What are mergers and acquisitions (M&A)?
M&A – a common abbreviation of mergers and acquisitions – is a general term that refers to a range of financial transactions whereby businesses are bought and sold.
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Mergers and acquisitions always involve the consolidation of two separate companies, which can be either private or public companies.
M&A is intended to increase the value of a company by diversifying into new markets, improving market share, or expanding geographically.
A merger is an agreement that combines two separate, existing companies into a new, larger entity. The aim of a merger is to create a stronger, single company.
A merger is often referred to as a ‘merger of equals’ as the companies involved usually have a similar size and value.
An acquisition - sometimes referred to as a business acquisition or a takeover - occurs when one company takes control of another, either through purchasing shares or acquiring assets.
Within an acquisition, the acquired company is absorbed and no longer operates as an independent entity; however, the purchasing company may still have the right to use the name and trademarks of the acquired company.
Although the terms ‘merger’ and ‘acquisition’ are often used interchangeably, mergers and acquisitions are slightly different activities.
The main difference between mergers and acquisitions is the balance of power in the new entity. Within a merger, the original companies – in theory – become equal partners in the new organisation; however, an acquisition always results in one business handing control to the other.
Another key difference between mergers and acquisitions is their perception. The term ‘acquisition’ can have negative connotations for the company that’s absorbed into the other, whereas a merger is usually seen in a better light.
The combined concept of M&A is slowly replacing the individual terms ‘acquisition’ and ‘merger’ and has become a commonly used, general term that refers to any kind of activity whereby businesses join together. This is for two main reasons:
A true merger (a ‘merger of equals’) is extremely uncommon. In practice, one party is almost always larger, more powerful, or more valuable than the other.
M&A is a more neutral term that’s usually well received by shareholders, employees, or directors.
There are many reasons why a company may choose to acquire, be acquired by, or form a merger with another business. There are also many potential issues that should be considered before agreeing to combine with another company.
To weigh up the pros and cons of any merger or acquisition, it’s essential that a company does enough research and carries out extensive due diligence.
The main purpose of M&A activity is to increase the value or accelerate the growth of a business. Both acquisitions and mergers allow a company to grow at a rate that would not be possible through organic growth. Other benefits of M&A include:
Access to new technologies
Access to a wider customer base through the target business’ established distribution channels
Access to valuable intellectual property such as names, trademarks, or patents
Additional staff with valuable skills, knowledge, and experience
Reduced costs and overhead – whether through economies of scale or shared budgets
When considering a merger or acquisition, companies need to address the potential risks involved. Some of the most common risks of M&A include:
A clash of company cultures
Assets being less valuable than originally thought
The cost of the actual M&A process being higher than planned, especially if other parties are interested in a target business
Resources being diverted to managing the merger
Key staff being reluctant to join a new company