What is Merger and Acquisition ?
The merging of businesses or their primary business assets through financial transactions between businesses is referred to as mergers and acquisitions (M&A). A business can make a tender offer for another company's stock, conduct a hostile takeover, buy the other business altogether, combine with it to form a new business, or obtain some or all of its significant assets. They're all M&A-related.
KEY KNOWLEDGE
Understanding Merger and Acquisition
In contrast, a merger is the coming together of two businesses that are roughly the same size in order to proceed as a single new entity as opposed to continuing to be owned and run independently.
Example :
Microsoft acquisition of Activision Blizzard
Types of Mergers and Acquisitions
Merger
When two businesses merge, their boards of directors authorize the union and ask the shareholders for their consent. For instance, in 1998, the Digital Equipment Corporation and Compaq entered into a merger agreement wherein Compaq acquired the Digital Equipment Corporation.
Acquisition
In a simple acquisition, the acquiring company obtains the majority stake in the acquired firm, which does not change its name or alter its organizational structure. An example of this type of transaction is Manulife Financial Corporation's 2004 acquisition of John Hancock Financial Services, wherein both companies preserved their names and organizational structures.
Consolidations
By merging key operations and doing away with outdated corporate frameworks, consolidation results in the creation of a new corporation. Following their acceptance, shareholders of both firms will get common equity shares in the combined company. The consolidation requires their permission. For instance, the 1998 announcement of a merger between Citicorp and Travelers Insurance Group led to the creation of Citigroup.
Tender Offer
In a tender offer, one company offers to purchase the outstanding stock of the other firm at a specific price rather than the market price. The acquiring company communicates the offer directly to the other company's shareholders, bypassing the management and board of directors.
Purchasing of Assets
An asset acquisition occurs when a business directly buys the assets of another business. The shareholders of the company whose assets are being acquired must provide their permission. During bankruptcy procedures, it is common for other companies to bid for different assets of the insolvent company. The bankrupt company is then liquidated upon the ultimate transfer of assets to the purchasing firms.
Acquisitions of Management
In a management acquisition, which is often referred to as a management-led buyout (MBO), the executives of one firm acquire a majority stake in another, therefore bringing it private. In an attempt to assist with financing a transaction, these former CEOs frequently collaborate with financiers or former corporate officers. These M&A deals usually require the approval of the majority of shareholders and are financed mostly through debt. For instance, Dell Corporation declared in 2013 that its founder, Michael Dell, had purchased the company.
How Acquisitions Are Organized
How Acquisitions Are Financed
A business may purchase another business with cash, equity, debt assumption, or any combination of these three. It is also typical for one company to purchase all of the assets of another company via smaller transactions. When Company X purchases all of Company Y's assets for cash, Company Y will be left with nothing except cash (and any debt, if any). Naturally, Company Y eventually reduces to a shell and either goes out of business or liquidates.
A different kind of transaction known as a reverse merger makes it possible for a privately held business to go public very quickly. Reverse mergers take place when a publicly traded shell company with little assets and no real business operations is purchased by a private company with promising future prospects that is keen to secure funding. Together, the public and private companies reverse merge to form a brand-new public corporation with exchangeable shares.
How Acquisitions and Mergers Are Valued
The target company will be valued differently by each of the two parties participating in an M&A transaction. It goes without saying that the selling will try to get the best price for the business, while the buyer will try to get the best deal. Thankfully, a company's value may be determined objectively by looking at similar businesses in the same industry and using the following parameters.
Price-to-Earnings Ratio (P/E Ratio)
An acquiring business uses a price-to-earnings ratio
(P/E ratio) to make an offer that is greater than the target company's earnings. The acquiring business will get good advice on what the target's P/E multiple should be by looking at the P/E for all the companies in the same industry group.
Enterprise-Value-to-Sales Ratio (EV/Sales)
The purchasing company, knowing the price-to-sales
(P/S ratio) of other companies in the industry, makes an offer as a multiple of the revenues with an enterprise-value-to-sales ratio (EV/sales).
Replacement Cost
Acquisitions are sometimes determined by how much it would cost to replace the target company. Assume, for the purpose of simplicity, that a company's worth is equal to the total of its labor and equipment expenses. The target can be ordered to sell at that price by the purchasing business, or else it will create a competition at that price.
FREQUENTLY ASKED QUESTIONS
The acquired company fits well with the acquirer’s existing business and strategic objectives. This could mean access to new markets, technologies, or resources. The acquisition leads to an increase in earnings per share and generates a return on investment that exceeds the cost of capital.
Friendly acquisitions are most common and occur when the target firm agrees to be acquired; its board of directors and shareholders approve of the acquisition, and these combinations often work for the mutual benefit of the acquiring and target companies.
Generally speaking, the value of the acquiring company's shares will temporarily decline in the days preceding a merger or acquisition. The value of the target company's shares usually increases at the same time. This is frequently because purchasing the target company at a price higher than the pre-takeover share prices will need the acquiring company to expend capital.
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