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Mergers and Acquisitions (M&A) is a way of consolidating two companies. Here companies join hands with each other to do business.

There are various reasons why any company goes for mergers and acquisitions step.

Also, there are a lot of companies as mergers and acquisitions examples.

We will be discussing all M&A in this blog.

So let’s get started…

What is in it for you?

  1. What are Mergers and Acquisitions?
  2. Ways of Mergers and Acquisitions
  3. Types of Mergers and Acquisitions
  4. Reasons for Mergers and Acquisitions
  5. Mergers and Acquisitions Process
  6. Conclusion
  7. FAQs

What are Mergers and Acquisitions?

M&A is a process where companies join hands to do business. In other words, consolidation of companies takes place.

If we separate the term, we get two different words. The merger means the combination of two companies to form one. For example, suppose there are two companies in the market X and Y.

Now X and Y want to merge their business. So they soon become a new company, say, Z. Now X and Y no more exist. A single company operates with the name of Z.

Then what do acquisitions mean?

mergers and acquisitions

It means one company takes over the other company. Again let us take the example of X and Y. Here X buys up Y Company, but they do not rename the whole business. Both X and Y is a separate entity.

They operate independently, but the management, rules, policies, guidelines, etc. are all the same for both companies.

I hope that by now, you are clear with the mergers and acquisitions as a whole and separate terms.

Now let us see various ways of M&A.

Ways of Mergers and Acquisitions

M&A can take place in the following ways:

  1. Purchasing assets
  2. Purchasing common shares
  3. Exchanging shares for assets
  4. Exchanging shares for shares

Types of Mergers and Acquisitions

There are seven types of M&A. Let us study each of them in detail.

Horizontal Mergers

It means those companies mergers together who are working in the same industry. It can also be possible when they are producing the ideal products.

There are various reasons for the horizontal merging of the companies. Such as:

  • Get benefit for economies of scale
  • Reduction of competition
  • Control over the market
  • Capturing large market share
  • Achieving monopoly status in the industry

An example of horizontal mergers and acquisitions are Bank of Mudra and ICICI Bank.

Vertical Mergers

In this, companies of the same industries but producing different goods join hands. This kind of M&A can be in two forms.

One is where you buy the other company that produces raw materials for your company. For example, you provide cloths. So you get a cotton yarn manufacturer company.

The other way is you get that company which helps you reach more customers. For example, you buy a marketing agency that can help you increase your reach to customers.

Conglomerate Mergers

In this, those companies come together whose industries are different. For example, a cloth manufacturing company acquires an FMCG company.

These kinds of mergers and acquisitions happen to capture the vast market and earn a substantial profit.

Concentric Mergers

Here two or more companies come together. They are those companies that share the same target customers, use the same technology, or are in the same industry.

For example, a production house acquires a marketing agency. Again their main motive is to capture the market, reduce competition, etc.

Forward Mergers

It is also known as direct mergers. Let me explain this term with an example because many of the people get confused with this term.

Do you remember the example X and Y?

Here suppose X wants to buy Y. So the Y Company mergers with the X Company, and then it stops to exist. It means now Y no more exist and is no more considered as a separate entity.

Both companies operate under a single name, X. Also, all the assets and liabilities of Y now become X’s.

Reverse Mergers

You can call this as an acquisition process. Remember, I defined this term in the beginning?

Here X buys Y, but Y does not lose its identity. It works as a subsidiary of X and continues to be a separate entity. In this, the shareholders of X Company get the shares of Y Company.

Subsidiary Mergers

In this, the target company becomes the subsidiary of the buyer. All the management for both companies now goes hand in hand.

mergers and acquisitions

Reasons for Mergers and Acquisitions

Different reasons why companies go for mergers and acquisitions are:

  1. Lower cost of capital – When the companies merge, all the assets and liabilities of the company becomes of other companies. So, here the company got the advantage of a lower cost of capital.
  2. Improves performance and growth – After merging, the work power increases—the existing capital increases. Hence, performance and growth also enhance.
  3. Economies of scale – You get the advantage of economies of scale. There is a chance of getting more extensive opportunities for your business.
  4. Diversification of product or market – means that after merging, you can go for diversification of the product. You can add a new product line to your actual business. Also, you can go for diversifying your market. Try to enter some new market if you get or see the opportunity.
  5. Increase market share – You get a more extensive market share, which proves to be beneficial for your company. Also, you are now able to connect with more customers.
  6. Strategic realignment – It means you can plan your marketing and other business functions. It gives you an edge over other competitors.
  7. Technological change – The company you merged with may use high technology in the production process or other business activities. So you get the support of technologies.
  8. Tax considerations – Again, you also get the advantage of tax considerations.
  9. Undervalued target – It might happen that you have missed connecting with some of the customers or cannot serve any particular area. By merging process, you get the opportunity to come out from an undervalued target market.
  10. Diversification of risk – After merging the risk, your company bears now will be taken by both of the companies. So your risk gets distributed, and you have to face less burden.

Mergers and Acquisitions Process

Let us look into M&A process in detail.

Pre-Acquisition Review

Think for a while. If you are planning to get any company, you will check and analyze everything. Like what benefit you will get if you go for merging or acquiring any company. You will plan out everything.

Search and Screen Target

In this stage, your search for an able company with whom you can go for joining hands. So you do the screening of all the possible companies.

Let's Decode: Financial Modeling for Merger & Acquisitions

Investigation and valuation

Once you have analyzed all the possible companies and chose the apt one for your company, investigate everything.

You can check them in the following fields:

  • Market position
  • Share price if they are listed company
  • Customer reach
  • Mission, vision, aims, and objectives
  • Future plans
  • Work effectiveness and efficiency
  • Workforce
  • Goodwill in the market
  • Profit and Loss account
  • Balance Sheet
  • Liquidity status
  • Sources of funding
  • Debt/Equity Ratio

These are some of the areas I have mentioned. Consider adding more if you find anything useful.

After checking all this and if you find it perfect, then go for valuation. Find out how much you are ready to pay for that company.

Negotiation and Acquiring

After investigating and evaluating the target company, start negotiating with the company. Discuss with them how much they are asking for, and you are going to pay.

Tell them about all the terms and conditions. There should be transparency in the deal. After the negotiation is done and both the parties have agreed over the terms and conditions, you are ready to get the target company.

Cross Border Mergers And Acquisitions | Law Corner

Post Merger Integration

After all the above steps are completed, there is a final announcement of mergers and acquisitions of the companies that took place.

It is so that the public can know what the companies are up to and who the owner is, etc. Also, they have the right to know about which company’s products they are buying.

Conclusion

So by know, I hope you have understood what mergers and acquisitions are. I have tried explaining it with an example.

Also, I covered different subtopics, such as mergers and acquisitions types, reasons, and processes. I hope it proves to be beneficial for you.

FAQs

1. What is the difference between mergers and acquisitions?

Difference between them is:
Merger – Two companies join hands and become a single company. They also change the name of the new company.
Acquisition – Two companies join hands and work together. In this, the name of the companies does not change. They both exist as a different entity.

2. What is a horizontal merger?

It means two companies of the same industry merge to work together and take the benefit.

3. What is the mergers and acquisitions process?

I have tried explaining the whole mergers and acquisitions process in detail. Do have a look at the above section.

4. What are the benefits of mergers and acquisitions?

Mergers and acquisitions give the following benefits-
1. More capital
2. Financial advantage
3. Technological advancement
4. Access to a large market
5. Increase in market share
6. More customer attraction
7. Increase in goodwill