Mergers vs. Acquisitions: An Overview
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- Mergers And Acquisitions Definition
- Mergers And Acquisitions Process
Mergers and acquisitions are two of the most misunderstood words in the business world. Both terms often refer to the joining of two companies, but there are key differences involved in when to use them.
Unlike all mergers, all acquisitions involve one firm purchasing another - there is no exchange of stock or consolidation as a new company. Acquisitions are often congenial, and all parties feel satisfied with the deal. Other times, acquisitions are more hostile. In an acquisition, as in some of the merger deals we discuss above, a company. As far as I can tell, Yahoo did a lease/sale deal with Microsoft, thereby exiting the growing online search business to focus on the fragmented, super-competitive, online media business. Mergers and acquisitions (M&A) is an umbrella term that refers to the combination of two businesses. It gives buyers looking to achieve strategic goals an alternative to organic growth; It gives sellers an opportunity to cash out or to share. The article answers the question why mergers and acquisitions (M&As) are important in today’s economy. It presents the advantages of M&A deals and underlines their features. It also presents the correlation analysis on selected factors and results of research completed among Lithuanian companies. The article concludes that the number of. Oct 02, 2019 Mergers, Acquisitions and Divestitures News about Mergers, Acquisitions and Divestitures, including commentary and archival articles published in The New York Times.
A merger occurs when two separate entities combine forces to create a new, joint organization. Meanwhile, an acquisition refers to the takeover of one entity by another. Mergers and acquisitions may be completed to expand a company’s reach or gain market share in an attempt to create shareholder value.
Mergers
Legally speaking, a merger requires two companies to consolidate into a new entity with a new ownership and management structure (ostensibly with members of each firm). The more common distinction to differentiating a deal is whether the purchase is friendly (merger) or hostile (acquisition). Mergers require no cash to complete but dilute each company's individual power.
In practice, friendly mergers of equals do not take place very frequently. It's uncommon that two companies would benefit from combining forces with two different CEOs agreeing to give up some authority to realize those benefits. When this does happen, the stocks of both companies are surrendered, and new stocks are issued under the name of the new business identity.
Due to the negative connotation, many acquiring companies refer to an acquisition as a merger even when it is clearly not.
Acquisitions
In an acquisition, a new company does not emerge. Instead, the smaller company is often consumed and ceases to exist with its assets becoming part of the larger company. Acquisitions, sometimes called takeovers, generally carry a more negative connotation than mergers. Due to this reason, many acquiring companies refer to an acquisition as a merger even when it is clearly not. An acquisition takes place when one company takes over all of the operational management decisions of another company. Acquisitions require large amounts of cash, but the buyer's power is absolute.
One well-known acquisition in 2019 occurred when Xerox acquired 3D printing company Vader Systems, a company which manufactured liquid metal jet 3D printers. The startup was run by Zachary Vader and Scott Vader, in the Buffalo, New York, area. After the acquisition, Vader Systems was relocated outside of Rochester, New York, at the Xerox Webster campus. Xerox intends on tapping into a market worth $8 billion USD.
Since mergers are so uncommon and takeovers are viewed in a negative light, the two terms have become increasingly blended and used in conjunction with one another. Contemporary corporate restructurings are usually referred to as merger and acquisition (M&A) transactions rather than simply a merger or acquisition. The practical differences between the two terms are slowly being eroded by the new definition of M&A deals.
Key Takeaways
- A merger occurs when two separate entities combine forces to create a new, joint organization.
- An acquisition refers to the takeover of one entity by another.
- The two terms have become increasingly blended and used in conjunction with one another.
Table of Contents
- Mergers and Acquisitions
- The Action of Acquisition
- The Structure of Mergers
- Valuation Matters
What Are Mergers and Acquisitions – M&A?
Mergers and acquisitions (M&A) is a general term used to describe the consolidation of companies or assets through various types of financial transactions, including mergers, acquisitions, consolidations, tender offers, purchase of assets and management acquisitions. The term M&A also refers to the desks at financial institutions that deal in such activity.
What's an Acquisition?
The Essence of Merger
The terms 'mergers' and 'acquisitions' are often used interchangeably, although in actuality, they hold slightly different meanings. When one company takes over another entity, and establishes itself as the new owner, the purchase is called an acquisition. From a legal point of view, the target company ceases to exist, the buyer absorbs the business, and the buyer's stock continues to be traded, while the target company’s stock ceases to trade.
On the other hand, a merger describes two firms of approximately the same size, who join forces to move forward as a single new entity, rather than remain separately owned and operated. This action is known as a 'merger of equals.' Both companies' stocks are surrendered and new company stock is issued in its place. Case in point: both Daimler-Benz and Chrysler ceased to exist when the two firms merged, and a new company, Daimler Chrysler, was created. A purchase deal will also be called a merger when both CEOs agree that joining together is in the best interest of both of their companies.
The Action of Acquisition
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Unfriendly deals, where target companies do not wish to be purchased, are always regarded as acquisitions. Therefore, a purchasing deal is classified as a merger or an acquisition, based on whether the purchase is friendly or hostile and how it is announced. In other words, the difference lies in how the deal is communicated to the target company's board of directors, employees and shareholders. Nestle, for instance, has performed a variety of acquisitions lately.
Types of Mergers & Acquisitions
Here is a list of transactions that fall under the M&A umbrella:
Merger
In a merger, the boards of directors for two companies approve the combination and seek shareholders' approval. Post merger, the acquired company ceases to exist and becomes part of the acquiring company. For example, in 2007 a merger deal occurred between Digital Computers and Compaq, whereby Compaq absorbed Digital Computers.
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 legal structure. An example of this transaction is Manulife Financial Corporation's 2004 acquisition of John Hancock Financial Services, where both companies preserved their names and organizational structures.
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Consolidation
Consolidation creates a new company. Stockholders of both companies must approve the consolidation. Subsequent to the approval, they receive common equity shares in the new firm. For example, in 1998, Citicorp and Traveler's Insurance Group announced a consolidation, which resulted in Citigroup.
Tender Offer
In a tender offer, one company offers to purchase the outstanding stock of the other firm, at a specific price. The acquiring company communicates the offer directly to the other company's shareholders, bypassing the management and board of directors. For example, in 2008, Johnson & Johnson made a tender offer to acquire Omrix Biopharmaceuticals for $438 million. While the acquiring company may continue to exist — especially if there are certain dissenting shareholders — most tender offers result in mergers.
Acquisition of Assets
In an acquisition of assets, one company acquires the assets of another company. The company whose assets are being acquired must obtain approval from its shareholders. The purchase of assets is typical during bankruptcy proceedings, where other companies bid for various assets of the bankrupt company, which is liquidated upon the final transfer of assets to the acquiring firms.
Management Acquisition
In a management acquisition, also known as a management-led buyout (MBO), a company's executives purchase a controlling stake in another company, making it private. These former executives often partner with a financier or former corporate officers, in an effort to help fund a transaction. Such M&A transactions are typically financed disproportionately with debt, and the majority of shareholders must approve it. For example, in 2013, Dell Corporation announced that it was acquired by its chief executive manager, Michael Dell.
Key Takeaways
- The term mergers and acquisitions (M&A) refer to the process of one company combining with another.
- In an acquisition, one company purchases the other outright. The acquired firm does not change its legal name or structure but is now owned by the parent company.
- A merger is the combination of two firms, which subsequently form a new legal entity under the banner of one corporate name.
- M&A deals generate sizable profits for the investment banking industry, but not all mergers or acquisition deals close.
- Post-merger, some companies find great success and growth, while others fail spectacularly.
The Structure of Mergers
Mergers may be structured in multiple different ways, based on the relationship between the two companies involved in the deal.
- Horizontal merger: Two companies that are in direct competition and share the same product lines and markets.
- Vertical merger: A customer and company or a supplier and company. Think of a cone supplier merging with an ice cream maker.
- Congeneric mergers: Two businesses that serve the same consumer base in different ways, such as a TV manufacturer and a cable company.
- Market-extension merger: Two companies that sell the same products in different markets.
- Product-extension merger: Two companies selling different but related products in the same market.
- Conglomeration: Two companies that have no common business areas.
Mergers may also be distinguished by following two financing methods--each with its own ramifications for investors.
- Purchase Mergers: As the name suggests, this kind of merger occurs when one company purchases another company. The purchase is made with cash or through the issue of some kind of debt instrument. The sale is taxable, which attracts the acquiring companies, who enjoy the tax benefits. Acquired assets can be written-up to the actual purchase price, and the difference between the book value and the purchase price of the assets can depreciate annually, reducing taxes payable by the acquiring company.
- Consolidation Mergers: With this merger, a brand new company is formed, and both companies are bought and combined under the new entity. The tax terms are the same as those of a purchase merger.
Details of Acquisitions
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Like some merger deals, in acquisitions, a company may buy another company with cash, stock or a combination of the two. And in smaller deals, it is common for one company to acquire all of another company's assets. Company X buys all of Company Y's assets for cash, which means that Company Y will have only cash (and debt, if any). Of course, Company Y becomes merely a shell and will eventually liquidate or enter other areas of business.
Another acquisition deal known as a 'reverse merger' enables a private company to become publicly-listed in a relatively short time period. Reverse mergers occur when a private company that has strong prospects and is eager to acquire financing buys a publicly-listed shell company, with no legitimate business operations and limited assets. The private company reverses merges into the public company, and together they become an entirely new public corporation with tradeable shares.
Valuation Matters
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Both companies involved on either side of an M&A deal will value the target company differently. The seller will obviously value the company at the highest price as possible, while the buyer will attempt to buy it for the lowest possible price. Fortunately, a company can be objectively valued by studying comparable companies in an industry, and by relying on the following metrics:
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- Comparative Ratios: The following are two examples of the many comparative metrics on which acquiring companies may base their offers:
- Price-Earnings Ratio (P/E Ratio): With the use of this ratio, an acquiring company makes an offer that is a multiple of the earnings of the target company. Examining the P/E for all the stocks within the same industry group will give the acquiring company good guidance for what the target's P/E multiple should be.
- Enterprise-Value-to-Sales Ratio (EV/Sales): With this ratio, the acquiring company makes an offer as a multiple of the revenues, again, while being aware of the price-to-sales ratio of other companies in the industry.
- Replacement Cost: In a few cases, acquisitions are based on the cost of replacing the target company. For simplicity's sake, suppose the value of a company is simply the sum of all its equipment and staffing costs. The acquiring company can literally order the target to sell at that price, or it will create a competitor for the same cost. Naturally, it takes a long time to assemble good management, acquire property and purchase the right equipment. This method of establishing a price certainly wouldn't make much sense in a service industry where the key assets – people and ideas – are hard to value and develop.
- Discounted Cash Flow (DCF): A key valuation tool in M&A, discounted cash flow analysis determines a company's current value, according to its estimated future cash flows. Forecasted free cash flows (net income + depreciation/amortization - capital expenditures - change in working capital) are discounted to a present value using the company's weighted average costs of capital (WACC). Admittedly, DCF is tricky to get right, but few tools can rival this valuation method.