Mergers and acquisitions of companies
|Image courtesy Stavos on Flickr|
External development is a form of corporate growth that results from the acquisition, participation, association or control of a company, companies or assets of other companies, broadening their current businesses or venturing into new ones. The most widely used term in corporate jargon is mergers and acquisitions (M&A).
The reasons for a company to choose external development (fusions, acquisitions, alliances...) as opposite to the internal one may have its origins in:
1. Economical reasons
● Cost reduction: through economies of scale or economies of scope by the integration of two companies whose productive and commercial systems are complementary to each other, thus creating synergies.
● To acquire new resources and capacities by means of the union or acquisition of another company.
● Substitution of the management team: often, when the management is substituted, a greater increase in value occurs.
● Obtaining tax incentives that can increase the benefits of the acquisitions and mergers, thanks to the existence of exemptions or bonuses.
2. Market power reasons:
● It can be the only way of penetrating an industry or country, due to the existence of strong barriers to entry
● When the mergers and acquisitions occur through an horizontal integration, an increase of market power of the resulting company is pursued, and as a consequence, a reduction of the level of competition within the industry.
● When the mergers and acquisitions occur through a vertical integration, companies who act in different stages of the productive cycle are integrated. The goal in these cases is to obtain the advantages of the vertical integration as soon as possible, both backwards and forwards.
Types of external development
Company merger: it’s the integration of two or more companies in such a way that at least one of the original ones disappears.
Acquisition of companies: trading operation of blocks of shares between two companies, keeping their legal entities.
Cooperation or partnership between companies: this is an intermediate formula, bonds and relationships are established between the companies, without losing the legal entities of any of the participants, who keep their legal and operative independence.
In terms of the type of relationship that is established between the companies, they can be classified as follows:
● Horizontal: the companies are competitors of each other and they belong to the same industry.
● Vertical: the companies are located in different stages of the complete product exploitation cycle.
● Conglomerate: Companies have very different activities from each other.
|Image courtesy Kyle MacDonald on Flickr|
These are unions between two or more companies, where at least one participant loses its legal entity.
1. Pure merger:
Two or more companies of an equivalent size agree to merge, creating a new company to which they bring all of their resources, dissolving the original companies (A + B = C)
2. Merger by absorption
One of the companies involved (absorbed) disappears and its patrimony is integrated into the absorbent one. The absorbent company (A) continues to exist, but it accumulates into its patrimony the corresponding to the absorbed company (B).
3. Merger with partial contribution of assets:
A society (A) contributes only a part of its patrimony (a) next to the other company with which it merges (B), be it to a new society (C) created in the merger agreement, or to another pre-existent society (B), which as a consequence increases in size (B’), it is necessary that contributes assets (A) does not dissolve.
Company participations or acquisitions take place when a company buys part of another company’s capital stock, with the intention of dominating it completely or partially.
The acquisition or participation in companies will allow different levels or degrees of control according to the percentage of capital stock of the acquired company in its power and according to the way in which the rest of the bonds are distributed among the other stakeholders: large stock blocks in the hands of a few individuals or a large number of stakeholders with scarce individual participation.
The buyout of a company can be done through a conventional purchase contract, but in the past few decades, two financial formulas have been developed.
1. Leveraged buyout:
It consists in financing an important part of the purchase price of a company by the use of debt. This debt is insured, not just for the patrimony or creditworthiness of the buyer, but also for the assets of the acquired company and their future cash flows. This way, after the acquisition, the debt ratio usually reaches high values.
The purchase may be made by the company directors themselves. In this case we’ll find ourselves before a “management buyout” (MBO). The reason why they might make the decision of purchasing the company for which they work could be to lead it towards the appropriate direction.
2. Share Acquisition Public Offer
The Share Acquisition Public Offer is produced when a company makes a purchase offer, of all or part of the capital stock, to the stakeholders of another listed company under a specific set of conditions, usually related to price, percentage of capital stock and time.