Mergers and Acquisitions: Types, Structure, Purpose

Mergers and Acquisitions are important activities in the corporate world. It represents the process by which companies integrate to improve their market position and financial growth. Merger refers to the formation of a new single entity from two different firms, whereas acquisition refers to the outright buyout of a company by another. These are implemented as strategic tools for growth.

Mergers and Acquisitions primarily reshape corporations, which helps in the creation of a stronger and more efficient organisation. Understanding the different types along with their structures and core purpose is important for anyone interested in business and finance.

What are Mergers and Acquisitions (M&A)?

M&A stands for Merger and Acquisition. It is a general term used to describe financial transactions that involve combining or consolidating businesses or their major assets. Both terms are often used interchangeably, but the key difference lies in how the deal is structured and communicated (friendly vs. hostile) and whether a new entity is formed.

• Acquisition: This strategy is implemented by one company to purchase another company outright and establish itself as the new owner. The acquired company may or may not change its name or structure. Most of the time, unfriendly or hostile takeover deals are considered acquisitions.

• Merger: It is the strategy where two companies combine to create a single, new legal entity. They are generally of similar size, and the original companies often cease to exist.

• Some of the major Mergers and Acquisitions Companies in India are as follows:

1. J.P. Morgan

2. Goldman Sachs

3. Morgan Stanley

4. Citigroup

5. RBSA Advisors

6. Wells Fargo

Types of Mergers and Acquisition Transactions

The different activities and strategies of Mergers and Acquisitions are categorised based on the relationship between the different companies looking to combine. It is summarised in the table below:

How Does Mergers and Acquisitions Work?

There are different methods and strategic ways through which companies execute Mergers and Acquisitions (M&A). These structures and methods are implemented to reorganise, expand, or change ownership of a corporation. The 5 stages of Mergers and Acquisitions are summarised below:

• Consolidations: Two or more companies combine to increase market share and eliminate competition, often forming a new entity or absorbing promising competitors (e.g., Facebook/Meta acquiring Instagram).

• Tender Offers: One company offers to purchase the outstanding stock of the target company directly from shareholders at a price above the current market price, bypassing management and the board.

• Acquisition of Assets: One company directly acquires the physical or intellectual assets of another company, which often happens during bankruptcy proceedings.

• Management Acquisitions (MBO): A company’s executives purchase a controlling stake in the company, taking it private (e.g., Elon Musk purchasing Twitter, Inc.).

• Reverse Merger: A private company with good prospects buys a publicly listed shell company with no operations to quickly become a publicly traded corporation.

Mergers and Acquisitions Investment Banking

Mergers and Acquisitions within Investment Banking look for Financing and Valuation of a target company as important steps in any M&A deal. 

Financing Methods

A company can use various Financing Methods to pay for an acquisition. Some of these processes are explained below:

• Readily available Cash or issuing Stock, providing the target company's shareholders with new shares in the combined entity. 

• An acquiring company might also proceed by Assumption of Debt, specifically taking on the acquired company's existing financial liabilities. 

• Companies often implement a combination of all these methods.

Valuation Methods

Corporations and organisations involved in an M&A deal use objective metrics to value the target company. Sellers always look for the highest price, and buyers always look for the lowest. Key methods include:

• Price-to-Earnings Ratio (P/E Ratio): The acquiring company makes an offer that is a multiple of the target company's earnings, guided by the P/E of comparable companies.

• Enterprise-Value-to-Sales Ratio (EV/Sales): The offer is made as a multiple of the target company's revenues.

• Discounted Cash Flow (DCF): This determines the company's present value by estimating its future cash flows and discounting them back to today using the company's weighted average cost of capital (WACC).

• Replacement Cost: The value is based on the cost of replacing the assets, product lines, or customer base.

Purpose of Mergers and Acquisitions

Different organisations in various sectors implement mergers and Acquisitions strategies for several reasons and serve different purposes. Some of the major purposes served by M&A Vs private equity are summarised below: 

• Increased Efficiency: Combining operations increases overall performance and reduces costs by leveraging the strengths of both companies.

• Market Expansion: M&A allows a company to increase its market share or enter a new, related industry (e.g., Amazon acquiring Whole Foods to enter grocery delivery).

• Eliminating Competition: Consolidating with a rival reduces the number of competitors in the market.

• Synergy: The combined company aims to be worth more than the sum of the two separate parts.

What Are the Risks of Mergers and Acquisitions?

Mergers and Acquisitions (M&A) offer several strategic benefits. However, several risks are also associated that can impact both companies involved. Risks associated with mergers and acquisitions are summarised  in the following table:

 Mergers and Acquisitions Advantages and Disadvantages

Mergers and Acquisitions (M&A) are important tools for business growth, market expansion, and operational efficiency. However, they are associated with both advantages and potential disadvantages. The advantages and disadvantages associated with Mergers and Acquisitions are summarised below: