Here's Everything You Need to Know About Mergers and Acquisitions

Mergers and acquisitions of companies

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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.

Mergers

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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.

Acquisitions

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. 

A Marriage of Equals? The Difference Between Corporate Mergers and Acquisitions

Although both types of restructuring are intended to increase a company's value, profitability, and synergy, the concepts of a merger and acquisition are not interchangeable. The simplest difference is whether the interaction is friendly or hostile. Part of this distinction exists in how it is announced to the public and the target company's employees, shareholders, and board of directors. Friendly purchases are generally called mergers, while hostile ones are almost universally known as acquisitions.

To put it plainly, a merger occurs when two companies consolidate into one new identity, whereas an acquisition involves one company taking over another entirely, establishing itself as the new sole owner. 


What Is a Merger?
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A merger consolidates two companies into a new entity, combining their operations under a new ownership and management structure. Ostensibly, this new management structure includes key members from each firm, building a greater whole from the sum of the two (or more) parts. A merger involves complicated negotiations, rather than one company dictating terms to another. A merger of equals occurs when two CEOs heading companies of approximately the same size decide a marriage between their two companies is in the their best interests.

Upon merging, both companies surrender their stocks, issuing new stocks in the name of the newly formed entity. Depending on the relative size of the companies, shareholders of the merged companies often receive new shares at different ratios. The rate of exchange for shares is one of the important details determined by the negotiations. Once the merger is complete, a single new company exists, while the merged companies either cease to exist or become branded sub-entities of the new company.

Why Merge?
Companies may choose to merge for a number of reasons. In a merger, the combined larger entity typically results in increased resources for marketing, finance obligations, or product expansion. Alternatively, the combined entity may merge similar operations to reduce costs, creating a more streamlined company that is smaller than the two independent companies. By downsizing redundant staff and consolidating facilities, the new company often reduces payroll and overhead costs. When the merged companies previously competed directly against each other, they also reduce marketing costs due to the decrease in competition.

What Is an Acquisition?
In an acquisition, one company takes over the operational management decisions of another company. Sometimes called takeovers, acquisitions generally have a more negative connotation than mergers. In some instances, a larger company buys out a smaller one, then compels the purchased company to refer to the acquisition as a merger to avoid negativity. Unlike a merger, the purchased company's stocks are purchased before the sale rather than surrendered afterwards.


Why Acquire?
The strategic reasons for an acquisition mirror those for a merger, such as a decreased market or the desire to reduce competition. Unlike the often expensive and lengthy process of merger negotiation, an acquiring company generally has more freedom to dictate the terms of sale and purchase to the target company in a shorter time-frame. 

In some instances, companies acquire other entities to acquire rights to a specific product, allowing them to bypass the process of product creation. Similarly, a company may acquire another to gain control over a resource it requires, allowing it to bypass the market. By purchasing another company, a business can increase its size, visibility, and prestige.


Types of Mergers and Acquisitions
There are several kinds of mergers and acquisitions, distinguished primarily by the relationship of the entities involved. In a horizontal merger, the two companies exist within the same business sector. By merging, they increase marketplace visibility, combined value, and cost savings. 

In a vertical merger, one company buys a supplier or retailer, allowing it to reduce overhead operational costs and to increase its economy of scale. A conglomeration deal involves two businesses whose products or services are unrelated to one another. This allows for diversification of interests and capital investment.


Synergy
Whether friendly or hostile, horizontal or vertical, or negotiated or purchased, all mergers and acquisitions have one important goal in common: to make the value of the combined companies greater than the sum of the parts combined. Accordingly, a combined company must have more value than either individual company had on paper previous to the restructuring. This is called synergy.

Synergy often takes the form of revenue enhancement and cost savings by focusing on staff reduction, economies of scale, improved visibility, greater market reach, and development of new technologies. Success of a venture, whether merger or acquisition, depends on whether this synergy is achieved.

Increasingly, the blended Mergers and Acquisitions (or M&A) moniker is used to cover all discussion of mergers and acquisitions, regardless of the nature of the deal in question. The two kinds of corporate marriages, however, remain subtly different, especially to a business in the process of merging and creating a new identity, or being acquired and losing its identity altogether.