What are Mergers and Acquisitions (M&A)?

Where two or more companies merged and form a single entity or where one company purchases and absorbs another company is known as merger and acquisition. In case of merger when two companies join together to combine resources and expertise for mutual benefit and form a new company. The companies often of similar size and strength. Mergers are of different types:

• Horizontal Merger: Companies in the same industry merge with each other. Example: Facebook and Instagram merged in 2012.
• Vertical Merger: When two or more company producing common product and services who are in different stage of same supply chain. It involves a partnership or acquisition where one company is a supplier or distributor for the other. Example: Netflix and Original Content Studios. Netflix started producing its own original content instead of relying solely on external production houses.
• Conglomerate Merger: Merger between the companies operating in unrelated business. Example: Amazon and Whole Foods 2017

An acquisition occurs when one company usually larger or financially stronger, buys another company and takes control of its operations. The acquired company may retain its name and structure acquisition occurs when one company, usually larger or financially stronger, buys another company and takes control of its operations. Acquisitions can be of types:

• Friendly Acquisition: Agreed upon by both companies. Example: Disney and Pixar 2006.

The Walt Disney Company acquired Pixar Animation Studios in a friendly deal. Both companies saw the merger as mutually beneficial, with Disney gaining access to Pixar’s creative capabilities and Pixar benefiting from Disney’s distribution and marketing expertise.

• Hostile takeover: The acquiring company bypass the management of the target company. Example: Kraft foods and Cadbury 2010.

Kraft Foods launched a hostile takeover of Cadbury a British confectionery giant.   At first Cadbury’s management wasn’t ready for the takeover but Kraft increased its offer and directly appeal to Cadbury’s shareholders.

Objective of Mergers and Acquisitions

Mergers and Acquisitions (M&A) are undertaken by companies to achieve various strategic, financial, and operational objectives. Here are the key goals:

1. Diversification: Any entity enters new industry or offer different product and services to reduce its risk. This provide stability to the entity even if one market or product line do not perform well.
2. Strategic Growth: To execute long-term growth strategies such as vertical integration to control supply chains or forward integration to control distribution.
3. Market Expansion: Companies enter into M&A to enter into new market segment or new geographic reason and to expand its customer base.
4. Synergies and efficiency: To achieve operational synergies by combining resources, expertise, and infrastructure. This reduces costs and increases efficiency.
5. Cost advantage: Companies can reduce its per unit cost by scaling-up production or operation.
6. Increased market power: To strengthen competitive position by acquiring competitors or increasing bargaining power with suppliers and customers.
7. Access to new technology: Companies acquire new advanced technologies or a skilled workforce to remain innovative and competitive.

Process of M&A

The process of merger and acquisition involves several steps to ensure the deal is sound, financially beneficial and legally compliant. Here is the process:

• Strategy Development: Identify why the company wants to opt for M&A, set the clear objective, choose the type of M&A and align the M&A strategy with the company’s long term goals.
• Target identification: Find the right company based on financials, market position and compatibility target it then perform analysis to ensure the target aligns with the strategic goals then merge with the target or acquire it.
• Valuation: Analyze the financial statement, revenue, asset and liabilities. There is valuation technique like discounted cash flow, market multiple or comparable transactions. Use this to evaluate the target’s market position and growth potential.
• Negotiation: Determine the structure or deal negotiate key term such as price, payment structure and other conditions and then draft the preliminary agreement.
• Due Diligence: Perform a thorough investigation of the target company to uncover risks and validate the deal by focusing on areas like Auditing financial statement, tax records, reviewing contracts and regulatory compliance, assessing supply chains, production process and understating compatibility between organizational cultures.
• Regulatory approval: Address legal and regulatory issues specific to the industry involved, take approval of board and secure shareholders if required and ensure compliance with laws and obtain necessary approvals.
• Financing the deal: Determine the financial structure, secure loans or issue share if necessary and confirm the availability of funds before deal closure.
• Signing the Agreement: Finalize terms and condition in the merger or acquisition agreement and include clauses for dispute resolution, exit strategies and post-deal contingencies in agreement.
• Integration Planning: Develop a detailed integration plan addressing operations, systems and workforce. Identify key synergies and cost-saving opportunities. Assign leadership roles and integration teams.
• Deal closure: Officially complete the transaction by transferring ownership and funds as per the agreement and announce the transaction to stakeholders, employees and the market.

Benefits of Mergers and Acquisitions

Mergers and Acquisitions (M&A) offer multiple benefits. Companies opt for M&A to enhance company’s growth, competitiveness and financial performance. By merging with or acquiring another company, businesses can achieve economies of scale, reducing costs per unit and improving operational efficiency. Here are some of the benefits of M&A:

• Enable companies to enter into new geographical market and increase their market presence and customer base.
• Two or more companies combine their operations which help it to reduce cost per unit by sharing resources, production facilities and administrative function.
• Reduce dependence on single product, market or industry and lowering risk of underperformance.
• M&A enhance profitability by creating new revenue streams and optimize cost structures.
• It helps to provide a quicker path to growth compared to organic strategies like developing products or entering markets from scratch.
• It gives tax advantages; companies can utilize tax shields or offset profits with the acquired company’s losses.

Challenges in Mergers and Acquisitions

Mergers and Acquisitions (M&A) are complex processes that come with significant challenges which if not managed properly, can hinder their success.

One major obstacle is cultural integration, as differences in organizational cultures and values can lead to conflicts and reduced employee morale. Regulatory and legal compliance also pose challenges, especially when the merger involves companies in different jurisdictions with varying laws.

Financial risks, such as overvaluation of the target company or underestimating integration costs, can strain the acquiring company’s resources. Operational difficulties, including integrating systems, processes, and supply chains, often lead to disruptions.

Additionally, resistance from stakeholders whether employees, management, or shareholders can slow the process. Communication gaps and unclear post-merger strategies further complicate matters, making it essential to plan meticulously and address these challenges proactively to achieve the intended objectives of M&A.

Conclusion

Mergers and Acquisitions (M&A) are powerful strategies for companies seeking growth, diversification, and competitive advantage. It has numerous benefits, including economies of scale, market expansion, access to new technologies, and improved financial performance.

However, the success of M&A depends on careful planning, thorough due diligence and effective post-merger integration. Addressing challenges such as cultural alignment, regulatory compliance and operational synergy is critical to realizing the full potential of the transaction. When executed with a clear strategy and robust management, M&A can create significant value for companies, their stakeholders and the markets they serve.