What is merger & acquisition (M&A)?
Merger and acquisition (M&A) is a business process in which two firms merge or buy one
other to form a bigger enterprise.
Mergers happen when two firms join hands. Such partnerships are most common amongst
firms of similar size that recognise the benefits that the other may offer in terms of profitability,
capabilities, and efficiencies. Merger terms and conditions are frequently amicable and
mutually agreed upon, and the two firms grow to be equal partners in the new endeavour.
Acquisitions happen when one firm decides to acquire another firm and integrate it into
its operations. Unlike mergers, acquisitions could be amicable or hostile, depending on
whether the purchased firm feels that it is better positioned as an operating unit of
a larger initiative.
Frequently Asked Questions (FAQs)
What is the structure of merging two companies?
Mergers could be structured in various ways, depending on the connection between the two
organisations engaged in the transaction:
Conglomerate
This kind of deal is typically conducted for diversification purposes between enterprises
in different industrial sectors.
Horizontal
In business, a horizontal merger occurs when two firms in similar industries but are not
direct rivals unite.
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Vertical
Along the supply chain, a vertical merger occurs between a corporation and its consumer
or supplier. The corporation intends to consolidate its market position by going up or down its
supply chain.
Congeneric
This type of Congeneric merger arises when two firms serve the same customer base in
various ways, for example, a cable operator and a television manufacturer.
Market extension
When two organisations sell the same items in multiple markets, they can merge to broaden
their market reach.
Product extension
When two businesses sell separate but similar items on the same market, they can explore
a product extension to boost their reach.
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What are the intentions behind mergers and acquisitions transactions?
One of the most critical elements of the corporate financial sector is mergers and acquisitions.
The rationale underlying M&A is that when two distinct entities work jointly, they generate
more income than if they worked separately. The following is a list of reasons for mergers
and acquisitions.
Higher growth
Compared to expanding organically, inorganic growth through mergers and acquisitions is
generally a speedier option for a corporation to obtain more significant earnings. A business
could profit from acquiring or merging with a corporation with the latest resources rather
than taking on the risk of establishing the same.
Synergies
The most common reason for mergers and acquisitions is to develop synergy, making the merged entity
more valuable than the two firms independently. Synergies can emerge because of lower costs
or more significant margins.
Cost synergies are formed through economies of scale. In contrast, revenue synergies are
usually made through cross-selling, rising market share, or raising prices, and cost
synergies are the simpler to calculate and quantify the two synergies.
Diversification
Businesses in cyclical sectors recognise the significance of diversifying their cash flow
to reduce significant losses during the recession in their sector. Obtaining a target in a non-cyclical
sector enables the firm to diversify its portfolio and mitigate market risk.
Significant market share
In a horizontal merger, the new organisation will gain a more significant market share
and buy the power to influence costs. Vertical mergers also strengthen market power because
the firm will have better control over its supply chain, avoiding external supply disruptions.
Tax advantages
When one firm recognises significant taxable revenue while the other incurs tax loss carryforwards,
this is referred to be a tax benefit. This is because purchasing a firm with tax losses
allows the purchaser to use the losses to decrease their tax liability. Mergers, on
the other hand, are rarely done only to evade taxes.