The term M&A (short for Merger & Acquisition) is a corporate strategy which envisages management of processes related to selling, buying and combining one or more businesses for a common cause. The common causes could be to aid, finance or assist a business to grow faster or perhaps even for a non-performing business to exit. Regardless of good times or bad times, the demands from stakeholders on businesses are always in one direction – increasing growth. In an economic downturn with declining demands and a competitive landscape, it is becoming increasingly challenging to maintain a consistent growth rate which are expected from businesses. Although not all businesses heading into M&A are in search of an answer to their stakeholders in lieu of organic growth, there are a number which are turning to M&A to grow their market share, revenue, economies of scale, expand their market or customer base or to eliminate the competition.
In H1 of 2009, the European M&A market had 1,530 deals (worth Euro 130 billion), and in North America, M&A activities have picked up in the Pharmaceuticals, Medical & Biotech sector where it has hit the US$174 billion mark (accounting for 42% of overall value of deals in North America). From January to July 2009, Greater China accounted for 42.6% of the total M&A deal in Asia Pacific region, and 34.7% in deal volume, which is a significant increase from the same period in 2008. Asia, ex Japan, recorded at least 250 deals in H1 2009, worth more than US$173 billion. (source: mergermarket)
Lets first understand what mergers and acquisitions means. In economics or business sense of the term, merger may be referred to as the establishment of a larger business organization as a result of the amalgamation of two businesses. Mergers comprise the process of “stock swap”. Stock swap is a process, in which the risk undertaken by the shareholders are equally borne by the shareholders of both the companies.
Many a times, mergers may appear to be similar to takeovers. But in case of takeovers, the name given to the new resulting company is a compound name consisting of the two company names. It also acquires a new brand.
There are several categories of mergers, namely:
- Conglomerate mergers: Occurs when the two merging businesses belong to two different industrial sectors.
- Vertical mergers: A vertical merger is said to have taken place if two businesses producing the same goods combine. The two businesses should be at different stages of production.
- Horizontal mergers: Take place when two merging businesses manufacture similar goods and belong to the same industry.
- Congeneric merger: A merger is said to be congeneric when two companies belong to the same industry. They however, do not have any common customer, buyer, supplier.
Other types of mergers include:
- Reverse mergers
- Dilutive mergers
- Accretive mergers.
As for acquisitions, a business is said to have “Acquired” another business, when one business buys another business. This can be either be:
- Hostile: The business, which is to be bought has no information about the acquisition, or is taken by surprise.
- Friendly: The two businesses cooperate with each other and settle matters related to acquisitions. There may be two types of friendly acquisitions depending on the option adopted by the buying party. The buying party could buy all the shares of the smaller business. The other option is buying the assets of the smaller businesses.
There are times when a much smaller business manages to take control of the management of a bigger business but at the same time retains its name for the combination of both the businesses. This process is known as “reverse takeover“.
In order for the resulting integrated business to be succesful, it is necessary to ensure that the strategy, planning, people and processes are aligned and approach to reduce redundancy and integrate the organizations are thoroughly designed taking into consideration the strengths, capabilities and niche of each business.
Tags: acquisition, Customer acquisition, merger, strategy