The primer of mergers and acquisitions
Stock Market Investing Advice, Stock Market Investing Strategies
Corporate restructuring in general and mergers and acquisitions in particular continue to be a large part of the global corporate finance industry. Almost every day, investment bankers through the world arrange these transactions where to smaller companies are transformed into one single larger company. Side by side, the opposite also takes place when companies shrink in size by spinning off subsidiaries or business units and sometimes break up completely. A working knowledge of mergers and acquisitions is important to any stock investor not only because of the size of the deals but also because of the far-reaching effects that it can have on the long-term prospects of a company.
When one company acquires or merges with another company, the underlying logic is that the combined company can create value for the shareholder that is much in excess of just the sum of the two companies. This logic may not always work out but is an important factor in driving mergers and acquisitions especially when business conditions are difficult and CEOs are required to show decisive action. There are a number of different motives that drive these transactions and we will examine them a little later…
The mergers and acquisitions terms that are used together and many people regard them as synonymous; there is a slight difference in technical terms. When one company buys another company and is clearly the owner, the transaction is called an acquisition. Legally, the company being acquired no longer has an existence and the stock being traded for the combined entity is the stock of the owner. In the correct sense of the term, a merger happens when two companies of roughly similar size agree to go forward into the future as a single entity. This is sometimes called a merger of equals and a new company is formed that absorbs the businesses of the two merging companies. The confusion arises because of the negative connotations of a company being bought out. For reasons of face, a technical acquisition is often referred to as a merger.
The main driver of mergers and acquisitions is that elusive term that is called synergy. Without exception, every deal will claim synergy but what does this actually mean? Some benefits of mergers and acquisitions:
- Reduction in staffing. Virtually everyone knows that a merger or an acquisition will result in large-scale layoffs from reducing the number of people who work in the combined departments such as accounting or marketing. This is often the main motive.
- Economies of scale. Size is important and the bigger the scale of your activity such as purchasing and procurement, the cheaper you will be able to buy. Economies can also arise from the combination of operating networks such as IT systems or logistics and supply chains.
- Acquisition of new technology. Smaller companies are often acquired by bigger companies in the quest for new technology either for new businesses or for product upgradation. This is regarded as a more convenient alternative to developing your own new technology.
- Improved market share. If the two companies are in the same business, the combined market share can result in a more dominant position and the combined entity in a better position to deal with competition and new entrants.
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