What are the different types of Mergers and Acquisitions?
Dashmeet Kaur | Updated: Mar 12, 2020 | Category: SEBI Advisory
The corporate world is extremely dynamic and evolves in every hour of the day. New technologies engulf old and outdated schemes. Thus, they challenge business models to either incorporate the latest techniques or retreat from the industry. An efficient way to persist in the corporate sphere is by enlarging the business through Merger and Acquisition. It is a potent tool for small scale Companies to reinforce their business structures. This write-up is a guide about various insights of Mergers and Acquisitions.
Decoding the terms Mergers and Acquisitions
Mergers and Acquisitions are mostly used by entrepreneurs to restructure their organizations. It shares the sole objective of business expansion and often helps Companies to attain success in a short period. Both refer to the consolidation of Companies, yet they differ on the implementation front, such as:
Merger: In Merger, two or more Companies combine to build a single entity for mutual benefit. In the Merger Agreement, both parties negotiate on terms and conditions of how powers shall be shared after the formation of a new entity. Generally, the Companies involved in Merge relish an equal treatment.
Acquisition: In an Acquisition,one Company gains authority over other Company by purchasing its assets. It can be a Voluntary Takeover or Hostile in nature. In the process of Acquisition, the Acquirer Company buys the Target Company; thereby, its identity gets dissolved completely.
An entrepreneur can choose from several types of Mergers and Acquisitions based on the needs of the business. Since both techniques accentuate organic business growth and development, it is beneficial for startups and mid-scale Companies.
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Advantages of Mergers and Acquisitions
There are many strategic reasons for each Merger and Acquisition apart from a rapid progression of the business, such as:
- Access to competent skills and technology- The central purpose of any Merger and Acquisition is to fill in the gaps between the shortcomings and goals with efficient skills. By merging or acquiring a potential business entity, Companies obtain the required skills and get exposure to advanced technology.
- An economy of scale- Another major benefit of M&A is that it helps to create economies of scale which further generates cost-efficient results. When two Companies combine, the production takes place on a large scale which in turn boosts the production and reduces its cost. M&A also streamlines the operations due to the integration of resources.
- Diversification of products- Through Merger and Acquisition, a Company can experiment with a variant product line and enter into a broader market that has good sales opportunities.
- Optimal use of finances- The merged Company can deploy various innovative plans with abundant collective finances and resources. When proficient resources work together, they discover the best ways for optimal utilization of funds.
Types of Mergers and Acquisitions
Merger and Acquisition differ in implementation and are divided into separate categories. Let’s look at different forms of Mergers and Acquisitions:
- Horizontal Merger– It occurs when two or more Companies of the same industry merge to form a single entity. Often such Merger happens amongst competitors that aim to reduce costs and gain a larger share of the market.
- Conglomerate Merger- This kind of Merger takes place when two Companies of entirely different industries merge to share their assets with each other or to reduce business risk.
- Product extension Merger– It refers to the union of those Companies that belong to the same market and sell related products. Such a Merger intends to increase profits by clubbing their products & services to access a bigger market.
- Market extension Merger– When two or more businesses sell the same products & services in discrete markets merge to create a larger customer base, it is known as Product extension Merger.
- Vertical Merger- In this Merger, two or more Companies unite that are involved in the supply chain of a common product/service to increase efficiency.
Also, Read: Mergers and Acquisitions in Financial Institutions.
Factors for Company Acquisition
Unlike Merger, in an Acquisition, the Acquirer Company has more power than the Target Company and it occurs under different circumstances like:
- Consolidating- It is a situation wherein, an Acquirer Company takes over the Target Company to reduce competition from an over-supplied market.
- Accelerating- A condition in which a large scale Company purchases a small Company to leverage its resources and accelerate market access.
- Resource acquiring- As the name suggests, it is a type of Acquisition when a Company Takeovers other Companies to gain skillful resources, technologies, intellectual property to stabilize its market position. It is very cost-effective for a Company than to develop its resources from scratch.
- Speculating- It occurs when a large Company acquires a small Company which offers a new product in a bid to capitalize on its future growth potential.
- Value creation– Under this condition, an Acquirer Company purchases another Company to improve its performance and market position and sell it for a profit.
Process of Mergers and Acquisitions
Regardless of the types of Mergers and Acquisitions you choose for your business type, the procedure remains the same. Undertake the following steps for Merger and Acquisition:
- Develop M&A Strategy- Before directly hopping onto the process, one must create a strategy. Identify your purpose, capital requirement, type of transaction that you want to incur in Merger and Acquisition.
- Identify potential Companies- After setting a strategy, now you need to conduct thorough market research to find a suitable Target Company. It should be figured out that whether merging or acquiring the chosen Company shall provide the expected results or not.
- Exchange information- Once the Target Company signs the Letter of Intent and Confidential Agreement, it’s time to exchange information like financial records, Company history etc.
- Valuation analysis- Based on the provided information, evaluate the potential growth of the Target Company and reconsider your decision of M&A.
- Negotiate and offer- After full contentment, propose a reasonable offer to the shareholders of the Target Company. Therefore, both Companies can negotiate on common terms.
- Due Diligence– Its time to assess each aspect of the Target Company from different perspectives like customer base, financial books, products, human resources etc. The object is to ensure that there is no discrepancy in the information based on which the offer has been made. In case of any discrepancy, you can revise the bid which justifies the actual state of the Target Company.
- Draft Purchase and Sale Agreement- When everything settles down; draft a final Agreement that states the cash or stock which shall be given to the shareholders of the Target Company.
- Closure and integration of the deal- Finally,both the parties will close the deal and sign the necessary documents. The operational and management teams of both the Companies will work together to integrate into the merged entity.
It entirely depends on your business structure, size and objective to select amongst the various types of Mergers and Acquisitions. The Government strictly regulates the process of M&A. Therefore, a Company needs to go through an extensive approval procedure. If the Government considers a transaction to be against the public interest, then it will disapprove the M&A deal.
To bypass such a situation, you can take guidance from a reputed legal consultancy like Swarit Advisors.
Recommended Post: Difference between Merger, Acquisition, and Amalgamation.
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