Mergers and acquisitions are not a new concept. They have been helping organizations become more efficient and powerful since time immemorial. However, 70% to 90% of mergers and acquisitions fail, according to Harvard Business Review. Despite these figures, businesses are still interested in such synergies.
Why are mergers and acquisitions still so prevalent and sought after? Is it a science with a set formula, or is it an art that is subjective? Let’s find out.
What are Mergers and Acquisitions
Mergers and acquisitions aka M&A are the consolidations of two or more businesses through various financial transactions. A merger is when two existing businesses combine to become one. On the other end, acquisitions are when one firm purchases a significant or controlling amount of another company’s equity.
Mergers and Acquisitions Examples
Let’s understand mergers and acquisitions better with some historic examples.
Google and Android (A successful acquisition)
In 2005, Google bought Android, a smartphone business that had only been around for a few years. This acquisition is counted as Google’s biggest successful acquisition by far, holding an estimated 85% of the smartphone industry.
eBay and Skype (A failed acquisition)
With a belief that the video communication features of Skype would help buyers and sellers communicate more effectively, eCommerce giant eBay purchased Skype for $2.6 billion back in 2005. Unfortunately, the results were not as expected as customers still chose emails for planning and carrying out daily transactions.
Exxon And Mobil (A successful merger)
In 1998, Exxon Corp. and Mobil Corp. announced this merger. Both of them were the topmost oil producers in the United States. Hence, it was a success that attracted global media attention.
AOL and Time Warner (A failed merger)
With the expectations of having exciting synergies and outcomes, the merger of AOL and Time Warner was done but it turned out to be one of the worst M&A catastrophes in history. The attempt to integrate two very different business cultures led to this failure.
How are Mergers and Acquisitions Valued
In mergers and acquisitions, the valuation part is generally in the hands of the acquirer. He/she controls both the objective and the valuation interaction. The acquirer must pay the least amount possible to get the goal, whilst the goal must pay the most. To determine the final exchange cost, valuation is a must and there are three important valuation techniques to do so:
- Equivalent Exchange Investigation: To determine the value, valuation measurements for prior, almost equivalent exchanges in the industry are used.
- Limited Income (DCF) Technique: The value is based on the projected future revenue.
- Practically Identical Organization Investigation: To determine the value, relative valuation assessments for public organizations are used.
Types of Mergers and Acquisitions
Types of Mergers
1. Horizontal Merger
A horizontal merger occurs when two companies that serve the same region or offer comparable goods or services come together. This kind of merger commonly happens between direct competitors in markets with few enterprises and intense competition.
2. Vertical Merger
Vertical mergers occur when two businesses that provide distinct goods for the same service unite. This kind of merger typically involves two businesses that are involved in a certain industry’s manufacturing or distribution process.
3. Concentric Merger
Concentric mergers happen when two businesses combine to offer goods to the same client, despite the fact that they sell distinct goods.
4. Conglomerate Merger
Two unconnected enterprises join to form a conglomerate. There are two types of conglomerate mergers: pure conglomerate mergers and mixed conglomerate mergers. Conglomerate mergers may be risky because they cause a sudden change in how businesses run.
Types of Acquisitions
A traditional acquisition means buying a business by purchasing its shares or assets. It is an effective strategy to grow your company.
When a private corporation buys a public company to become publicly listed, the transaction is known as a reverse merger. It helps businesses to expand and enter new markets.
How are Mergers Structured
Depending on the relationship between the two firms participating in an agreement, mergers can be set up in different ways. The structure of a merger can be horizontal where two businesses have similar markets and product lines or it can be a vertical merger between a client and a business or between a business and a supplier. Other than these two basic structures, there are congeneric mergers having two companies that provide the same clientele in various ways. Mergers can also be structured between market-extension mergers and product-extension mergers.
Based on financing strategies, mergers can be structured as:
- Purchase Mergers: Here, one corporation buys another company, and cash is used to make the purchase.
- Consolidation Mergers: A whole new company is created and the two businesses are acquired and merged under the new organization.
Mergers and Acquisitions Associate Salary
The annual salary range for mergers and acquisitions associates can vary, depending on factors like types of organizations, level of experience, the industry, and more. In the US, it ranges from $80,035 to $197,012. However, there can be some additional compensation too including financial incentives, a commission, gratuities, and profit sharing.
Why Do Companies Continue to Acquire Other Companies Through M&A?
- Business Valuation: A merger between two businesses boosts shareholder wealth. Synergies that boost the value of a newly formed corporate entity are often produced through the combination of two enterprises.
- Diversification: The goal of mergers is typically diversification. By expanding into new markets or providing new goods or services, for instance, a corporation can utilize a merger to diversify its business activities.
- Acquisition of assets: The desire to acquire certain assets that cannot be acquired through other means can be the driving force behind a merger.
- Increasing financial capacity: Every business has a financial ceiling within which it can no longer fund its operations using either the debt or stock markets.
- Tax Benefits: A business that produces a lot of taxable income merges with a business that has a lot of carryover tax losses. This can be a common reason why businesses seek out mergers and acquisitions.
Though this guide is an overview of what mergers and acquisitions are and how these help businesses to function efficiently, there is always room to learn more! You can sign up for Emeritus’ online business management courses and enter the corporate world with all the in-demand, new-age skills.
By Swet Kamal
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