquisition involve buying, selling and combining different companies and their assets.

You need to keep track of and understand the strategies that are adopted.

So how do you develop a Merger and Acquisition Strategy to dominate the deal or strategies to scale your business while involved in the process of demerger?

Because, ultimately, mergers and acquisitions are not only about scaling your business. It is about generating revenue so that shareholders of the company can benefit from it.

This article will help you get started on understanding and building strategies.

How do mergers and Acquisition work?

Mergers and Acquisition is a way through which companies come together to form one single legal entity (company). The method involves combining of their asset and also varied activities that include controlling the shares of the companies and the assets of these firms.

It is commonly seen that merger and acquisition are used interchangeably, but they are two different concepts; where consolidation involves combining of two different firms that are of similar in size whereas in the case of acquisition a larger firm buys a smaller firm that eventually becomes a subsidiary of the larger firm.

Types of Mergers

Mergers are divided into 5 different categories :

Horizontal Merger

A merger that involves the merger of companies that are in direct competition with each other. They are mostly completed to increase the market strength or market share of both the companies. The famous companies that were involved in a horizontal merger are Compaq and HP (Hewlett-Packard) in the year 2011. The merger was for 87 billion US dollars.

Vertical Merger

A vertical merger of companies involves the merger of companies along the production and distribution process of the whole business organisation. The basic rationale behind the vertical merger is combining of companies to make a better flow of information in the supply chain.

As was seen in the merger of Time Warner and America online in the year 2000. This merger was considered vertical due to the fact that AOL only distributed information online whereas Time Warner was known to distribute information to CNN and Time Magazine.

Product-extension Merger

A product-extension merger is a combining of companies that sell related products or services and function in the same market. The companies in the merger can group their products and gain access to a broader demographic. Both companies come together to use similar distribution channels. This is the reason why the two companies complement each other.

Note: The products of both companies are not identical but are similar.

Market-extension Merger

Companies selling the same product or providing the same services but in different market combine their products to gain access to the broader market and consequently larger consumer base.

Conglomerate Merger

A conglomerate merger is a merger between companies that are unrelated to each other. The most significant risk factor in this merger is a significant shift in the operations of the company with a separate product and different markets and consumers.

The major Conglomerate merger was seen with companies like Walt Disney and American Broadcast Companies (ABC). Disney was involved in the entertainment business whereas ABC is engaged in providing advertisement and news.

Merger and Acquisition Process

The entire M&A process may take upto 6 months to many years to complete depending upon the strategies adopted by the professionals. Merger and Acquisition process is a 10 step process which includes:

  • Developing Acquisition Strategy

You need to lay down the purpose of acquiring the target company, for instance, why are you buying the company is it for expanding your product line or for gaining access to the new market. The strategy helps you develop a clear idea of what they expect to gain from the acquisition.

  • Setting up of search criteria for your M&A

Merger and Acquisition require setting up of search criteria for the target companies. The criteria will include the geographical location of the company, customer base and the profit margin of the company.

  • Setting up of acquisition targets

Based on the above search criteria the acquirer needs to select target companies and then obtain the information about them all.

  • Acquisition Planning

You can then make contact with one or more companies that would meet the search criteria set by them. This initial conversation is to see how accepting that company is to a merger or acquisition.

  • Valuation Analysis

Based on the communication with the target company went well then you can ask these companies for substantial information, i.e. their financials for the current year so that you can further evaluate the target company.

  • Preparing Negotiations

Based on the research in the financials of the company several valuation models are prepared for the target company. If you think you have sufficient information you can bring a reasonable offer to the table.

Based on the offer presented both the companies negotiate.

  • Due Diligence

Getting company information is a technical and exhaustive process that will begin only when the offer. The primary purpose of this examination process is to provide an analysis of every possible aspect of the operation of the companies. The procedure to be valued includes assets and liabilities of the company, demographics of the customers and financial metrics and all the legal obligations and cases.

  • Sale and Purchase Contracts

If the due diligence has no significant problems or concerns then, in that case, the next step for forwarding will be the execution of the final contract for sale. The parties will make a final decision based on the type of purchase agreement.

  • Financial strategies

Once the target company has signed the sale purchase document, the complete detail of financing will come together.

  • Closing and integration of Acquisition

When an entire acquisition deal is closed the target company and the acquirer work together in the process of merging of the 2 companies.

What is merger and acquisition strategy?

In 2015 India saw a lot of Inbound deals  and activities involving (report)

Preparing a strategy for M&A process is the most complicated task which a professional needs to deal with such as all the laws applicable to these deals which can range from antitrust laws, regulations governing corporate law, taxes, contacts, market conditions and all the specific negotiation points.

The documents required for structuring the strategies is the Timesheet and Letter of Intent.

Applicability of Merger provisions to Foreign Companies

Companies act permits and recognise merger of foreign companies into Indian company(Inbound Merger) but an outbound merger, where an Indian company merger into the foreign company is not allowed.

Advantages of Merger and Acquisition

The advantages of any merger or acquisition depend upon the short term and long term strategies of the company. The major affecting factors are the market environment, a cost incurred in acquiring the company and changes in the financial power of the company bought.

Following are the advantages of merger and acquisition are:

  • To take control of the market. This the most common reason why companies enter into merger and acquisition.
  • Helps in reducing the risks using innovative techniques in managing the financial risks
  • One of the major advantages is tax benefits; mergers are used to increase tax leverage and utilise all the alternative benefits that come along with it.
  • Have made the market a competitive minefield and forced companies to peak through technological development.

Demerger

Demerger of the companies involves transferring of the companies one or more business undertakings to other companies. The company separates different units of the company with an intent to distribute the operations between the newly formed companies.

The underlying intent behind demerger of the company is to specialise the smaller companies in their operations thereby increasing their effectiveness and efficiency. The demerger process is a systematic manner of expanding the operation of your company that would allow the smaller divisions to grow as a separate and focussed entity.

The shareholders of such a company can participate in the operations of the company management and decision-making process which in turn benefit the applicant companies.


Related Articles


Search Companies