M&A Strategy: The Definitive Guide to Merger and Acquisition
Merger and acquisition news is often publicized wildly in business media. These types of transactions are interesting for shareholders, stockbrokers, and business owners alike.
When one company is acquired by another, it means it holds value—both financially and socially—to the new parent company. Understanding the opportunities that may exist for a company to merge with or acquire another is a piece of critical knowledge that all companies should consider.
What is Merger and Acquisition?
Merger and acquisition are core components of business for many companies. The term describes the consolidation of many companies into one, through financial transactions. Often one company will acquire smaller companies to enhance its portfolio, and allow it to reach different audiences from a variety of backgrounds.
Merger and acquisition strategies are often shortened to M&A in business terms and are a core consideration for many businesses to gain access to a new market or to bolster their potential or actual financial gains.
The terms mergers and acquisitions are so often used interchangeably but they actually represent different parts of business level strategy. In a merger, two companies consolidate to form one with a new legal name. The original two companies shed their identities, in a way, to create a brand-new company. During an acquisition, on the other hand, one company (usually the larger or more established company) purchases the other one outright.
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How Does a Merger and Acquisition Deal Work?
There are different types of mergers and acquisitions based on the nature of the deal. Typically, mergers occur between two companies of relatively equal size and prominence. These deals tend to be amicable agreements where both CEOs sign off on creating a new company.
Why would a company agree to create a new one, you might ask? For companies exploring merger options, there is much to consider. Mergers can present new resource opportunities, such as physical facilities, more established brands, or procurement networks. It’s important to note that in a merger, both companies need to come to the table with a very attractive value-add that they are willing to offer the other company. These types of deals tend to benefit both parties and allow the businesses to add to their already existing offerings.
Acquisitions occur when the company that is acquiring the other, takes a majority stake in the acquired company. This company retains the power in the relationship, and does not change its name or need to make alterations to its business structure.
In an acquisition of assets, on the other hand, one company will acquire the assets of another, though this typically happens during bankruptcy or financial hardship. The company that is essentially getting rid of its assets will become liquidated after all its assets are acquired by other firms.
Why Do Companies Enter This Type of Deal?
Why merger and acquisition? These types of business strategies allow companies to enhance their portfolios and open up opportunities for financial and social gains. Like all business techniques, mergers and acquisitions allow companies to become more competitive and give them opportunities to grow. As an example, if company A manufactures one type of automobile, and company B manufactures another, they may benefit from merging. This will allow both companies access to new types of consumers that will now buy their cars.
Whether they are looking to expand their product offering, increase their revenue, develop their physical presence, or reach a new or adjacent market and consumer-base, an M&A is an attractive deal to consider.
Recent merger and acquisition deals that you may have heard of include:
Merger and Acquisition Strategies
There are many reasons why a company would enter into a merger or acquisition deal. Likewise, there are a number of ways that mergers and acquisitions are structured.
How mergers and acquisitions are structured:
Horizontal Merger
Two companies merge that were previously in direct competition with one another, meaning they shared similar product offerings, markets, and consumers
Vertical Merger
Two companies that exist in a similar market, but offer complementary products, such as an automotive tire manufacturer and a vehicle manufacturer
Congeneric Mergers
Two companies that serve the same market in different ways, such as an internet provider merger with a PC manufacturing company
Market-extension merger
two companies that have the same type of product offering in different markets
Product-extension Merger
two companies that offer different products that are somewhat related, into the same market
Conglomeration
two companies that really have no business being in the same market
In purchase M&A transactions, one company purchases the other. This can be made in cash or with an instrument of debt, where the sale is taxable. The tax benefits of this type of transaction are attractive to the companies that acquire the other, because these newly acquired assets can be written up in the purchase price, meaning that they will depreciate annually, giving the acquiring company a tax-break.
Things to Consider When Selling Your Company
Just like all business transactions, there are key considerations to keep in mind when thinking about buying another company or selling your company. Forbes outlines these considerations carefully:
1. Valuation is negotiable
It’s difficult to know exactly what a company is worth, but a first offer is not the only offer. Valuation is dependent on financial revenue, as well as trends and consumer interest in products and offerings.
2. M&A deals take a long time to close
These types of transactions typically do not happen overnight, often lasting anywhere from four to six months from the market, negotiation, and closing. There are a number of strategies that can shorten that time frame, which Frontier can discuss with your company.
3. Anticipate due diligence investigations
Like all-important financial considerations, buyers will do their homework. Sellers need to anticipate this attention to detail, and buyers need to ensure they hire the right management consulting firm to accomplish this investigation thoroughly to ensure they are making the right decisions.
4. More bidders ensure a more attractive deal for sellers
this is rather intuitive, but driving up competition between bidders means that sellers will get the best offer
5. It’s worth the investment to hire experts in the field to help secure your interests during M&A deals
Often there is an inclination to accomplish business in-house, but there is much to be gained by hiring experts to support your business needs. Hiring an investment banker, legal team, and management consultants to take care of various components of the process will ensure you have the information you need to make business-savvy decisions.
6. Intellectual property is valuable
Whether your company is buying or selling, retain the hold you have on IP to ensure that you maintain power in negotiations and after the M&A. IP is a valuable asset to control.
7. Don’t get stopped at the letter of intent phase
The deal will take a while to accomplish, but many companies get trapped by the intent to purchase and forget to actually go through with the deal.
8. Internalize the negotiation dynamic
Each company will be forced to make concessions in an M&A deal, so keep in mind what is most important to your company so that you can get the most out of the negotiation process
Mergers and acquisition deals are huge decisions. It’s important to accomplish the property due diligence to make thoughtful decisions to ensure the best path forward for your company. Frontier Consulting is experienced in assisting buyers and sellers in M&A deals and is happy to discuss options with your organization.
A company can purchase another in cash, with stock, assuming debt, or some combination of all three. The most common type of M&A transaction for small companies is an asset acquisition, where one company will buy all the assets of another. The selling company will end up with cash (and debt in some cases), but will effectively become a shell of its former self. At this point, it is very common for the company to liquidate its operations, at least in that market
Pros and Cons of a Mergers and Acquisition Deal
We are often asked, “Why do companies keep acquiring other companies through M&A?” The answer is to grow and compete.
When a company faces competition, it must be able to compete financially, often by cutting costs, and remain interesting to the customer. In the face of this type of challenge, it is common for companies to consider merging with their competition. On the pro-side of this consideration, the competition would decrease; however, on the con-side, this company may no longer retain the same brand it may have worked tirelessly on establishing.
Though many M&A deals are friendly, there is such a thing as a “hostile takeover”. This occurs when the target company—the one being acquired—does not wish to be acquired. Acquiring companies can by-pass this by simply purchasing large stakes of the target company, which forces that acquisition.
