What are Mergers and Acquisitions?

Mergers and Acquisitions may initially look the same but has a lot of difference within them when we study both the terms in depth. A merger is said to have taken place when two different companies come together and form a third company under a different name whereas, talking about acquisition, it is something in which one company takes over the other company and makes it a part of itself. The relationship between the companies in both the concepts can be understood much easily with the help of the diagrams given below.

Merger

Acquisitions

Types of Mergers and Acquisitions

• Horizontal Merger and Acquisitions – A horizontal merger or acquisition takes place between two companies into the same line of business, i.e., between the competitors, intending to reduce the competition by joining hands together. But remember horizontal merger would result in the formation of a new company and a horizontal acquisition would result in one company taking over the other. An example of a merger horizontally is the one that takes place between HP and Compaq.
• Vertical Merger and Acquisitions – The companies that belong to the same supply chain when merging or acquire one of the companies, are called a vertical merger or acquisition. The member of the same supply chain can be, for example, a café that sells sandwiches and the bread manufacturer. Both of them are in a line one after the other in providing the ultimate output i.e. the sandwich to the customer. This is generally done to reduce the production costs and gain more profit along with higher productivity and efficiency in operations.
• Conglomerate Merger and Acquisitions – In this case, the two companies participating in the process are not similar to each other in any way i.e. they belong to two completely different industries. These types of mergers and acquisitions are done to increase the market share and expand. Like for example, an electronics brand "A" has taken over a food brand "B" which is very famous among its target audience to make itself more popular in the food industry too by expanding.
• Concentric Merger and Acquisition – the companies selling complementary services or products prefer concentric mergers or acquisitions. These companies share their customers. This is somewhat horizontal but the companies here are not the immediate competitors of each other rather they sell products that complement the use of other company's product. For example, a mobile phone manufacturing company acquires a company making SIM cards.            

             Significant Differences between a merger and an acquisition

Why Mergers and Acquisitions are Important?

• Speedy Growth – there are two ways for a company to grow i.e., either organically or inorganically.
• Organic – To grow internally, using one's resources and efforts.
• Inorganic – To grow artificially, that is by acquiring another company, merging into a new company, etc.

The organic way requires quite a lot of time and effort which might even fail due to competition and therefore businesses prefer to acquire or merge with another company that is already well established and doing well in its domain.

• Reduction in Competition – One of the major reasons for mergers and acquisitions is to reduce competition by either joining hands with the competitors or acquiring them.
• The Pooling of Resources – when two different entities become one there is a huge and vital addition to the resulting company's resources be it the employees or the assets.
• Technological Advancement – There is also a hike in the exposure to technology in a merger and acquisition. Both the companies join hands technologically too which is very beneficial for success.
• Economies of Scale – It results in purchasing a larger quantity of raw material leading to economies of scale.

The Process of M&A’s

Step 1- Developing the Acquisition Strategy

The major decision is to decide the strategy which depends on the company's needs or the reason for the acquisition. The strategy formulation revolves around what expectation does a company has from the merger or acquisition.

Step 2 – Setting the search criteria

The key criteria that would determine the potential company should be identified. For instance: the company's turnover, its location, the target audience, etc.

Step 3 – Searching the Target

According to the search criteria set previously, the acquiring company begins its search for the potential company.

Step 4 – The planning for acquisition

Now the acquirer, based on the search criteria identifies some companies that fit the criteria and are believed to provide good value, and these potential companies are then conversed with to know their actual potential.

Step 5 – Analyzing the Value

To know more about the potential company, the acquirer is required to get more in-depth information from the company to evaluate its financial soundness and potential to become an acquire

Step 6 - Negotiation

This is the stage when the valuation models are presented by the acquirer to the target company and based on which negotiations are done.

Step 7 – Final Contract

Once all the formalities are done and the valuation is completed the final agreement is executed after deciding whether it would be a purchase of shares or assets. The deal is completed and the two different companies start working together since then. 

Conclusion

Mergers and Acquisitions are considered to be a vital step in businesses in this highly competitive era where innovation and dynamism are the keys to success. Not only does M&A help the business survive the competition but it also has a lot more to give. When two successful empires work as one it results in a great venture.

People from distinct work cultures might face difficulties initially but gradually they give good results. Moreover, nobody can work well in stagnation, and therefore for a company to grow M&As are the best things one should opt for. But yes the efficiency of this collaboration depends on the Board and the employees working together.

Context and Applications:

This topic is significant in the professional exams for both undergraduate and graduate courses, especially for        

• B.COM
• BBA
• MBA