The Main Principles Behind Mergers and Acquisitions

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Within the world of corporate finance, mergers and acquisitions play a vital role. A merger describes the action of two companies becoming one larger unity. An acquisition, by contrast, happens when one company swallows up a second company. Corporate mergers and acquisitions are very common, but surprisingly unsuccessful.

The Principles of Mergers and Acquisitions (M&As)

One of the reasons why M&As are often unsuccessful is because people don’t approach them from the right angle. The focus is, quite rightly, on money, but this has to be looked at from the right point of view, including future projections. You will likely have heard of “hostile takeovers”, which happen when an M&A takes place against the will of one company. This can happen when a business owner doesn’t want to sell, but another company comes in and buys out all the stock.

Money is at the heart of M&As. Larger companies look at taking over smaller ones, and particularly those with fantastic brand reputation, technological innovations, distribution channels, and customer databases. If done properly, they can be very positive for everybody involved, but this is rarely the case with a hostile takeover. If it is done on a friendly basis, however, the newly formed company, or the acquiring company, can take over technologies, employees, and clientele. While some terminations are inevitable, this can generally be achieved on a friendly basis.

When two companies merge, or one acquires another, change is inevitable. The type of change depends on the type of M&A. There are a number of common types of mergers, being:

  • Product extension, where two companies that create or sell products that are related come together. An example would be a potato chip dip company and a potato chip manufacturer.
  • Market extension, where two companies that sell the same products but do so to different markets join forces, thereby increasing their overall demographics.
  • Conglomeration, where two completely unrelated companies come together, such as a camera company and a motorcycle company. In so doing, they increase market reach.
  • Horizontal merger, where two competing companies come together thereby no longer fighting each other but working together instead.
  • Vertical merger, which means that two companies that are in complementing industries (a fabric company and a sewing company, for instance), come together and become better.

The biggest difference between a merger and acquisition is what happens afterwards. With a merger, two companies become one, which means there is usually a name change, a reshuffle of management, and more. With an acquisition, the purchasing company is the remaining company, which means the name doesn’t change and management in the acquired company is likely to lose their job.

If done properly, a synergy can be formed and the overall value of the business can be increased. However, creating synergy takes time and cannot truly be anticipated. This is why it is so important to work together with financial experts when considering merging with or acquiring a different company.