Mergers & Acquisitions

Many business professionals will experience a merger during the course of their careers. In fact, mergers and acquisitions are common business practices, particulary in industries like tecnology, finance and retail. 

The motivation to pursue a merger or acquisition can be considerable; a company that combines itself with another can experience boosted economies of scale, greater sales revenue and market share in its market, broadened diversification, and increased tax efficiency. However, the underlying business rationale and financing methodology for mergers and takeovers are substantially different.

Mergers is the combination of two companies to form one, while acquisitions is one company taken over by the other. M&A is one of the major aspects of corporate finance world.

A typical merger involves two relatively equal companies which combine to become one legal entity with the goal of producing a company that is worth more than the sum of its parts.

In a merger of two corporations, the shareholders usually have their shares in the old company exchanged for an equal number of shares in the merged entity.

For example, American automaker Chrysler Corp. in 1998, merged with German automaker Daimler Benz to form DaimlerChrysler. This has all the makings of a merger of equals, as the chairmen in both organizations became joint leaders in the new organization. The merger was thought to be quite beneficial to both companies, as it gave Chrysler an opportunity to reach more European markets, and Daimler Benz would gain a greater presence in North America.

Acquisition, or takeover, is characterized by the purchase of a smaller company by a much larger one. It does not necessarily have to be a mutual decision. A larger company can initiate a hostile takeover of a smaller firm. The acquiring firm usually offers a cash price per share to the target firm’s shareholders, or the acquiring firm’s shares to the shareholders of the target firm, according to a specified conversion ratio.

For example, in perhaps the most visible deal of the 2017., the e-commerce behemoth Amazon stepped out into the real world last August with a major acquisition of the brick-and-mortar food retail company Whole Foods Market. Amazon is known for its quick turnover of inventory and its logistical mastery. Whole Foods, on the other hand, gives off the vibe of a local artisanal food shop where time and effort goes into everything. The effects on the food retailer have been quick, with lower prices and Amazon lockers in stores within the first few months. The changes are likely to attract a new customer base that has avoided Whole Foods because of its niche reputation and relatively high prices

Another example of an acquisition would be how the Walt Disney Corporation bought Pixar Animation Studios in 2006. In this case, the takeover was friendly, as Pixar’s shareholders all approved the decision to be acquired.

Principle behind any merger  and acquisition (M&A) is 2+2=5. There is always synergy value created by the joining or merger of two companies. The synergy value can be seen either through the revenues (higher revenues), expenses (lowering of expenses) or the cost of capital (lowering of overall cost of capital).

Mergers and acquisitions involve complex agreements and deal structures that present organizational challenges. Often businesses work with M&A consultants to ensure success.

The merger & acquisition process is very complex, yet can be broken down into four phases: due diligence, agreement, integration, and value attainment. While the M&A may contain four phases, it is critical for organizations to understand that all four phases are interconnected, and that each stage presents challenges and opportunities.

Due Diligence Phase – due diligence is the first step in a successful M&A project that involves intense analysis of the target firm to determine if the business is a good investment and if so, how to structure the transaction and determine the cost. The due diligence process should assess every aspect of the business from intellectual property and technology to human resources and finances.

Agreement Phase – the agreement phase centers on the terms and conditions for the M&A. It involves a detailed plan that includes processes and strategies for change management, inventory assessment, organizational design, and communications.

Integration phase – the integration phase involves change management, vendor selection, evaluating improvements, schedule visibility, and resource investment.

Value Attainment – M&A activity provides transformational value. It reduces costs within operations, creates operational efficiencies to maximize asset value by optimizing people, processes, and technologies, and enhances revenue opportunities.

Developing competency in M&A is becoming critical in the current business environment, so it is important to work with an experienced partner – advisor, that has helped transition many businesses through an M&A.

Author: Petar Petrić, Attorney at Law