Most of the industries are working hard to highlight their market presence. But in this drastically changing environment, staying ahead of competitors is a challenge. Merger and acquisition are the most effective tools to mitigate these challenges and conquer the market. Therefore, to understand mergers and acquisitions is essential for growing companies, as they are two powerful strategies implemented especially by the corporate sector. It allows companies to grow, expand, and improve their market position by performing due diligence.

What is Merger and Acquisition (M&A)?

Merger and acquisition, referred to as M&A, is a method of combining major assets of two or more businesses via financial transactions. This method of combining two or more companies is called a merger and acquisition.

In this procedure, one organization buys out another organization by fully integrating all its resources and functions into a new company, by buying only a significant portion of its assets or through complete acquisition.

Each of the above activities is considered merger and acquisition; also, the business transactions that are carried out between financial companies are referred to as M&A.

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Key Insights:

1. Merger and acquisition lead to strategic business expansion and market development.

2. The main goal of mergers and acquisitions is to generate more opportunities and expand the business operations efficiently.

3. Establishing a new business through mergers and acquisitions reduces risks and makes the business more powerful.

4. Businesses undergo mergers and acquisitions to expand their reach to assets, tools, and expert skills.

5. A well-executed merger and acquisition brings more value for the shareholders of the company.

Merger vs. Acquisition –

The terms merger and acquisition are used as conjunctions, but they have slightly different meanings as below:

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Types of Mergers and Acquisitions –

We have explained 7 major types of merger and acquisition in detail:

1. Horizontal Merger and Acquisition:

1. Horizontal merger: When two or more companies working in a similar industry and offering the same products or services come together, it is called a horizontal merger. The main purpose behind a horizontal merger is that the newly emerged company is worth more than they are separately.

2. Horizontal Acquisition: When a holding company buys another company or competitor firm operating in a similar supply chain and providing the same products or services, it is referred to as a horizontal acquisition. The main purpose behind horizontal acquisition is to maintain the leadership position of large and renowned industries.

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2. Vertical Merger and Acquisition:

1. Vertical Merger: When two or more companies operating at different levels of the supply chain process within the same industry for providing common goods or services merge, this merger is called a vertical merger. The primary objective behind a vertical merger is to ensure better control over the supply chain by the leading company.

2. Vertical Acquisition: When a leading company acquires a competitor company operating at a different level of production or supply chain, it is called vertical acquisition. It especially occurs when one company focusing on a specific area acquires another company focusing on one of the other areas to boost the supply chain value, with the objective of improving the performance of the company.

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3. Conglomerate Merger and Acquisition:

1. Conglomerate Merger:A conglomerate merger refers to signing a deal between the two companies after mutual consent of both parties, but their operations or geographical locations are different. The main perspective behind this kind of merger is diversifying profitability, thus maintaining balance in operations.

2. Conglomerate Acquisition: When a leading company has grown out after a series of acquisitions, specifically those operating in different geographical locations, industry outlooks, products, and service lines, it is called a conglomerate acquisition. The primary focus of such an acquisition is to diversify their sources of revenue generation and minimize dependency on just one market.

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4. Product Extension/Congeneric Merger and Congeneric Acquisition:

1. Product Extension Merger: A product extension merger is also called a congeneric merger. When two companies that are part of the same industry, like market, technology, or production process, but operate in different product lines, sign a deal to merge, it is called a product extension merger. The main purpose behind this merger is to extend market reach by leveraging their market connections.

2. Congeneric Acquisition: Congeneric acquisition is also called concentric acquisition. It is the opposite of horizontal acquisition, where companies involved in a deal have different product or service lines, but broadly, they cater to a similar customer base. This overlap creates synergies.

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5. Market Extension Merger and Acquisition:

1. Market Extension Merger: When a company operating in a specific business industry merges with a company operating in a totally different market featuring the same product or services but for a different audience, it is called a market extension merger. The main focus of such mergers is to extend reach to a large customer base by expanding into a larger market area.

2. Market Extension Acquisition: Market extension acquisition is a type of horizontal acquisition where both companies located in different geographic locations agree to sign a contract with the objective of operating within a wider geographic area. Another example of this is cross-border acquisition.

6. Reverse takeovers or SPAC (Special Purpose Acquisition Company):

1. A reverse takeover is another form of acquisition, where a private company acquires a public company with the objective of utilizing it to make itself a public company by avoiding the costly IPO process or vice versa. 

2. The ultimate motive for the private company behind this acquisition is to take control over the newly merged company and make it publicly listed as an IPO.

7. Acqui-Hire:

1. This form of acqui-hire is mostly seen in big companies, where they acquire talented persons to win the talent race in their industry rather than targeted products or services.

2. It is most common in the technology sector, where any shortfall of talented programmers at a higher level will lead to acquiring value-added talent or acquiring the same company.

Why Do Companies Go for M&A?

Companies go for merger and acquisition for a number of reasons, as below:

1. Synergies:

By integrating the businesses, the performance efficiency also increases, and overall costs drop as both companies enjoy the benefits of each other.

2. Growth:

Merger and acquisition offers an opportunity to increase the market share without performing any major tasks other than buying a competitor at a certain price.

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3. Improve supply chain power pricing:

By buying a supplier, a company can save on margin costs that were added earlier by the supplier and by buying a distributor, a company has the power to ship the products at a lower cost, which was previously charged higher by the distributor.

Thus, through the merger and acquisition process, buying a supplier or distributor can save a maximum amount of costs.

4. Remove competition:

Buying an anticipated competitor reduces the possibility of upcoming competition, and the acquiring company also benefits by holding a larger market share.

How the M&A Process Works (Step-by-Step Guide) –

Merger and acquisition are distinct processes. The transactions of such processes vary due to various factors like the size of the transaction, any international aspects, competition, regulatory compliance, monetary considerations, and understanding between the parties.

But these processes follow more or less the same steps outlined below:

The basic steps of the merger and acquisition process include:

1. Prepare an acquisition strategy:

Creating a good acquisition strategy includes the buyer or acquirer having clear knowledge of what benefit the opposite party is expecting from such an acquisition. What is their business purpose behind acquiring the target company?

2. List the merger and acquisition criteria:

Define criteria for the target company, which will help in identifying potential prospects. This search may include the size of the company, income, type of industry, geographical location, culture followed, and type of products and services offered.

This step is a preliminary filter to eliminate irrelevant options during the early stages.

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3. Search for potential acquisition target:

In this step, the acquirer researches and identifies potential targets that match the ideal profile created in the previous search criteria step. This is a preliminary assessment step where some companies qualify and proceed to the further shortlisting stages.

4. Begin acquisition planning:

In this step, the acquirer connects with one or more identified potential targets that offer good offer value either directly or through an agency.

Connecting with one or more potential targets allows the buyer to collect sufficient information needed to assess and decide whether the merger or acquisition is beneficial to both the target and the holding company. This allows them to offer a Letter of Intent (LOI) to show their interest in the further procedure of merger or acquisition.

5. Perform valuation analysis:

After communicating with the parties, those who are ready to move forward follow the next step of valuation analysis. During this stage, the acquirer asks the target company to provide confidential information that will allow them to proceed further with the evaluation process of the target company.

From both perspectives, as a business and as a potential merger or acquisition partner.

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6. Negotiation:

Further proceeding with the valuation analysis step, the company formulates and presents an offer to the target company, which helps them to negotiate over the terms in more detail. This phase is crucial, as it offers an opportunity to the target company to express concerns over various factors, like valuation and other issues related to price, deals, terms, and conditions.

7. Merger and acquisition due diligence:

Due diligence is the most important step of the merger and acquisition process, performed just after the engagement between the two companies is completed.

It is done and carried out to confirm whether the data or information mentioned in the documents and reports is credible or not. This is the most crucial step for both the acquirer and the target company, as this procedure reveals the hidden truth associated with the deal.

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8. Purchase and sale contract:

After the due diligence is completed, both companies step ahead with the process of the purchase and sale contract. This sales contract includes the type of purchase agreement, all terms and conditions agreed during the negotiation process, date and time of agreement, etc.

9. Financing:

Financing is a key aspect throughout the merger and acquisition process, as the acquirer has already explored alternative options for financing, but it is finalized after the purchase and sales agreement is signed and the final contract is created.

10. Closing and integration of acquisition:

After completing all the assessment and valuation steps, the contract is finalized and closed, and now the management team of both the acquirer and the target company begins working on the process of merging the two firms.

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Real-World Examples of Mergers and Acquisitions –

1. The merger of companies Exxon and Mobil in 1999 created ExxonMobil, a great leader in the oil and gas industry.

2. PepsiCo acquired Burger King and Pizza Hut in 1980, and now they sell soft drinks along with pizzas.

3. The merger of mining firm Xstrata and commodity trader Glencore in 2012 resulted in the emergence of a natural resources group.

4. In 2022 shipbuilding company Wight Shipyard from the U.K. merged with OCEA from France, creating a company twice the size of their previous company.

5. U.S. Airways acquired America West in 2015

6. Facebook acquired Drop.io in 2010

Advantages of Mergers and Acquisitions –

1. Economies of scale:

Due to the increased demand for materials and supplies, the punching power of the newly emerged company also increases, and hence the company is able to improve its economies of scale.

2. Economies of scope:

Merger and acquisition help improve the economies of scope by expanding geographically; however, it would result in increased distribution of products and services to a wider consumer sector.

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3. Synergies:

When two companies mutually agree to merge, the forces and power of both companies blend and emerge as a stronger company. Hence, merger and acquisition helps the newly formed company to become more powerful.

4. Increase market share:

Merger and acquisition helps to enhance the market share of newly formed companies, as it offers an opportunity to leverage the market share of two businesses operating in the same industry.

5. Risk diversification:

This advantage is aligned with the economies of scope; due to more sources for revenue generation, the company can diversify its risks across those sources instead of focusing on just one option.

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Risks and Challenges in M&A Deals –

1. Loss of potential opportunity:

The two companies involved in the merger and acquisition process spend lots of time, money, and energy to compete in such a process. In such cases, the business involved in the merger and acquisition process neglects to focus on other potential opportunities.

2. Losses of jobs:

The two companies engaged during the merger and acquisition process integrate and form a new company; in that case, there are chances of duplication of skilled employees within the company. This may result in a reduction of staff.

3. Higher Prices:

A significant amount of market share represents the good status of the company, but the effect of such market share is opposite for consumers. If a company has less competition and a high market share, consumers have to pay higher prices for products and services.

4. Diseconomies of scale:

Merger and acquisition may also lead to diseconomies of scale when the owner of the business does not have sufficient power to run the new larger business as compared to the prior business before merger and acquisition takes place.

5. Reduce Valuation:

Even if the two companies are a perfect match for each other, due to improper planning and implementation of the deal, like initiation, negotiation, due diligence, deal closing, or integration, can result in depletion of the value of the companies engaged in the merger and acquisition process.

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M&A vs. Joint Venture: What’s the Difference?

Conclusion –

In conclusion, this article provides you with a deep understanding of mergers and acquisitions with their definitions, meanings, examples, and benefits and negative effects. It is a profitable strategy that helps companies to broaden their production, strengthen their market position, and optimize their market share. By understanding what merger and acquisition are, businesses can evaluate their financial, cultural, regulatory, and strategic factors before making any deal.

A strong merger specifically focuses on mutual relationships and resource sharing, while an acquisition focuses on control and market ranking. Both strategies offer benefits like technology acquisition, economies of scale, and market expansion, but they also include some risks that need to be verified before closing the deal by understanding merger and acquisition transactions.

Frequently Asked Questions (FAQs) –

1. What is a merger in simple terms?

A merger is a mutual contract between two companies to combine with the purpose of forming a new company. It is a balanced partnership, where shareholders of both companies generally get stocks in the new company.

2. What are the examples of merger and acquisition?

1. Mergers: PepsiCo merged with Quaker Oats. They are two companies with complementary products.

2. Acquisition: Procter & Gamble, an FMCG company, acquired Gillette, a consumer packaged goods company that offers different products to the same customer base.

3. What is the difference between merger and acquisition?

1. A merger takes place only when both companies mutually agree to enter into an agreement with the goal of generating more profits.

2. Subsequently, an acquisition meaning in business is that it might not take place under mutual consent of both parties, and so it is said to be a cold takeover.

4. How much time does a merger usually require?

A small merger process may be completed in a short time, whereas a larger merger requires approximately six months to one year to complete.

5. Who receives the amount in merger transactions?

For every share sold, an acquirer pays a substantial amount of money to the acquired company for every share they own.