What Are Mergers and Acquisitions (M&A)?
Mergers and acquisitions (M&A) is a general term that describes the consolidation of companies or assets through various types of financial transactions. Including mergers, acquisitions, consolidations, tender offers, purchase of assets, and management acquisitions.
A merger occurs when two or more firms combine to form one new company. For example, in 2016, Johnson Controls, a leading provider of building efficiency solutions, agreed to merge with Ireland’s Tyco International. A leading provider of fire and security solutions, resulting in a company that will be a leader in products, technologies, and integrated solutions for the building and energy sectors.
The merger is valued at $30 billion, with new Johnson Controls PLC to be based in Ireland. Currently, AT&T and Time Warner have an $85.4 billion merger pending. “Once we complete our acquisition of Time Warner Inc. We believe there is an opportunity to build an automated advertising platform that can do for premium video and TV advertising what the search and social media companies have done for digital advertising,” AT&T’s CEO Randall Stephenson said in a prepared statement. Mergers such as this one, in a well-established industry, can produce winning results in terms of improved efficiency and cost savings.
For what reason are mergers and acquisitions critical to an organization’s general development?
In a consolidation, two organizations join to frame one organization. In a procurement, one organization or financial backer gathering purchases another. Organizations converge for key motivations to work on in general execution of the consolidated firm through cost reserve funds, dispensing with covering activities. Further developing buying power, expanding portion of the overall industry, or diminishing rivalry. Wanted organization development, widened product offerings, and the fast securing of new business sectors, innovation, or the executive’s abilities are different intentions. One more intention in blending is monetary rebuilding—reducing expenses, auctioning off units. Laying off workers, and renegotiating the organization to build its worth to investors.
There are three sorts of mergers. In a level consolidation, organizations at a similar stage in a similar industry join for more financial force, to broaden, or to win more prominent piece of the pie. An upward consolidation includes the procurement of a firm that serves a prior or later phase of the creation or deals measure, like a provider or deals outlet. In an aggregate consolidation, inconsequential organizations meet up to diminish hazard through expansion.
Types of Mergers and Acquisitions
The following are some common transactions that fall under the M&A umbrella:
In a merger, the boards of directors for two companies approve the combination and seek shareholders’ approval. For example, in 1998, a merger deal occurred between the Digital Equipment Corporation and Compaq, whereby Compaq absorbed the Digital Equipment Corporation. Compaq later merged with Hewlett-Packard in 2002. Compaq’s pre-merger ticker symbol was CPQ. This was combined with Hewlett-Packard’s ticker symbol (HWP) to create the current ticker symbol (HPQ).
In a simple acquisition, the acquiring company obtains the majority stake in the acquired firm, which does not change its name or alter its organizational structure. An example of this type of transaction is Manulife Financial Corporation’s 2004 acquisition of John Hancock Financial Services, wherein both companies preserved their names and organizational structures.
Consolidation creates a new company by combining core businesses and abandoning the old corporate structures. Stockholders of both companies must approve the consolidation, and subsequent to the approval, receive common equity shares in the new firm. For example, in 1998, Citicorp and Travelers Insurance Group announced a consolidation, which resulted in Citigroup.
In a tender offer, one company offers to purchase the outstanding stock of the other firm at a specific price rather than the market price. The acquiring company communicates the offer directly to the other company’s shareholders, bypassing the management and board of directors. For example, in 2008, Johnson & Johnson made a tender offer to acquire Omrix Biopharmaceuticals for $438 million. Though the acquiring company may continue to exist—especially if there are certain dissenting shareholders—most tender offers result in mergers.
Acquisition of Assets
In an acquisition of assets, one company directly acquires the assets of another company. The company whose asset acquired must obtain approval from its shareholders. The purchase of assets is typical during bankruptcy proceedings, wherein other companies bid for various assets of the bankrupt company, which is liquidated upon the final transfer of assets to the acquiring firms.
In a management acquisition, also known as a management-led buyout (MBO). A company’s executives purchase a controlling stake in another company, taking it private. These former executives often partner with a financier or former corporate officers in an effort to help fund a transaction. Such M&A transactions are typically financed disproportionately with debt, and the majority of shareholders must approve it. For example, in 2013, Dell Corporation announced that it was acquired by its founder, Michael Dell.