When one company takes over another and establishes itself as the new owner, the purchase is called an acquisition. On the other hand, a merger describes two firms, of approximately the same size, that join forces to move forward as a single new entity, rather than remain separately owned and operated. A purchased deal will also be called a merger when both CEOs agree that joining together is in the best interests of both of their companies.
One plus one makes three. This is the basic ideology behind any merger or acquisition. Acquiring or merging with another company, be it in industry vertical or horizontal, must create a value that is higher than the output of two companies independently.
Synergy is the magic force that allowed enhanced cost-efficiency in the new business.It can be due to the cost reduction or increased revenues. The following things immediately follow.
Every employee knows that mergers tend to mean job losses. Consider all the money saved from reducing the number of employees from accounting, marketing, and other departments. Job cut in some cases may also include the former CEO,who typically leaves with a compensation package.
Ownership over intangible assets; By buying a smaller company with unique technologies and intellectual properties(patents, copyrights, etc.), a large company gains control over these intangible assets and increases its technological horsepower to stay ahead of the competition.
Impact in stock market acquiring companies generally pays a premium on the stock market valuation of the company. Isn’t it a loss then? No.the amount of synergy created by acquiring another company usually squares it off. An M&A actually benefits shareholders when a company’s pots-merger share price increases by the value of potential synergy.
Common mistakes a company does are flawed intention-mergers are often attempted to imitate somebody else who has done a big merger, which prompts other top executives to follow suit A merger may often have more to do with glory-seeking than business strategy. If the basic motivation behind the M&A is dubious, then it eventually leads to failure. Things don’t work out when a company is acquired, the decision is typically based on product or market synergies, but cultural differences are often ignored, It’s a mistake to assume that personal issues are easily overcome. For example, employees at a target company might be accustomed to easy access to top management, flexible work schedules, or even a relaxed dress code. These aspects of the working environment may not seem significant, but if new management removes them, the result can be resentment and shrinking productivity.
Develop an acquisition strategy-Developing a good acquisition strategy revolves around the acquirer having a clear idea of what they expect to gain from marketing acquisition-what their business purpose is for acquiring the target company(e.g., expanding product lines or gaining access to new markets) Set the M&A search criteria for identifying potential target companies.
Search for potential acquisition targets-The acquirer uses their identified search criteria and appears to offer good value; the purpose of initial conversations is to get more information and to see how amenable to a merger or acquisition the target company is.
Perform valuation analysis-Assuming initial contact and conversation go well, the acquirer asks the target company to provide substantial information that will enable the acquirer to further evaluate the target.
Negotiations-After producing several valuation models of the target company, the acquirer should have sufficient information to enable it to construct a reasonable offer; once the initial offer has been presented, the two companies can negotiate terms in more detail.
M&A due diligence is an exhaustive process that begins when the offer has been accepted. Financial strategy for the acquisition -the acquirer will, of course, have explored financing options for the deal earlier, but details of financing typically come together after the purchase and sale agreement has been signed.
Closing and integration of the acquisition-the deal close and management teams of the target and acquirer work together on the process of merging the two firms.
