Mergers and acquisitions (M&A) increase during times of rapid economic growth. In 2021, the value of global M&A deals amounted to nearly six trillion U.S. dollars. They are powerful mechanisms that businesses implement to help increase customer reach, mitigate cost issues, and boost shareholder value.
Mergers and acquisitions can sometimes get muddled up, but there are distinct differences between the two. M&A both refer to the joining of companies, but they provide varying opportunities, allow for individual circumstances, and give separate outcomes.
So, which approach is the right fit for your business?
Are mergers friendly and acquisitions hostile?
People commonly believe that mergers take place on friendlier terms, and acquisitions are deployed in more hostile situations. This isn’t necessarily true. Both approaches have their pros and cons, depending on the needs of the business (or businesses) in question – and it’s essential that you understand the implications of each before rushing into a growth decision.
What is a merger?
A merger is when two companies decide to blend together to create a new organisation. This entails a new ownership and management structure, and a revised shareholding. Companies can keep both firm names, retain one title, or create a new name for the merged company, depending on what is agreed upon. Usually, a new identity is formed for the merged company. No cash is required to complete a merger, and it is generally a good option for similar-sized companies looking to expand into a higher market share.
The basic structure of a merger
There are two types of mergers: direct and indirect. Direct mergers entail the target company merging directly with the buyer. Indirect mergers lead to the target company joining forces with the buyer’s subsidiary. Here’s what tends to happen in the lead-up to a successful merger:
Step 1: Due diligence and research. The buyer looking to merge with the target company goes through robust research processes to understand the goals of the arrangement and how it will work.
Step 2: Agreement. The companies gain an understanding of one another and organisational needs. New management structures are put in place and planned. Clear goals for integration are implemented. At this stage, the company should also set down communication processes for the future of the merger.
Step 3: Integration. Change management is the number one factor that the new company will need consider. The firm may cancel product lines or transform teams. Managing all of this effectively, diplomatically, and with tact, is key to success.
Step 4: All assets, liabilities, and shareholders become part of the new firm.
What is an acquisition?
An acquisition is where a company (usually larger) takes over another business and all of its operations. It absorbs the smaller company, and that firm becomes a part of the larger organisation.
To have complete control, the acquirer has to purchase more than 50% of the smaller business’s shares. Most of the time, the acquirer keeps their company name and identity and assimilates the other business. Acquisitions can be a mutual or non-mutual decision.
The basic structure of an acquisition
Acquisition structures can vary depending on the buying or selling goals, broader objectives, and deliverables. The acquisition can involve assets, stocks, or both. Here’s how it works:
Step 1: Research. The buyer looks into the long-term benefits of acquiring the target company. At this point, it’s vital to lay down objectives to understand the best way forward.
Step 2: Share or asset acquisition. Once the target company has been researched, the buyer purchases over 50% of the shares or assets to take control of it. This requires cash payment.
Which is best for your business?
To understand what would work best for your business, you first need to think about your short-, medium-, and long-term goals.
Mergers can be more time consuming and complex but can create new opportunities and fortify your business. If you’re considering this approach, it’s essential to ensure you have the structure and management to move forward with a merger, as the way this significant change is handled will influence its success.
Acquisitions are faster to implement but can only deliver on shorter-term goals if they are planned correctly.
Mergers are great for:
Scaling and increasing your output to reduce costs and increase leads. Mobile providers are an excellent example of this. Companies that use national networks need to scale to be successful. Merging in this instance – like T-Mobile and Orange did – can create a more extensive reach for the business that provides more of what its customers need.
Acquisitions are great for:
Acquiring technology and talent. Getting the right people and intellectual resources for your business is vital if you want to secure a profitable future. Acquiring a target company that provides this is an excellent way of skyrocketing your business growth. Doing this organically can sometimes take extended periods and lots of cash, so an acquisition is often the more economical option.
It all comes down to finance
Whether you eventually establish that a merger or an acquisition is going to suit your organisational needs best, setting up and planning towards clearly defined financial goals is vital.
If you’re looking to make a buying decision for your company, you need to get clear financial advice. Our finance directors and financial consultants have the expertise to advise and support you in M&A decisions – and, of course, many other aspects of your company’s financial health. Get in touch today to find out more.