The Basics Of Mergers and Acquisitions
Mergers and acquisitions can be incredibly rewarding, but can also be very complicated transactions.
M&A activities have become more and more common among businesses looking to grow their market share and achieve strategic goals. However, these transactions involve many factors that need to be considered before making a decision.
In this article, we’ll take a closer look at different types of M&A methods and we’ll show you how to determine which approach is right for your business.
What are mergers and acquisitions?
Mergers and acquisitions (M&A) involve combining two or more businesses to achieve strategic goals or synergies. Mergers occur when two companies join forces, while acquisitions involve one company purchasing or absorbing another company or its assets.
M&A activities can take various forms, including tender offers and hostile takeovers, and are often facilitated by financial institutions such as business accounting firms.
The benefits of mergers and acquisitions
Economies of scale
One of the primary benefits of M&A is the ability to achieve economies of scale. This means that the combined company can produce and distribute goods and services at a lower cost due to increased size and market share. This can lead to increased profits and a more competitive position in the industry.
M&A can help companies diversify their product offerings or enter new markets, thereby reducing their dependence on any single product or market. This can help companies to manage risk and avoid over-reliance on any one thing.
Access to new technology
M&A can help companies gain access to new technology, expertise, and intellectual property. This can be leveraged to create innovative products or services that were not possible before. This can help companies to stay ahead of the competition and lead the industry.
Finally, M&A can help companies eliminate redundant operations and consolidate resources, resulting in increased efficiency and cost savings. This can help companies to streamline their operations and reduce costs, which can lead to increased profits and a more competitive position in the industry.
How does a merger differ from an acquisition?
While mergers and acquisitions are often used interchangeably, they are actually different. In a merger, two companies combine to form a new company, with the goal of sharing resources and expertise to create a stronger entity. In an acquisition, one company purchases another, with the goal of absorbing the company’s assets and operations into its own.
In both cases, the goal is to achieve growth and gain a competitive advantage but the approach is different. Mergers focus on collaboration and partnership, while acquisitions are more about gaining control and assets.
Different types of mergers and acquisitions
There are a variety of approaches that fall under the umbrella of M&A, each with its own unique methods and outcomes. The approach chosen will depend on a company’s goal and overall vision. Some of the different approaches are outlined below.
An acquisition typically refers to the purchase of another company, aiming to absorb the company’s assets and operations into its own. However, a business can also do an acquisition of other valuable items.
- Asset acquisition: One company purchases specific assets or divisions of another company, rather than the entire company. This can provide the acquiring company with access to specific resources or capabilities, without taking the entire company’s liabilities or operations.
- Management acquisition: Also known as a management-led buyout (MBO), is when the existing management team of a company purchases a controlling interest in the company from its current owner. Management-led buyouts are often used as a way to transition ownership of a company from one generation to the next, as a way for a group of managers to acquire a company that they believe has significant growth potential.
In a merger, two companies combine to form a new company, with the goal of sharing resources and expertise to create a stronger entity. A merger can be approached in a variety of ways.
- Horizontal merger: This type of merger involves two companies that operate in the same industry and are in direct competition with one another.
- Vertical merger: This type of merger involves two companies that operate at different stages of the same supply chain. For example, a company that produces raw materials may merge with a company that processes those materials into finished products.
- Conglomerate merger: This type of merger involves two companies that operate in unrelated industries. This is to diversify the company’s holdings and reduce risk.
While a merger involves two or more companies coming together through a takeover to form a single entity, consolidation occurs when two or more companies merge to create a new, single company.
In a merger, the company involved typically have an equal say in the new entity — while in a consolidation, one company may have a controlling interest in the new entity.
A joint venture is a type of M&A activity where two or more companies who share a common goal come together to form a new entity. The new entity is typically owned and controlled by the participating companies, with each company contributing resources, expertise, and capital to achieve a specific goal.
Joint ventures can be used to enter new markets, develop new products, or pursue other strategic objectives. They can also be a way for companies to share costs and risks associated with a particular project or initiative.
Friendly acquisition vs. hostile takeover
In a friendly acquisition, the two companies work together to come to an agreement about the terms of the acquisition. This can involve negotiations and compromises to ensure that both parties are satisfied with the outcome.
In contrast, a hostile takeover occurs when one company attempts to acquire another without the consent of the target company’s management. This can involve aggressive tracts, such as a tender offer or a proxy fight, and can be met with resistance from the target company.
While both methods can result in the acquisition of a company, the approach taken can have a significant impact on the outcome of the transaction, as well as the relationship between the two companies in the future.
Which approach is right for your business
Deciding which M&A approach is right for your business depends on several factors, including your company’s goals, the industry you operate in, and the resources you have available.
The first step is to clearly define your objectives and determine what you hope to achieve through M&A. From there, you can evaluate different M&A approaches and determine which one is best suited for your business.
Some important factors to consider include the level of control you want to maintain, the level of risk associated with the transaction, and the potential benefits and drawbacks of each approach.
With so many aspects to consider, it can be challenging to decide what is the best course of action for your business. Outsourcing a business accountant can make this process much easier. Wilkinson Accounting Solutions is a business accounting and consultancy firm that excels in handling mergers and acquisitions, always prioritising the long-term growth of your company. To learn more about how our accounting services could benefit your business, get in touch with us today.