In 2023, more than 17, 000 were completed in North America, making it the leading region in the number of merger and acquisition (M&A) transactions. Companies can take different transactions such as mergers and acquisitions to seek corporate restructuring, revenue growth, or market expansion. The main aim of M&A deals can vary from diversifying products or services, attaining economies of scale, extending market share, or acquiring new technology.
What are mergers and acquisitions?
Mergers and acquisitions meaning is generally used to describe integrating companies through various types of transactions. But what is the difference between these processes?
A merger is a uniting process of two private or public companies into a new entity to face strong prospects in the industry or extent markets. These companies are similar in size and have equal growth goals. A newly formed company gets unique branding.
An acquisition is used when one company takes over another, becomes its only owner, and obtains a controlling interest. Usually, the acquiring company is bigger than the target company.
The difference between mergers and acquisitions
These two terms are often used interchangeably. But there are some aspects in which they differ from each other:
- Business name. In an acquisition, the company acquiring the other company typically keeps its business name, legal structure, and operations. In a merger, the companies involved may choose a new name that can represent the vision of the joined company, or they may use one of the existing company names to maintain brand awareness and loyalty.
- Legality. The company acquired by another company ceases to exist under its previous name and as its legal entity. The acquiring company absorbs it, and if the target company sells or trades stock, it is owned and managed by the acquiring company.
Types of mergers and acquisitions
Various strategies behind M&A directly affect both companies’ integration. Understanding them results in better integration and increases the success of mergers and acquisitions. Here are different types of M&A strategies:
- Horizontal M&A. A horizontal M&A combines two companies that provide the same service or product to final customers. It happens when two direct competitive companies merge into one entity to increase market share.
- Vertical M&A. It involves two companies that are not competitive but are in the same industry. As a rule, they produce goods for the same products but are in different stages within an industry’s supply chain.
- Conglomerate M&A. This type of M&A involves combining two companies that have related business activities. Its main purpose is to expand into other industries.
- Product-extension M&A. It is a type of transaction in which companies sell different but related products in the same market. Its goal is to diversify products and offer more to the same customer base.
- Market-extension M&A. This type of M&A involves two companies that sell the same products but are in separate markets. A market extension merger is usually done to increase geographical reach and gain access to a larger customer base.
To read about examples of the most successful mergers and acquisitions as well as merger and acquisition news, head over here: https://mnacommunity.com/insights/biggest-mergers-and-acquisitions/
Advantages of successful M&A deals
Mergers and acquisitions can bring several benefits to those involved with the business. Some advantages relate to how a business interacts with and serves its customers, while others improve employee efficiency. Here are the main advantages that come with M&A transactions:
- Increased market share. The new company can appreciate a greater market share, tapping into the resources that both bring to the deal. This can help companies offer more products, and gain recognition regarding the product.
- Improved economic scale. A business that has joined forces with another business usually has higher needs in materials and supplies. By purchasing the necessary supplies at higher volumes, the business can improve its scale through lower costs and can potentially pass them on to customers.
- Lower labor costs. M&A may result in multiple staff members doing the same job at each company. Those involved in the M&A processes may review the performance of individuals in similar roles and choose the best talent for each position in the new company.
- More financial resources. All companies involved increase the overall financial capacity of the new company by pooling their financial resources. The company can reach a wider audience with a larger marketing budget or more critical inventory capabilities.
Due diligence in mergers and acquisitions
Before a merger or an acquisition is performed, a detailed review and audit of a business should be made. The goal of the due diligence process for M&A is to ensure that companies are making the best decisions to maximize the chances of adding more value to M&A transactions. Due diligence aims to clarify the potential risks and opportunities of the deals. Companies can focus on:
- Identifying liabilities. Uncover any debts or legal issues before they become deal-breakers.
- Evaluating assets. Understand the true value of the target company.
- Assessing cultural fit. Ensure the target company’s organizational culture coordinates with the merging and acquiring entity.
- Forecasting financial synergies. Understand potential savings, revenue projections, and financial implications that M&A can bring about.
Financial reasons for companies to go for M&A
Before the M&A process begins, the company’s key executives take countless considerations. The motives for mergers and acquisitions can be defined as follows:
- Synergies. They are the extra value generated when two companies combine. They are of two types. Cost synergies are the cost reductions incurred from combining the two entities. Revenue synergies are additional revenue that the combined entity will generate.
- Tax benefits. Combining businesses can often use tax laws to their advantage and reduce their tax payments.
- Financing. The buyer pays the seller a specific amount in exchange for the company’s ownership. It could be done by cash, debt, or stock payments. Cash is the most appealing method to sellers as it offers immediate payment.
Conclusion
M&A is a significant undertaking for business that enables the company’s growth, improves sales, and drives the company’s value. A long process of M&A aims to progress the company’s development and improve profitability.
