What are Mergers & Acquisitions?
Mergers & Acquisitions (M&A) are a business activity that involves the consolidation of two separate companies. There are two kinds of consolidation: two companies merge to become one entity or one larger company takes over the control of another small company.
-A merger is where two companies merge to become one entity, in equal parts: it is referred to as ‘merger of equals’ as the companies involved have a similar size and value.
-An acquisition is where one company takes over the control of another small company: often referred to as a ‘takeover’. The target company no longer exists but the acquirer have the right to use its name and trademarks.
However, the general term of M&A is more commonly used than that of ‘merger’ or ‘acquisitions’ when referring to any kind of consolidation of two businesses or companies. That is because in practice, one party is almost always more valuable than the other, and this term would hold a neutral connotation among the shareholders and management teams.
What are the purposes of M&A?
Despite a challenging economic landscape marked by a global pandemic, global mergers and acquisitions have totaled the all-time highest year-to-date total with a record $2.4 trillion, by June 2021, up 158% from the same period last year. What are the fundamental reasons behind the constant demand of these deals?
Mergers and acquisitions are intended to accelerate the growth of a business and increase the value of a company by taking advantage of the synergies between the two combined entities. It would not be considered if it does not allow a company to grow at a faster rate than the organic growth rate. Thus, M&A can be illustrated by the following premise: ‘the whole must be greater than the sum of its parts’.
This growth would be possible by different factors such as access to valuable intellectual property, new technologies and a wider consumer base. Others benefits include a relatively reduced competition and a reduction in costs through value chain optimization and an economy of scale.
What are the risks involved with M&A?
The risks involved with M&A concern mainly the amount of time set to close the deal. In our current financial landscape, there is often an intense competition for the same companies.
That results in a fear for the acquiring company to be left out and to miss an opportunity to grow. That would subsequently lead this company to try to get the deal completed in the fastest time. In consequence, drawbacks would often result such as assets being less valuable than originally thought and a cost of the M&A process being higher than planned.
-Ghali Moutawakil, University College London