What is an M&A deal?The term ‘mergers and acquisitions’ (M&A) refers to the process by which one company joins another, either by combining together (company merger process) or by one purchasing the other to incorporate into the larger business (acquisition process). M&A transactions can indicate any deal of this type.
What is the difference between a merger and an acquisition?The most common difference between a merger and an acquisition relates to the size of the companies involved. When one company is much larger than the other, it is likely that it will integrate the smaller one into the larger one in an acquisition. The smaller company may still retain its legal name and structure, but is now owned by the parent company. In other instances, the smaller company ceases to exist completely.
When the companies are of a similar size, they may come together to form a new entity which is when a merger occurs.
In an ‘unfriendly’ deal (or hostile takeover), a target company does not wish to be purchased, but may do so out of necessity. In these instances, it is always considered an acquisition. How the transaction is communicated to shareholders, employees and the Board can therefore also play a role in whether a deal is considered an acquisition or merger.
‘Targeted acquisition’ is a common term used by larger companies who have dedicated corporate development teams. These corp dev teams look for opportunities to acquire smaller companies in order to support their own growth strategies - which may or may not be considered unfriendly deals.
Types of mergers and acquisitionsThere are a number of different types of mergers and acquisitions, including vertical, horizontal, congeneric, market-extension, product-extension, and conglomerate. The benefits of each are varied, and depending on your strategy could include: building economies of scale, increasing market share, decreasing competition, boosting efficiencies, expanding product lines, or diversifying offerings. There are also, however, negative connotations associated with each type, which should also be carefully considered before merging companies.
Understanding which type of merger or acquisition will best support your long term strategy requires a careful look at the pros and cons of each type, and the support of an expert advisor for guidance.
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What is involved in an M&A deal?The process for preparing for and executing an M&A can be intensive. Months can be spent assessing potential target companies with a thorough review of their material information in due diligence. This deep dive into their data - financial, commercial, operational and more - is essential for understanding the company’s current health and whether a deal will be financially viable. If you are on the sell-side of the equation, you can learn more about what is involved in a successful exit in our business exits hub.
M&A generally starts with a preliminary evaluation of the target company, including high level discussions between buyers and sellers to explore how the two companies could strategically fit together, how their values align, and what potential synergies could be realized.
In the beginning of the due diligence process, there is a lot of preliminary work to be done in assessing the market, the business, and financial reports.
Once the parties move into formal due diligence using data room software, this process involves an intensive Q&A period and the delivery and verification of all critical documentation to highlight any potential risks or gaps along with key opportunities. Security is paramount throughout the entire deal process, with risk of disclosure potentially leading to failure of the deal and damage to personal and professional reputations.
The key steps in an M&A deal involve:
- Preliminary discussions and non-disclosure agreements
- Assessment and evaluation of target
- Due diligence in a Virtual Data Room
- Signing the contract and closing the deal
- Post deal integration
What are the pros and cons of an M&A deal?
- M&A is a proven means for growth, allowing the newly formed business entity to boost market share, increase their geographical footprint, overtake or buy out competitors, and acquire new talent, technologies and assets.
- Two heads are better than one, so they say - a relevant sentiment for mergers and acquisitions where two companies can realize valuable synergies and generate much more value together rather than operating individually.
- Joining together can allow two companies to cut a number of costs associated with duplicate roles, systems and licenses.
- M&A deals can be incredibly time consuming. The M&A process is intensive, and can take months or even years to finalize. Due diligence is time-consuming manual work that can take key players away from their day jobs, causing a dip in productivity and taking a toll on the companies involved.
- There is a lot of risk involved in an M&A deal. Proper due diligence must be done to ensure that the acquiring company has a full understanding of the target company, which is why it’s standard practice for companies to seek external services to evaluate the risk of a deal.
- Integrating two companies with different visions and cultures can be its own unique challenge, with lots of M&A deals running into problems at the integration stage of the deal if this strategy has not been considered alongside deal execution.
- Due to the demanding requirements, mergers and acquisitions have a high failure rate - approximately 47% of M&A deals fail due to financial or operational issues revealed during due diligence and 57% due to management issues or lack of fit, according to a survey by KPMG.
What are some mergers and acquisitions examples?Some of the most famous and successful examples of M&A deals that have occurred over the last few decades include Google’s acquisition of Android, Disney’s acquisition of Pixar and Marvel, and the merger between Exxon and Mobile (a great example of a successful horizontal merger). But they can't all be good news stories like these.
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