MERGERS & ACQUISITIONS: (M&A)

The synergy of one plus one equals three.  That is the logic of “mergers and acquisitions”. When a company is taken over or bought over, the merger and acquisition creates additional value for the shareholders over and above the sum value of the two companies.  That is the reasoning for merger and acquisition.

When in difficult times, the rationale of M&A is very attractive to companies.  A strong company will use M&A to create a more competitive and cost effective organization.  The merger is to benefit both companies for greater market share, greater efficiency and more profit.  For a weaker company such benefits are alluring and hence agree to be bought over.

Distinction between merger and acquisition:

M&A is often used together in one breath as if they mean the same thing; yet there is a slight distinction between the two words.

Acquisition is when one company takes over another, and clearly establishes itself as the new owner of both the companies.  Legally, the target company, or the company that has been bought over, ceases to exist any more, but the buyer’s stock continues to be traded.

Merger is when two companies, more or less of same size, decide to move forward and go ahead as a single new entity rather than remain separately owned and operated.  In fact, it is a `merger of equals`.  Stocks of both companies are surrendered and the new company’s stocks are issued.  The best example is when both Daimler-Benz and Chrysler ceased to exist with merger and the new company was called “Daimler-Chrysler.

In practice, actual mergers of equals are very rare.  Generally, one company buys another and as part of the terms of agreement, allows the acquired company to claim it is a merger of equals, though truly it may be an acquisition.  A take over often leaves a negative connotation or bad taste; therefore it is described more often as a merger to make it easy and comfortable for all concerned.

Mergers can be horizontal, vertical, market extension merger, or product extension merger, or a conglomeration.

Benefits of synergy:

Merger and Acquisition leads to cost saving, and revenue increase.  It also leads to staff reduction, economies of scale, new technology acquisition, improved market reach, and industry visibility; also better standing in the industry for raising capital borrowing and investment.

Questions:

• Explain the distinction between 'merger' and 'acquisition'.
• What are the benefits of merger and acquisition?