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A guide to mergers and acquisitions

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Last editedMay 20213 min read

There are lots of different ways that businesses can grow, but sometimes, it makes more sense for a company to purchase another business than rely on internal growth. That’s where mergers and acquisitions come in.

What are mergers and acquisitions?

Mergers and acquisitions – also known as M&A – refer to a situation in which two companies are combined. The term ‘mergers and acquisitions’ is usually applied to any deal of this nature, but there is an important difference between an acquisition and a merger.

What are acquisitions?

Acquisitions are when one business is purchased by another. So, if Company A is bought by Company B, Company A ceases to exist, and Company B will simply absorb Company A. In acquisitions, the company that is bought is called a target company, while the company looking to buy is referred to as the acquiring company.

Types of acquisitions

  1. Friendly takeover: A friendly takeover refers to new acquisitions in which everyone is in agreement. If Company A wants to purchase Company B, Company A’s board of directors must approve the action. Then, the CEO can reach out to Company B’s CEO with the offer. After price and terms are agreed upon, Company B’s stockholders must tender their shares so they can be purchased by Company A.

  1. Hostile takeover: Hostile takeovers are when new acquisitions are made against the will of the target company. A hostile takeover essentially consists of Company A convincing Company B’s stockholders to tender their shares so they can purchase them. Company B will then have to convince its shareholders to reject the offer. If this is not possible, Company A can acquire Company B even without the CEOs consent.

What are mergers?

Mergers are when two companies are consolidated to create a new company. If Company A were to merge with Company B, they would cease to exist separately but operate under the new name of Company C, although most mergers will combine the two existing names, i.e., Company AB.

Types of company mergers

  1. Horizontal: A horizontal merger is when two companies in similar industries combine.

  2. Vertical: A vertical merger is when a company merges with another that is already a part of its supply chain. This can help consolidate both offerings to strengthen their positions, like an online shopping site merging with an online payment system.

  3. Conglomerate: A conglomerate merger is when two companies that do not share the same industry combine to reach a larger market. For example, a movie studio merging with a TV network.

Why are mergers and acquisitions used?

There are many reasons that mergers and acquisitions may be used, including:

  • Synergies: By combining with or buying a new business, the resulting business is worth more than either was individually.

  • Tax benefits: If one company was subject to a lower tax rate, the new company can also benefit from this.

  • Economies of scale: This allows a company to increase production and improve their service offering.

  • Improve market share: Gaining access to more customers can help solidify your business and set you up for market dominance.

  • Management improvement: Mergers and acquisitions benefit from the strengths of two companies. When it comes to management, the competencies of Company A can help mend the weaknesses of Company B.

  • Diversification: A more diverse offering can protect a company from any dips in their industry, giving them wider reach and reducing market risk.

Advantages and disadvantages of mergers and acquisitions

Mergers and acquisitions may lead to company growth, but this isn’t always a guarantee that they will continue to be successful. Obtaining or blending with a new company requires fundamental changes to both businesses, which can cause difficulties as well as benefits:

Advantages of mergers and acquisitions

  • Improved synergies for both companies

  • Shared access to intellectual properties

  • Acquiring the skills and talent of staff

  • Potential to adopt new efficiencies via combined assets

Mergers and acquisitions disadvantages

  • New and old management may not see eye to eye

  • Corporate culture and mission may change, risking the loss of current staff

  • Synergies may not live up to predicted performance

So, there you have it – mergers and acquisitions can be immensely beneficial, but you need to take care over the integration of the two companies to ensure that there are as few bumps in the road as possible.  

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