Mergers & Acquisitions (M&A)
Merger – the combination of two companies to form one entity.
Acquisition – the take over of one company by another company.
Announcements of new Mergers and Acquisitions is common and often seen to be related to large well-known companies, however M&A strategy occurs frequently in lesser known companies both large and small. There are many reasons why a merger or acquisition makes sense as part of a business growth strategy including to;
- Gain a greater market share
- Diversify into other related products and markets
- Benefit by economies of scale
- Accelerate growth
- Increase the company’s capital value
- Access different and new technologies
- Improve the tax structure
- Diversify risk
Mergers & Acquisitions can take place by:
- Purchasing ordinary shares
- Purchasing assets
- Exchange of shares for assets
- Exchanging shares for shares
Types of Mergers and Acquisitions
There are several ways in which M&As can be classified:
- Horizontal – two companies that are in the same industry
- Conglomerate – two companies in unrelated industries which may or may not have parts of their operations in common
- Vertical – two companies at different production stages in the value chain
- Market Extension – two companies that deal in the same products but in separate markets.
- Product Extension Mergers – two companies that deal in products that are related to each other and operate in the same market.
M&A legal perspective
From a legal point of view M&As can occur in different ways:
- Short-Form Merger – when a subsidiary merges into a parent that already owns most of the subsidiary’s shares. This can be less expensive and time consuming than an ordinary statutory merger.
- Statutory Merger – a combination of two or more corporations under the corporation laws of the State, with one of the corporations surviving. The surviving corporation acquires the assets and liabilities of the merged corporation(s) by operation of State law.
Fundamental considerations for small companies planning a Merger or Acquisition
1. Points to consider for both the buyer and seller
- Will the two businesses produce more income together than apart?
- Does either business have assets that can be sold to allow for more profit?
- Do company cultures match?
2. Questions to ask if your company is the buyer
- Will the existing revenue and clients of the company you are acquiring remain after acquisition?
- Are there legal, legislative or economic issues that can be foreseen that will affect future revenue?
- Is the revenue dependant on a small number of clients?
- Are staff loyal to the business or may depart with the owner of the business you intend to purchase?
- Are there new competitors moving into the market of the company you intend to acquire?
- Is the acquisition a purchase of stock (equity) or the assets of the acquired company?
3. Points to consider if your company is the seller
- Do not overestimate the value of your company. If you are a business owner and have the possibility of merging with or being acquired by another company it is easy to have an inflated view of your company’s value based on the amount of effort and money it has cost you to get to this point. This is often the reason why deals fail, and an opportunity is wasted. It is often wise to seek advice on this from an independent professional adviser.
- What obligations, financial and otherwise, will be transferred to the new owner?
- Has your earnout been clearly stated and acknowledged by all parties? An earnout is a contractual provision stating that the seller of a business is to obtain additional compensation in the future if the business achieves certain financial goals, which are usually stated as a percentage of gross sales or earnings. If an entrepreneur seeking to sell a business is asking for a price more than a buyer is willing to pay, an earnout provision can be utilised. In a simplified example, there could be a purchase price of $1,000,000 plus 5% of gross sales over the next three years.
- Has the sale been structured to minimize risk and taxes?
- Is there a proper contingency plan in place if your company’s revenue decreases during the buyout period?
Typical stages of a Merger or Acquisition
1. Pre-acquisition review
An internal review conducted by the buyer to determine if a M&A will be advantageous, to estimate the value of the acquisition target and forecast what the combined growth may look like.
2. Target search and examination
Searching for attractive takeover candidates and examining their operations to determine whether they are a good strategic fit for the acquiring company.
3. Investigate and valuation of the target
An in-depth analysis of the target company also referred to as due diligence.
4. Negotiation stage
Discussion between the buying and selling companies with the objective of reaching a mutually agreeable deal.
5. Post-merger integration
After execution of the agreement the work commences to combine the assets and operations of both companies.
Recent Mergers and Acquisitions
Some of the larger M&As that have taken place over the past year or so have included;
Amazon acquires Whole Foods Market – $13.7bn
Amazon is known for its quick turnover of inventory and its logistical strengths. The effects on the food retailer have been lower prices and Amazon lockers in Whole Foods stores. It is expected that this will attract a new customer base that has previously avoided Whole Foods because of its niche reputation and relatively high prices.
Disney acquires 21st Century Fox – $52.4bn
The deal brings together two of the biggest entertainment companies in the world, and future-proofs Disney’s vast empire.
CVS acquires Aetna – $69bn
CVS is the biggest pharmacy chain in the country and the acquisition merger puts pressure on other significant players in the market.
Intel acquires Mobileye – $15.3bn
Intel, the world’s largest chipmaker acquired the Israeli visual sensor company Mobileye and is looking to position itself as a leader in of the hottest fields in tech right now.
Verizon acquires Yahoo – $4.48bn
In 2016, Yahoo was the world’s sixth most visited site. The company now operates under Oath, Verizon’s digital content subsidiary, which also controls AOL and Huffington Post.
M&A’s are considered as important change agents and are a critical component of any business strategy providing opportunities for growth and expansion into other markets. As an example of M&A in action, in 1999 the author of this article founded a company called Smartsalary Ltd. Between 1999 and 2019 Smartsalary Ltd has acquired 16 companies in related fields and now has a capital value exceeding $1 billion.