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Understanding mergers and acquisitions

Buying or selling a company can be an exciting prospect, and in today’s competitive environment where businesses are looking to expand and increase market presence quickly and effectively, going through a merger and acquisition is a common strategy
What are mergers and acquisitions?

What are mergers and acquisitions? 

A merger and acquisition is the process where two companies join together in some form or another. Today, the term mergers and acquisitions is commonly used mutually but they actually describe different scenarios. A merger is when two companies merge to form a new legal entity under one corporate brand. Whereas an acquisition is when a larger company purchases all or some of another company and gains control of it – purchasing more than 50% of a company’s assets will enable the acquirer to make decisions. 

The types of mergers and acquisitions

What types of mergers and acquisitions are there? 

The process of combining two companies together might sound simple, but there’s a lot to consider and a number of different types of mergers and acquisitions. Each one will come with it’s own set of challenges and so it is important to consider which one suits your business model the best. Here are some types of M&A’s: 

Mergers

Mergers

1. Horizontal 

A horizontal merger is when two companies in similar industries merge to enhance their market reach. For example, the merge of Facebook, WhatsApp, Instagram and Messenger. All of these companies operated in a similar space, but combined Facebook was able to increase it’s standing in the social media industry . 

2. Vertical

A vertical merger is when two companies that exist in the same supply chain at different production stages merge. An example of this is the 2002 vertical merger between eBay and Paypal – this merger enabled eBay streamline purchases made on it’s website. 

3. Conglomerate 

A conglomerate merger is essentially any merger that falls outside of the description of horizonal and vertical. These types of mergers are usually done to diversify a company’s assets and generally happen with companies of different industries and regions. There are a number of examples of Conglomerate mergers – Amazon is known for being an online marketplace but this billion dollar company owns over 40 subsidiaries which don’t relate to this such as Whole Foods, Goodreads, IMDB and diapers.com to name a few. 

Acquisition

Acquisition

1. Stock purchase

A stock purchase acquisition occurs when the acquiring company buys or exchanges shares from the target firm’s shareholders – the aim is to acquire all the assets of the target firm. This can be a lengthy process as a majority vote must be approved by the target firm’s shareholders. Furthermore, whilst shareholders will receive compensation in the form of cash or shares, they will be the ones to bear the brunt of tax liabilities. 

2. Asset purchase

When an acquiring company goes through an asset purchase they essentially buy all of the target company’s assets directly from them. This can be less time-consuming than a stock purchase because the transaction happens between the two companies – no shareholder approval is needed unless the assets are grater than 50% of the total company. However, the compensation that the target company gains will be taxed as capital gains.

The benefits of merging or acquiring companies

What are the benefits of merging or acquiring companies?

If done correctly, mergers and acquisitions can open a number of doors for your company. Here are a few benefits: 

1. Increased growth

Building and growing your business organically can be a long journey, but an M&A could provide a faster route to growth and revenue growth. If done right, by merging or acquiring another company you can combine your resources and market reach to target a whole new arena of potential customers.  

2. The combined value and performance of two companies

Many mergers and acquisitions happen with the aim of combining two companies’ value and performance through the possibilities of cost reduction and higher combined revenue. Together the hope is the company will be worth more than as individual companies.

3. Greater market share 

By gaining greater market share as a combined force, the new entity will have more power over it’s supply chain and be able to increase their influence over price.  

4. Diversification

A merger and acquisition can help companies diversify their portfolio and place them in a better position to deal with any possible losses in their industry. By acquiring another company in a different industry, a company will be able to reduce market risk. 

5. Tax benefits

Whilst this is not a sole reason for companies to go through an M&A, there are tax benefits if a company acquires another with significant losses. If a company does this, they can use the target company’s losses to lower their tax bill. 

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Helping you grow

Helping you grow

Mergers and acquisitions can prove lucrative for many companies, but due diligence and careful planning is needed for success. If you need any support or have any questions then we’re just a call or email away.  

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