Mergers And Acquisitions
You may have heard of mergers and acquisitions before, but what exactly are they? How can they help you in business? Mergers and acquisitions can be very useful in business and can help the business grow in its success and recognition for future endeavors in the market.
In simple terms, a merger and acquisition occurs when two or more companies join, becoming one company. This is usually done to help the companies become more successful as they become united. It is usually much easier for two or more companies to join, rather than for one company to build a new business from the ground up. This is another benefit when the companies merge. This corporate strategy is also called an M&A. Companies often do this to help the growth and efficiency of another company. Selling and combining companies can help aid, finance, or move a growing company into a rapid growth rate. All the companies involved in a merger are adsorbed into the company that is acquiring the new business. When an acquisition occurs, one company is purchased by another. All the assets of the business that has been purchased are then owned by the company that has bought them. This strategy in business is often a great help to smaller companies. All the parties involved, either the board of directors or the owners if privately owned, come to an agreement of business merger and acquisitions. When the new company forms, the original companies no longer exist; all the assets and personnel are combined. Depending on the business deal, the merger and acquisition can be either complex or straightforward. There is a difference between mergers and acquisitions; however, they are often spoken of together.
During the years of 1895 and 1905, there were small firms that had little markets that began to consolidate with like firms to form larger, more powerful institutions that dominated their markets. This movement was so powerful that in the 1900s, the business mergers that occurred were 20% of GDP, and in 1990 it was only 3%. Because of these mergers, many companies were created to become some of the strongest businesses we know of today in the market. This began the trend of companies mixing and becoming dominant in the business force and providing the consumer with what they needed or wanted at a price they could afford. So, as you can see, this was a very important movement in business history for our businesses to be standing as they do today.
When companies want to expand operations, a merger is usually done with another company. The goal is to allow for an increase in long-term profitability. Mergers are very often done in a setting that allows larger companies to help a smaller one. This is done with diligence to make sure the deal that is to be acquired is beneficial to both parties. There are 15 different actions that can be taken for an M&A. Often to reduce market competition, corporate mergers can cut costs and will often run with more efficiency. Corporate mergers are watched and heavily regulated by the Federal Trade Commission and Department of Justice. With a merger, usually the companies are the same size and move forward together; this is called a "merger of equals." When this happens, the companies involved relinquish their stocks and a new company stock is issued. When the merger happens on any level, it is commonly voluntary. There is also a stock swap or a cash payment. This stock shop allows the shareholders of the companies to share in the risk of the deal involved. The company is also given a new name; it is often the combination of the names of the original companies.
There are many forms of mergers. When two merging companies are of the same industry and produce similar products, this is called a horizontal merger. When companies are producing the same goods, but are at different stages, it is a vertical merger. When the companies have no mutual buyer/customer or supplier relationship, but are in the same general industry, this is called a congeneric merger. When two companies operate in different industries, this is considered a conglomerate merger. When a company acquires another company's earnings per share (EPS), it is known as an accretive merger. With the accretive merger, the company with a high price to earnings ratio (P/E) acquires one with a low P/E. When a company that has a low P/E acquires a company with a high P/E, this is called a dilutive merger and the company's EPS decreases. A very unique form of merger that is created without the expense and time required by an IPO is called a reverse merger. The contract that is the vehicle to achieve these mergers is called a "merger sub." When two companies sell the same product, but are in different markets, this is called a market-extension merger. When the products are related, yet different in nature, but are sold in the same market, it is called a product-extension merger. When a company is paid for with cash or through some type of debt instrument, the sale is taxable, and it is considered a purchase merger. When two companies are bought and combined into a new entity, it is called a consolidation merger. Both the consolidation and purchase mergers are distinguished by how the merger is financed, and both are subject to the same tax terms.
Acquisitions are different from mergers in that they are considered takeovers; this is when one business buys another business, thus creating a business acquisition. Most of the time they are friendly, but they can become hostile. Most often it is a larger company buying a smaller company, but a smaller company can buy out a larger company as well, and will usually keep the larger company's name after the business acquisition. This is known as a reverse takeover. Once purchased, the smaller company ceases to exist, or it will become a part of the company that bought it. The company that is bought turns over all assets, equipment, personnel, patents, and other intellectual property to the purchasing company. Keep in mind that both companies' boards or owners have agreed to this transaction. When both CEO's have agreed in joining together, this is called a merger; however, when the deal is unfriendly, meaning when the company that is being bought does not wish to be purchased, it is regarded as an acquisition. Often though, business acquisitions are different in name only and are used for the efficiencies and enhancement of the market visibility of the businesses involved. Often in an acquisition, all parties are happy with the transaction between the companies involved. During a business acquisition, the business being bought is purchased with cash, stocks, or a combination of the two. In smaller deals, one business will simply take the assets of the other company.
One type of acquisition is when a buyer purchases the shares and takes over control of the business that has been bought. This, in turn, will allow the new owners to control the assets of the company bought; however, because the company is bought fully, all liabilities the business bought are now the buyer's responsibility. There is also a type of business acquisition called a reverse merger. This is where a private company will be publicly listed in a short period of time by purchasing a publicly listed shell company. Often, the publicly listed shell company is limited on assets and has no business; whereas, the smaller company has strong prospects and is eager to raise their financing. At this point, the smaller company becomes a new public corporation, and the shares are now tradable. When a buyer purchases the assets of another company, cash received from the sell-off is paid to shareholders through liquidation, leaving the company that was bought an empty shell if all assets are bought out. This is often done when there could be foreseeable liabilities such as unquantified damages from litigation over defective products, environmental damages, employee benefits, or terminations.
There are various methods of financing in an M&A deal; often the financing of a merger is different from acquisitions, also due to the size of the companies. When a company is bought with cash, it is usually an acquisition and not a merger. The shareholders of the main company are removed from the picture, and the business is in indirect control of the bidder's shareholders alone. This deal makes good sense when there is a downward trend in interest rates. One of the advantages of using cash is that there is less of a chance of an EPS dilution in acquiring the company. The issue that comes into play when cash is used is that the cash flow of the company is placed under constraints. A company may also be financed by borrowing from a bank or can be raised with bonds. Also, the stock from the acquirer may be offered for consideration. When an acquisition is financed, it is known as a leveraged buyout; this is due to debt, and the debt is often moved down to the balance sheet of the acquired company. There is also what is called a hybrid; this is when cash and debt, or cash and stocks, are combined in the purchasing of the companies.
There are many reasons for mergers and acquisitions. When companies are combined, this creates the ability to reduce duplicate departments or operations, which lowers the cost of the company to the revenue stream and will increase profit. This also increases revenue and market shares, cross selling, synergy, lowers taxes, increases geographical or other diversifications, and allows for transferring of resources. When one company finds an interest in a smaller company and wishes to combine with the smaller company, it is a benefit for both in the sense that the smaller business can increase their productivity, revenue, exposure, and growth. For the company acquiring another company, the benefits are a stronger work force, more exposure, and lowering of costs due to the ability to merge departments. This is a benefit to the business that is being merged, if it is at a point that the product they put out is getting great recognition, but perhaps they do not have the revenue to cover the costs of creating the production they need. When companies are merged, they will be able to grow and combine their abilities for the products or services they provide at a cost that the consumer can afford, benefiting both in the end.
In 2000, Lehman Brothers did a study, and they found that the corporation appreciated by 1% after the mergers. For every $1-billion deal, the business that was merged increased by .5%. In one of the reports, they found that after the deal was announced, there were strong upward movements in the business that was being merged and a strong upward movement in the parent business that bought them. With the rise in globalization, mergers and acquisitions are very important for all businesses to be able to allow growth. Mergers and acquisitions have become a large part of the business world today to encourage growth. This also encourages investors to begin to invest further into companies, because this allows shareholders to have over and above the sum of the two companies. When two companies are working together, they are considered more valuable than that of two separate companies. When a strong company is willing to come in and merge with a company that is not doing as well as it would like, this can create a boost and allow the company that is not doing so well to survive. When the merger and acquisition happens, it will also create a more competitive, cost-efficient company. The bottom line is that if the two companies were not to merge, one of the companies would not survive. It is up to you if you should consider a merger and acquisition; only you can truly make that decision, along with all involved in the situation.