Suppose you are an entrepreneur and you want to start your own venture soon. What’s your primary goal? To achieve sustainable growth over the years and to disrupt the competitive market landscape. In times of these, there’s a very powerful tool that comes in handy- Mergers and Acquisitions (M&A). They help emerging companies find their niche in the market, diversify their portfolio, and boost their productivity like never before.
However, there are a few questions that need to be addressed-are M&A just simple transactional processes? Or are they very meticulously crafted strategies that need a lot of ideation and brainstorming? And what about the execution? Is it seamless, or does it require meticulous planning and deliberation?
Unearthing Mergers and Acquisitions
Speaking simply, mergers and acquisitions entail the combination or consolidation of two or more business entities. That gives rise to a compact, unified structure. If you observe closely, “mergers” and “acquisitions” are often confused with each other. However, they have very different meanings.
So, what is “mergers and acquisitions” exactly? A “merger” happens when two business entities come together and join hands. An “acquisition” means when one company acquires or purchases another company. The company that purchases the smaller company assumes full or partial control of the purchased company.
There are very bespoke strategic motives behind these actions. Let us quickly comb through some of them-
Business expansion
by using M&A strategies, the upcoming business ventures can gain access to shares in the market, disrupt the market, and aim for even international markets. This leads to an increase in revenue and in turn, more profitability.
More synergy
Two is always better than one. The combination of the two companies leads to more revenue creation, cost reductions in the long term, and more market penetration.
Diversification
If one or more companies depend on a single line of products, the risks are higher. Hence, a good M&A strategy helps to expand more into diverse markets, and even services.
Technological advancement
Let’s take the example of MongoDB. It is a data development company that acquired Voyage AI to leverage innovative AI capabilities. What Voyage AI does is, it eliminates “hallucinations” which are very common in RAG (Retrieval-Augmented Generation).
Mergers vs Acquisitions
Let us look at the key differences between the two strategies now-
Mergers | Acquisitions |
A merger means when two or more companies get consolidated into one single business entity. | An acquisition occurs when one company takes over another, gaining control. |
In a merger, both companies often share control. | In an acquisition, the acquiring company assumes full or majority ownership. |
A merger typically results in a new, unified company. | In an acquisition, the acquired company may retain its name or be absorbed entirely. |
Different Types of Mergers and Acquisitions
There are countless types of M&A strategies in the market which are very distinct from each other. They vary from each other in terms of operations and the goals they cater to.
Let us take a look at the different types of mergers and acquisitions quickly-
Horizontal mergers
If two business firms are in the same market, a horizontal merger is possible. The main goal of such a merger is to increase the market size and become a sizable entity in the market landscape. This enhances the pricing power of the two companies easily.
Vertical mergers
For a vertical merger to take place, the companies need to be at different levels of the supply chain. There are a lot of tangible benefits of a merger like this. The supply of raw materials can be synchronized easily for the two companies, along with the production of goods. The quality control is also more stringent.
Conglomerate mergers
If two companies are in entirely different industries, they usually go for conglomerate mergers. These companies are not competitors in a similar market. Within the conglomerate, the companies can function independently of each other but they need to report to one parent firm. The firms may also have entirely different business models, goals, and business strategies.
Congeneric Mergers
This type of merger is possible between firms that are in the same industry but deal in different services or different products. But there are middle grounds like similar production processes, distribution networks, and even strategies. Expansion of the product line and increase in the market share are the two main objectives of a strategy like this.
Reverse mergers
This is a transaction deal where a private company buys a public business entity. It is also referred to as a “reverse takeover”, and sometimes as a “reverse IPO”.
In June 2020, Nikola, a private company that manufactures hydrogen fuel-cell electric trucks, completed a reverse merger with VectoIQ, a special purpose acquisition company (SPAC). Through this transaction, Nikola became a publicly traded company listed on the NASDAQ stock exchange. This allowed Nikola to access public markets and raise capital without the lengthy and costly process of a traditional IPO.
What Are Hostile vs Friendly Takeovers?
When discussing mergers and acquisitions, it is very difficult to understand what are friendly takeovers, what are hostile takeovers, and the differences between both-
Friendly takeovers
- Companies proceed after deliberation with the management.
- These generally require board approval and communication with the stakeholders is a mandate.
- The interaction is smoother and it generally invites positive publicity.
Hostile takeovers
- The consent of the management is not necessary, neither is a board approval.
- The communication is pretty aggressive.
- Integration of such a procedure is quite complex and it generally calls for negative publicity.
The Essential Services of Mergers and Acquisitions
In general, M&A services serve a wide variety of services. Let us quickly take a walk through some of the most prominent ones-
Strategic Advisory
Mergers and acquisitions help in this regard by providing them with a platform or means. Companies can then achieve their goals with the help of consolidation with other business entities, and align their business objectives accordingly.
Negotiation
M&A transactions help in negotiations in a variety of ways. They facilitate access to entirely new market landscapes and help suggest new and better consolidations when it comes to more profitability. They also help in identifying and gaining access to potential customers.
Deal restructuring
With the aid of mergers and acquisitions, companies get a lot of help with deal structuring. Companies can combine their assets based on the alignment of their strategic goals and liabilities. Post that, the transactors can be customized to expand the market size, reduce costs, or meet other business needs.
Planning and execution
Nowadays, getting access to the most cutting-edge technology or to the most diverse pool of talents is not an easy feat. Mergers and acquisitions help in the same way by helping companies diversify their product portfolio, gain access to the most innovative technologies, and meet the financial targets of the firm.
Legal and regulatory compliance
A “due diligence” process is facilitated by most mergers and acquisitions. If an acquirer has set its eye on a potential company to acquire, it is crucial to examine the legal standing of a company. Many legal complications can arise like pending lawsuits or business processes that are not very ethical.
Strategic Considerations for Successful Mergers and Acquisitions
Compatibility
Before any merger or acquisition, evaluating cultural compatibility is crucial. This prevents clashes in the future. Some of the factors include work culture, norms, beliefs, and values.
One good example would be the Disney and Pixar merger way back in 2006. Even after acquiring Pixar, Disney considered it important to preserve the work culture of Pixar, especially when it came to creative activities like storytelling.
Talent retention
The acquirer company should develop innovative strategies to maintain the top talent pool of the target company.
Let us recall how Microsoft acquired LinkedIn in 2016 for 26.2 billion. In order to facilitate the retention of talent at Pixar, Microsoft adopted a few strategies like helping LinkedIn employees decide their career paths and offering sizable retention bonuses for the employees.
Communication
For a successful M&A transaction, clear communication with the stakeholders is very important. These include clients, investors, and employees.
Again, when Microsoft acquired LinkedIn in the year 2016, they took care to communicate everything to the employees clearly. Some of the key topics included primary reasons why Microsoft decided to acquire LinkedIn, and how this acquisition is going to help LinkedIn in the long term.
Change Management
This is a crucial factor during a mergers and acquisitions process. In order to implement this correctly, communication is very important. All the stakeholders have to be kept in the loop, the different cultures need to be integrated and all the processes need to be streamlined effectively. During this time, the employees need to be supported and assisted in every way possible to ensure team bonding and unity.
A striking example of this would be the merging of Groupe PSA and Fiat Chrysler Automobiles in the year 2021, to give rise to Stellantis. During the process, both companies prioritized communicating openly with all the stakeholders like the suppliers, the employees, and everyone in the teams. The employees received an ample amount of training to adapt to the new changes.
Risk Management
For this, the companies first have to identify the potential risks, assess the level of the risks, and strategize ways to mitigate the risks. This is done with the combination of a lot of policies, detailed procedures, and rigorous monitoring afterwards.
Long-term goals
A lot of factors need to be kept in mind while setting the long-term goals of a successful mergers and acquisitions strategy. Firstly, the company has to develop a plausible acquisition strategy and enlist the potential target companies to acquire. After that, a proper plan has to be chalked out and the valuation analysis has to be performed accordingly.
How Are Mergers And Acquisitions Valued?
There are quite a few ways to evaluate successful mergers and acquisitions services. Let us quickly take a look at some of the common procedures-
DCF ( Discounted Cash Flow) Analysis
This method is very helpful when it comes to guessing the real value of the company. A company takes all the factors into consideration- the present value of the company, long-term finances, and the time for which it is being evaluated.
The objective of doing this is to arrive at the terminal value of the firm, which is significant even beyond the forecast period. This provides the starting point for the roadmap of the company. We need to know the risks associated with borrowing money today. This is done by taking the discount rate into consideration, which is called the Weighted Average Cost of Capital (WACC).
Comparative Company Analysis
If there are other publicly traded companies of similar type, it is important to compare the target company to the competitors. There are a few variables that are taken into consideration- the price-to-earnings (P/E) ratio, the EV/ EBITDA ratio, and the EV/ Revenue ratio.
Precedent-transactions analysis
As they say, “The taste is in the pudding”. If there have been successful mergers and acquisitions transactions in the past with similar companies, the market data helps to give a rough idea.
Asset-based valuation
When the worth of a company is dependent on the Fair Market Value (FMV) of a company, ie, the price that buyers are willing to pay for the company, it is called Asset-based valuation. For such a transaction to take place, both the buyer and the seller need to be completely aware of the assets and their value. Also, there is a significant time given to complete the transaction.
Key takeaways
- While the terms, “mergers” and “acquisitions” are used interchangeably, they differ from each other. The former means the coming together of two companies, while the other entails a company gaining control over another.
- There are different types of mergers and acquisition services. They can be horizontal, vertical, conglomerate, congeneric, and reverse. Each type has different objectives to meet and the procedures are different.
- Successful M&A deals require compatibility assessment, talent retention, effective communication, change management, risk mitigation, and long-term strategic alignment.
- Companies are valued using different techniques, including Discounted Cash Flow (DCF) analysis, Comparative Company Analysis, Precedent Transactions Analysis, and Asset-Based Valuation.
Final Thoughts
When it comes to strategic business growth, mergers and acquisitions are very powerful tools. Understanding their key differences, types, and valuation methods is crucial for successful execution. With the right planning, risk management, and integration strategies, companies can leverage M&A to achieve long-term success and competitive advantage.
