What is Merger and Acquisition?
Merger and Acquisition are different types of transactions. In a merger, there are two or more separate companies at the outset. Once a merger is concluded, the survivor company or a newly created holding company will have absorbed all obligations, assets and liabilities of all companies that are party to the merger.
Above: A Diagram depicting what happens when two companies merge to form one establishment.
In an acquisition, the acquirer takes ownership of a target company. Then, the target company will remain a going concern in its existing form as a business, as will the acquirer. The two companies remain separate legal entities, and the acquirer achieves the title of the parent company of the acquiree or target company, known as the subsidiary. It is only the ownership that will change.
Above: Diagram depicting Company A acquires Company B
Comprehensive M&A Transactions
One of them is ‘Divestitures’, the action or process of selling off subsidiary business interests or investments. The following methods are available when a company wants to separate an asset or business division from its overall company.
- Split-off is a transaction in which an asset or business unit belonging to a company is separated to form a new independent entity. In a split-off, the parent company offers shareholders the option to keep their current shares or exchange them for shares of the divesting company.
- Spin-off involves converting a pre-existing company division into a wholly owned subsidiary or distributing the stocks in the subsidiary pro rata to all shareholders in the original company.
- Carve-out is to sell some or all the shares in its subsidiary in a public market through an IPO.
‘Business Collaboration’ is also considered a form of M&A. A company enters the following contracts with a target company for a specific period to utilise its technology or something else and create a new product or service instead of acquiring the target company.
- Knowledge transfer agreements
- Business collaboration agreements
- Supply/distribution and licensing agreements
- Joint venture agreements
Why are companies involved in M&A activities?
Companies attempt M&A transactions for various reasons. We could group those many motives into two broad categories.
One is to strengthen the acquiring company’s market dominance. The acquirer becomes a larger organisation, gaining increased market share, market dominance and brand value in its industry via acquisitions.
- M&A may increase synergies through economies of scale by reducing mutually redundant costs after merging target companies.
- Companies could receive multiple patent protections and achieve vertical integration to remain competitive. That represents high barriers to entry.
- It is challenging to penetrate efficient and highly competitive markets with low margins and high business moats without acquisitions.
- Those may result in the only viable method to gaining access to a market can be through acquisition.
Another reason is to diversify a company’s portfolio of products or businesses so that the acquirer is less dependent on segments experiencing declining sales. This motive mainly stems from companies experiencing a slowdown in sales in their core businesses.
- It could be very challenging and often takes a long time for a company to go greenfield and establish a successful business in a new field or sector.
- In such cases, acquiring a company with new products, technologies, or businesses, or entering into a collaboration agreement with that company, is much more efficient by saving time.
Sources and Further Reading
If you are interested in looking further into the Merger and Acquisition of a company, you can also check out our blog on Disney’s Acquisition of Marvel. It provides a key example to what we have learnt so far. It describes vocal elements where two companies have come together under contract to provide each other with financial gain.
Further information and understanding for Merger and Acquisition can be found in the following articles: