Meaning Of M & A:
Mergers and acquisitions (M&A) deals in which two or more companies merge in
some way. Although the terms mergers and acquisitions (M&A) are sometimes used
interchangeably, they have distinct legal meanings. Two companies of similar
size merge to establish a new single entity.
An acquisition, on the other hand, occurs when a larger organization purchases a
smaller company and absorbs its operations. Depending on the target company's
board of directors' approval, M&A agreements can be friendly or hostile.
Types Of M & A Transactions:
Horizontal, vertical, concentric, and conglomerate mergers and acquisitions are
examples of distinct types of mergers and acquisitions.
- Horizontal Merger
When a company merges or acquires another company
that delivers the same service or product to ultimate customers, this is known
as a horizontal merger. Both businesses are in the same industry, serve the same
clients, and are in the same stage of development.
- Vertical Merger:
A vertical merger is similar to a horizontal merger,
except that the companies are at different phases of production. A vertical
merger would occur, for example, if a car manufacturer purchased a company that
supplied seat belts for the cars. Both businesses are in the same industry, but
they are at different stages of the manufacturing process.
- Concentric Merger:
A concentric merger is another sort of M&A. This
occurs when two businesses in the same industry have the same clients but offer
distinct products and services. The products or services must complement one
other for a merger to be termed concentric. A cell phone firm merging with a
cell phone case company is an example of a concentric merger.
- Conglomerate Merger:
A conglomerate merger occurs when two completely
different businesses unite. This form of merger and acquisition is commonly used
to grow into new industries.
M & A Example
Google and Android Acquisition - Google purchased Android for an estimated $50
million in 2005. Android was a relatively unknown mobile startup company at the
time of the transaction. Google was now able to compete in a market dominated by
Microsoft's Windows Mobile and Apple's iPhone.
As of May 2018, 54.5 percent of U.S. smartphone subscribers used a Google
Android device, indicating that the acquisition was a success.
Reasons Behind M & A Activity
Mergers and acquisitions (M&A) can occur for a variety of reasons, including:
- Identifying and exploiting synergies:
Mergers and acquisitions (M&A) are
commonly used to produce synergies that make the merged firm worth more than the
two enterprises separately. Synergies might emerge as a result of cost-cutting
or increased revenue. Cost synergies are achieved through economies of scale,
whereas revenue synergies are achieved through cross-selling, expanding market
share, or boosting prices. Cost synergies are the easier to quantify and
calculate of the two.
- Increased growth:
When opposed to organic growth, inorganic growth
through mergers and acquisitions (M&A) is usually a speedier technique for a
firm to obtain bigger sales. Rather than risk creating those talents internally,
a company can gain from acquiring or merging with a company that has
- Increased market dominance:
A horizontal merger will give a new
organization a larger market share and the ability to influence prices. Vertical
mergers also provide a company with more market power since it has more control
over its supply chain and can avoid supply disruptions from other sources.
- The ability to diversify:
Companies in cyclical industries feel
compelled to diversify their cash flows to avoid severe losses during a
downturn. By acquiring a target in a non-cyclical industry, a company can
diversify and reduce market risk.
- Tax advantages:
When one company has a lot of taxable income and another
has a lot of tax loss carryforwards, the tax benefits are investigated. The
acquirer can use the tax losses to reduce its tax liability by acquiring the
company with the tax losses. Mergers, on the other hand, are rarely carried out
only to save money on taxes.
Advantages Of M & A
Some of the advantages of M&A agreements are related to efficiencies, while
others are related to capabilities, such as:
- Economies of scale have improved. Costs can be decreased, for example,
by being able to purchase raw materials in larger quantities.
- Market share has increased. If the two businesses are in the same
industry, pooling their resources could result in a higher market share.
- Distribution capacities have been improved. Companies may be able to
expand their geographic service area or add to their distribution network by
- Labor costs are lower. Getting rid of redundant employees can help you
- Talented workforce. Expanding the labor pool from which the new, larger
company can draw can help the new, larger company grow and thrive.
- Financial resources have been increased. Two companies' financial
resources are typically bigger than one company's alone, allowing for
Disadvantages Of M & A
Although mergers and acquisitions are costly endeavors, they can yield
There are also drawbacks, or reasons not to buy an
acquisition, such as:
- Buying a firm comes with a lot of costs, especially if the company
doesn't want to be bought
- Higher legal fees might be prohibitively expensive if a company refuses
to be acquired.
- The expense of foregoing other agreements to concentrate on bringing two
- The probability of a negative reaction to a merger or acquisition,
resulting in a drop in the stock price of the company.
Transactions involving mergers and acquisitions are becoming more common. M&A
opens up doors that might otherwise be closed to you.
M&A is a common expansion strategy used by businesses to quickly expand their
size, service area, talent pool, client base, and resources. However, because
the procedure is pricey, firms must be certain that the benefit achieved is