What is Mergers and Acquisitions
Introduction
Mergers and acquisitions (M&A) are a common way for companies to expand their businesses. They involve combining two or more companies to create a new, larger company. In simple language, M&A is when a business buys another company or sells a part of its current company to another entity. M&A is often used as an umbrella term to include Mergers, Acquisitions and Divestitures. Mergers and acquisitions can be an effective way for businesses to grow and meet new market opportunities.
Types of M&A
There are two key types of M&A transactions: strategic and defensive.
Strategic
A strategic acquisition is the acquisition of another company by the acquiring company in order to further its business interests. For example, acquiring a company may help the acquirer to expand its product offering or enter into a new market.
Defensive
On the other hand, a defensive acquisition involves acquiring another company when the acquiring company is facing financial difficulty. The acquired company may have certain assets or resources that will complement the existing business of the acquiring company. An example of a strategic and defensive transaction is Apple’s acquisition of Beats by Dr. Dre, which gave it access to a new line of premium headphones.
Acquisitions
When a company purchases another company, this is called an acquisition. The buyer usually makes a cash payment to the seller and accepts all or most of the seller’s assets as part of the purchase. These assets can include land, buildings, equipment and inventory.
Divestitures
A Divestiture occurs when the company’s owner decides to sell all or part of the company. In this case, the owner sells the business rather than its assets. Most Divestitures occur as the result of a restructuring effort. This may be due to a refocus on core markets or product lines resulting in the sale of those that are seen as ‘non-core’. It could be because particular product lines or business units no longer fit with the overall strategy of the company. Alternatively, it could be because the investment required to run a particular business unit is no longer justified by the expected return. Whatever the reason for a Divestiture, the new owner will negotiate a price for the business and then acquire the business by executing the transaction.
There are a few different types of Divestitures that are commonly used. These are called Reverse Mergers, Share for Share Deals and Business Transfers.
In a reverse merger, a private company changes its legal structure by becoming a public company by buying an existing public company. In most cases, the seller retains control of the newly public company after the buyout is completed. However, this may not always be the case and the buyers could later take control of the company if things don’t go to plan. This is known as an Initial Public Offering (IPO). Private companies use reverse mergers as a way of bypassing the IPO process and getting their company listed on the New York Stock Exchange (NYSE) or the NASDAQ without having to pay the usual listing fees.
Summary
In summary, a company may decide to carry out a Strategic and/or Defensive Transaction for various reasons such as:
- Increasing exposure to a new market or niche;
- Diversifying their product offerings;
- Enhancing their ability to compete with other market participants;
- Opening up new distribution channels;
- Acquiring new technology or processes;
- Increasing operational efficiency and reducing costs;
- Reducing risk and strengthening the balance sheet; or
- Undertaking a merger or acquisition with another business in order to complement their own.
Whatever the reason, each M&A undertaking shares common features with others in other businesses and industries; we can recognize these features to help us navigate through the transaction and the downstream execution of the Merger or Divestiture.