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Mergers and acquisitions
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When two companies join forces aiming to make a bigger and better organization, it’s part of a process called M&A or “mergers and acquisitions.”
If the two companies are equals, that’s considered a merger. And if one company buys another, that’s an acquisition.
The goal of M&A is not about getting bigger but about creating “synergies,” the benefits that come from combining. A good M&A deal is said to be that 1 + 1 = more than 2.
Synergies can come through lower costs, greater market share, reduced competition, complementary resources and stronger finances.
Types of M&A
M&A deals come in different varieties.
Horizontal merger: Two direct competitors combine, such as when two media companies fused to spawn one giant film studio.
Vertical merger: Companies at different stages of the supply chain combine, such as when a drinks can maker buys an aluminum mine to secure its supplies.
Concentric merger: Companies selling to the same audience of customers join forces, like when a dieting service acquires a maker of fitness apps.
Conglomerate merger: When a company combines businesses from often unrelated areas, such as when a firm owns units specializing in alcoholic drinks, office supplies and insurance.
How M&A actually happens
The M&A process is long and complex.
In a takeover, the acquirer identifies a suitable target company.
It then appoints bankers and lawyers to scrutinize the target’s business and finances. If there are no red flags, the acquirer may make an offer.
The acquirer makes an offer based on how much more valuable it believes its combined business will be.
Overpaying is a big risk. There have been many cases where acquirers overestimate the synergies and end up later having to admit their mistake, sometimes costing many billions of dollars.
The target’s management will seek to extract the highest possible price for its shareholders.
In some cases, management does not want their company to be taken over at all, but the acquirer seeks to win shareholder votes for its deal anyhow. This is called a “hostile takeover.”
The final price can be paid either in cash or stock. If the two companies have agreed to merge, no money may change hands, and shareholders simply receive shares in the new united company.
Takeovers are also sometimes paid for with the acquirer’s stock or a mix of cash and stock.
The impact of M&A on shareholders
Billion-dollar deals shake up markets like nothing else.
Shares in a target company may increase in value once the news becomes public, while shares in the acquiring company will often see their price fall.
Long-term success depends on whether the acquiring company manages to generate the synergies it was looking for.
But it’s very possible that won’t happen. According to Harvard Business Review, between 70 and 90 percent1 of mergers fail to deliver shareholder returns in the long run.
KEY TAKEAWAYS:
M&A is when two companies combine to pursue synergies: the financial benefits that can come about when companies join forces.
The type of M&A depends on the relationship between the two companies – they could be competitors, supplier and consumer, have the same customer base, or have no common business.
Typically, the target company’s shares will go up in value while the acquirer’s shares will fall – and long-term, success of M&A depends on whether synergies actually appear.
