Mergers and acquisitions (M&A) are essentially business dealings in which the ownership of a company is transferred or consolidated with another company. Both mergers and acquisitions effectively result in the link of assets and liabilities under one entity. M&A allows businesses to grow and/or change competitive positioning in a very short period of time. This is why they must comply with stringent EU antimonopoly competition laws. M&As are very potent strategic tools that have the potential to substantially lessen competition or even create monopolies.
The term M&A is often used interchangeably, but the words differ quite a lot in implication. A merge is a fusion of two organizations into a new enterprise altogether. An acquisition (private or public) seeks to create value by absorbing another organizations value. Acquisition targets are commonly identified with market research, business expos, by internal business units, supply chain analysis and M&A specialist firms. They are commonly set at 100% ownership of the assets or equity of the acquired entity. Interestingly, an acquisition of a public company, can be friendly or hostile.
The key driver of capitalism is value through efficiency. Therefore, acquiring competitors, product lines, intellectual property, human capital and data tends to increase efficiency and leverages existing strengths. This is why companies involved on either side of an M&A deal will attempt to value themselves inversely. The seller will attempt to value at the highest conceivable price, while the buyer will attempt to buy at the lowest. Nonetheless, most audited companies can be quite objectively evaluated by examining specific financial indicators and metrics.
For public companies, the share price and balance sheet offer transparency. But determining value independently is more challenging. Price-to-Earnings Ratio, Enterprise-Value-to-Sales Ratio, Discounted Cash Flow and target company Replacement Cost are common ways of doing that. But even these tools have limitations within industries that people or ideas are hard to develop or quantify. Therefore, a combination of methods and the target company’s distinctive positioning needs to be understood. But when done well, M&A benefits are exponential:
- Stronger market power to influence prices.
- Higher growth as compared to growing organically.
- Unlocking synergies due to cost reduction or higher revenues.
- Diversification to avoid significant losses during a slowdown in their industry.
- Tax benefits when acquiring a company with the tax losses.
Mergers and acquisitions can be complex, time-consuming and depend on the size of the transaction, human capital, competition, regulatory implications, fiscal considerations and of course the relationship between the two organizations. But in general, an M&A transaction (either acquisition of shares or an acquisition of the business entity) tends to follow more or less a process of Assessment, Intent, Due Diligence, Negotiations and Integration. However, the organizations that do master identifying value, creating synergies and integrating value through M&As can quickly and ruthlessly drive growth and compete both locally and internationally with the best.