What Is Merger and Acquisition and its significance?
Without creating another business object, two or more different companies can buy, sell or combine to help or finance a fast-growing business.
This aspect of corporate strategy, corporate finance and management associated with this process is called mergers and acquisition.
The concept of this combination is that the shareholder value is higher than the sum of the two companies. Both terms are used interchangeably but have a slight difference in meaning.
The Differences Between Merger and Acquisition
One acquisition is the process of buying one organization from another. It can be a friendly takeover or a hostile takeover.
With a friendly acquisition, company directors negotiate during a hostile acquisition if the bidder continues to search for it, even if the company (or target) does not want to agree.
Usually, a large company takes on a smaller company. However, in some situations, a small company may outperform a larger one and retain only the name of the new firm that results from the acquisition. This type of acquisition is called reverse merging.
The merger takes place between two organizations that have made a decision to merge into one. It occurs when two companies, most often of the same size, agree to move forward and decide to one new company, instead of remaining separately owned and managed.
This type of action is more accurately referred to as the “fusion of equals.” Mergers are often financed by the stock exchange, on which stockholders of both companies receive an equivalent number of shares in the new company.
The shares of both companies were delivered, and the shares of the new company were issued instead.
There are different ways to finance a merger and acquisition transaction. They partially differ in the way they are financed and partly in the relative size of the companies.
Cash payments are usually called acquisitions rather than mergers because the shareholders of the target company are removed and the target is indirectly controlled by the shareholders of the applicant.
Payment for shares is made to the shareholders of the acquired company in a report proportional to the valuation.
Mergers and Acquisitions
Mergers and acquisitions mean a process in which one company buys another and combines both.
Each company and each combination is unique, but no matter what industry you are involved in, there are key strategies for successful integration.
First, successful Mergers and acquisitions should be based on an understanding of the underlying cause of the contract, potential savings, and the assets that you hope to receive.
Secondly, clearly defined roles and responsibilities are important for process management. Finally, it is important to know that real value does not refer to the assessment of transactions, but to the integration and consideration of the synergy of planned transactions.
Quick Tips On Steps Involved in Mergers and Acquisition
In order to survive acquisitions and mergers, you need to take several steps:
- It starts with the team leader. The team leader will have the honor and burden of helping to select a potential partner or purchasing company.
At this point, a heavy reversal of acquisitions and mergers will begin. It should be remembered that each step of the process is an educational experience.
There is a high probability that you will ever encounter one type of merger while working with one company, but you will learn a lot about joining both companies during the merger.
Understanding the history of each company and how it survives is the key to developing new policies and procedures that increase efficiency and increase revenue.
- The next step in this process is the integration of staffs. It is no secret that there will be layoffs, which means that people will lose their jobs.
However, it is an unavoidable evil if you expect both companies to merge successfully. With too many employees, the salary paid will be too high, and those who perform similar functions will be more.
Dismissal of staff can demoralize the rest of the workers, so it is important to carry out moral training activities for those who remain.
When two companies merge, both sides adopt a system called synergy. This allows them to develop greater cost savings in the new company.
The system includes an increase in revenue and cost reduction, which is achieved by reducing staff, acquiring new technologies, expanding market coverage and improving the visibility of the industry.
Job loss is quite common during mergers and acquisitions. In addition, the CEO of the target company leaves with a compensation package.
The structure of the company will change, personnel and rules will change. In the end, a completely new company will be created from the union of two people, and it is important to perceive this new company as your own company.
Also Read: Meaning of financial instruments
Types of Mergers and Acquisitions
The type of change that will occur during the merger of the two companies will depend on the type of merger that occurs.
There are several types of business mergers, but some of the best known is vertical, horizontal, conglomerate, market expansion, and product expansion.
Vertical mergers include companies that sell or produce products that complement each other. For example, a sewing machine manufacturer may combine with a fabric company, or a flower manufacturer may combine with a snack company.
Horizontal mergers are companies that directly compete with each other. For example, a fitness apparel company might merge with a sports apparel company.
Conglomeration refers to companies that merge with other companies that sell or produce unrelated products. For example, a motorcycle company may merge with a photographic company.
Market-extension extends to companies that sell identical products in different markets. This applies to organizations selling products in North America or abroad.
Product-extension mergers occur when two companies sell related products in the same market. For example, a potato chip maker might team up with a potato chip maker.
The Importance of Mergers and Acquisitions
In addition to the general desire of a public company to increase revenues, companies turn to mergers and acquisitions for various reasons, the most common of which are:
- Synergy – it can be assumed that the combined organization will create improvements in revenue and cost reduction options.
Concentration companies often cite cross-selling and marketing opportunities as a means of increasing revenue and eliminating double airline tickets as potential cost synergies
- Economies of scale – companies can benefit from increased size and market share in a particular market. Large economies of scale often make companies a stronger competitor in the market.
- Diversification – companies concerned about the risk of concentration in a particular market may argue that one company may benefit from capturing another company in a separate market, although this may be related.
Companies that merge or absorb other companies to diversify know that they reduce overall business risk.
- Taxes – Tax credits often play an important role in purchases. For example, a bargain buyer may benefit from the transfer of tax losses associated with the acquired company.
While tax breaks often do not lead to mergers, they can play an important role in supporting the benefits of a potential merger.
Also Read: Understanding taxation in Nigeria
- Another reason companies are considering merging is the ability to cut costs while increasing revenue. This is just a scenario in which you can reduce many of the costs of general and operating costs. Or, in some cases, say, in a manufacturing company, productivity can be achieved.
So, what is merger and acquisition? Now you know that they are usually one of the most important strategies a company will apply to maximize potentials.
Unfortunately, many mergers and acquisitions are failures (or at least in some respects). One of the best ways to increase your chances of success is to plan a merger and acquisition, consider it as a project, and manage it accordingly.