Mergers, acquisitions and takeovers have been a part of the business world for centuries. In today's dynamic economic environment, companies are often faced with decisions concerning these actions - after all, the job of management is to maximise shareholder value.
Through mergers and acquisitions, a company can (at least in theory) develop a competitive advantage and ultimately increase shareholder value, but is not an operation to be undertaken lightly.
The distinction between a "merger" and an "acquisition" has become increasingly blurred particularly in terms of the ultimate economic outcome. From a legal point of view, a merger is a legal consolidation of two companies into one entity, whereas an acquisition occurs when one company takes over another and completely establishes itself as the new owner.
"With both the target and acquirer's stock generally up after deals are announced, buyers see value creation and tend to be more aggressive even if targets are not willing to sell," said Ravi Sinha, executive vice chairman of global corporate and investment banking at Bank of America Merrill Lynch.
Investor support for large acquisitions and a desire to trump rivals in consolidating markets has led chief executives to strike big transactions, raising year-to-date global deal volumes to their highest level in seven years.
"What is notable about the deal activity we have seen in the first half of the year is the blue-chip nature of the companies who are doing the acquiring. We have finally seen the return of the strategic acquirer," said Gregg Lemkau, co-head of global mergers and acquisitions at Goldman Sachs Group.
Business owners in what the ‘middle market’ (deal value of £1m-£20m) are more likely to exit through what is known as a “trade sale”. The buyer will most likely be a larger synergistic or competing business, a large consolidator within the same or a similar sector.
The reasons behind the acquisition and the potential benefits need to be explored by the company’s M&A advisers, who understand the pitfalls and solutions for the many issues and challenges that will arise.
Operating economies may arise when consolidating two companies in the same general line of business and industry. Duplication of functions such as accounting, purchasing, and marketing efforts within each firm may be eliminated to the benefit of the combined firm. This is particularly true if two relatively small firms merge, when the combined firm will be better able to afford the necessary activities of a going concern.
An important financial reason often given for a merger is economies of scale, meaning that the cost of doing business, whether in manufacturing or the aforementioned operating economies, will be lower in the combined business firm.
The company being acquired may have developed technologies or skills that would benefit the merged organisation and that are not readily available elsewhere, in which case the retention of the relevant staff members’ expertise will be vital.
The effects of such reorganisations on the management and staff of the acquired business need to be factored in as research indicates turnover rates in acquired top management teams are significantly higher than ‘normal’ turnover rates.
Whether a purchase is perceived as being “friendly” or “hostile" depends significantly on how the proposed acquisition is communicated to and perceived by the target company's board of directors, employees and shareholders.
In the case of a friendly transaction, the companies cooperate in negotiations; in the case of a hostile deal, the board and/or management of the target is unwilling to be bought or the target's board has no prior knowledge of the offer. Hostile acquisitions can, and often do, ultimately become "friendly", as the acquiring company secures endorsement of the transaction from the board of the company being taken over, usually following an improvement in the terms of the offer and/or through negotiation.
At every stage of the negotiations the services of a specialist M&A adviser are vital to the successful completion of the transaction and to realise the anticipated benefits of the merger. They will use their experience to evaluate the pros and cons, arrive at a realistic market valuation and bring their specialist expertise to assist in negotiations throughout.
A cautious approach should always be adopted, just because it may be the right decision to sell and acquire for both businesses it doesn’t necessarily mean that the process will be straightforward.