Merger and Acquisition: M&A Meaning, Definition, Examples

Merger and Acquisition: M&A Meaning, Definition, Examples

Mergers and Acquisitions (M&A) refers to the consolidation of companies or their major assets through financial transactions between companies. In an acquisition, one company takes over another and establishes itself as the new owner, while in a merger, two companies of similar size combine to form a new single entity.

M&A deals can be friendly or hostile, depending on the approval of the target company’s board. The goal of M&A is often to increase market share, diversify product lines, reduce competition, or gain access to new technologies or expertise.

Examples of M&A include the merger of Exxon and Mobil to form ExxonMobil, the acquisition of WhatsApp by Facebook, and the merger of Dow Chemical and DuPont to form DowDuPont.

M&A can have a significant impact on the companies involved, as well as on the broader industry and economy. Successful M&A deals can lead to increased efficiency, economies of scale, and increased profitability, while unsuccessful deals can result in financial losses and decreased shareholder value.

Mergers and acquisitions (M&A) are significant events in the business world. Here’s a breakdown of the term:

M&A in a nutshell:

• It refers to the consolidation of companies through various financial transactions.
• This consolidation can involve buying one company outright (acquisition) or combining two or more companies into a new entity (merger).

Merger vs Acquisition: Key Differences

• Merger: A combination of two relatively equal-sized companies into a completely new entity. The resulting company will have a new name and structure, combining elements from both previous companies. Ideally, this merger strengthens both companies’ market position and financial situation.
• Acquisition: One company (acquirer) purchases another company (target) and absorbs it into its own operations. The target company ceases to exist as a separate legal entity. Acquisitions can be friendly (agreed upon by both companies) or hostile (against the target company’s wishes).

Examples of Mergers and Acquisitions:

• Merger: Imagine Bank A and Bank B merging to form a new, larger bank, “Mega Bank.” Both sets of shareholders would likely own shares in Mega Bank.
• Acquisition: A large tech company like Google acquiring a smaller startup specializing in artificial intelligence. Google would own and control all the target company’s assets and technology.

Overall, M&A activity can be driven by various reasons, such as increasing market share, acquiring new technologies or resources, or expanding into new markets. It’s a complex area of business with significant financial and strategic implications.

Merger and Acquisition (M&A) refers to the consolidation of companies or assets through various financial transactions. In simple terms, it involves one company buying another company or merging with it to create a larger entity. Here’s a breakdown:

Meaning:

• Merger: A merger occurs when two companies of roughly equal size agree to join forces and become a single entity. This could be due to strategic reasons like expanding market reach, diversifying product lines, or gaining cost efficiencies.
• Acquisition: An acquisition, on the other hand, happens when one company purchases another company. The acquired company may retain its identity or be absorbed into the acquiring company.

Definition:

• Merger: A merger is a legal consolidation of two companies into one entity. The shareholders of both companies typically approve the merger, and the assets and liabilities of the merging companies are combined.
• Acquisition: An acquisition involves one company (the acquirer) purchasing another company (the target). This could be achieved through buying a controlling interest in the target company’s shares or acquiring its assets.

Examples:

1. Disney’s Acquisition of 21st Century Fox: In 2019, The Walt Disney Company acquired most of 21st Century Fox’s assets for $71.3 billion. This acquisition allowed Disney to expand its content library and strengthen its position in the entertainment industry.
2. Facebook’s Acquisition of Instagram: In 2012, Facebook acquired Instagram, a popular photo-sharing app, for approximately $1 billion. This acquisition helped Facebook diversify its offerings and expand its user base.
3. Exxon and Mobil Merger: In 1999, Exxon and Mobil, two of the largest oil companies in the world, merged to form ExxonMobil Corporation. This merger created one of the largest publicly traded companies globally and provided synergies in exploration, production, and marketing.

These examples illustrate how M&A activities are strategic decisions made by companies to achieve various goals such as expansion, diversification, cost savings, or market dominance.

What is the purpose of M&A? What are the three types of mergers? What is the difference between merger and acquisition and takeover?

The purpose of M&A can vary depending on the strategic goals of the companies involved. However, some common reasons for engaging in M&A include:

1. Strategic Expansion: Companies may merge or acquire other businesses to expand their market presence, enter new markets, or diversify their product or service offerings.
2. Cost Savings and Synergies: Merging or acquiring companies can lead to cost savings through economies of scale, increased efficiency, or the elimination of duplicate functions. Synergies can also be realized by combining complementary resources, technologies, or expertise.
3. Increased Market Power: M&A activities can enhance a company’s competitive position by increasing market share, reducing competition, or gaining access to valuable intellectual property or distribution channels.
4. Financial Gain: Mergers and acquisitions can be driven by the potential for increased profitability, enhanced shareholder value, or improved financial performance.

The three types of mergers are:

1. Horizontal Merger: A horizontal merger occurs when two companies operating in the same industry and at the same stage of the production process merge. The goal is often to achieve economies of scale, increase market share, or reduce competition. For example, if two competing airlines merge, it would be considered a horizontal merger.
2. Vertical Merger: A vertical merger involves companies that operate at different stages of the production process or supply chain merging. This type of merger aims to streamline operations, reduce costs, or secure a more reliable supply of inputs. An example would be a car manufacturer merging with a tire company.
3. Conglomerate Merger: A conglomerate merger occurs between companies that operate in unrelated industries. The primary motivation is typically diversification to spread risk or capitalize on new opportunities. For instance, if a technology company merges with a food and beverage company, it would be a conglomerate merger.

The difference between merger and acquisition and takeover lies primarily in the manner in which the transaction is carried out and the level of agreement or resistance from the target company:

• Merger: In a merger, two companies agree to combine and become a single entity. Both companies’ shareholders typically vote to approve the merger, and the assets and liabilities of the merging companies are consolidated. The process is often collaborative and involves negotiation between the companies’ management teams.
• Acquisition: In an acquisition, one company (the acquirer) purchases another company (the target). The target company may or may not agree to the acquisition. If the target company agrees, it is called a friendly acquisition. If the acquisition is made against the target company’s wishes, it is known as a hostile takeover.
• Takeover: A takeover refers to the acquisition of a target company by another company, usually through the purchase of a controlling stake in its shares. Takeovers can be friendly if the target company’s management and board of directors support the acquisition, or hostile if they oppose it. Hostile takeovers often involve attempts to gain control of the target company’s board of directors or bypassing management to directly approach shareholders.

Companies engage in M&A for a number of reasons, all aiming to increase their value or accelerate growth. Here are some key purposes:

• Growth: M&A can be a faster way to gain market share, access new technologies or resources, and expand into new markets compared to organic growth.
• Synergies: Merging or acquiring can create efficiencies by combining operations, eliminating redundancies, and leveraging economies of scale.
• Increased Profitability: M&A can improve a company’s profitability by combining resources, reducing competition, and strengthening its bargaining power with suppliers.

Three Main Types of Mergers:

1. Horizontal Merger: Combining businesses that compete in the same industry at the same level of the supply chain. (e.g., Two beverage companies merging)
2. Vertical Merger: Combining businesses involved in different stages of producing the same good or service. (e.g., A car manufacturer merging with a steel supplier)
3. Conglomerate Merger: Combining businesses in unrelated industries to diversify offerings and reduce risk. (e.g., A media company merging with a retail chain)

Merger vs Acquisition vs Takeover:

• Merger: Two companies come together to form a new entity, with a certain level of agreement between both parties.
• Acquisition: One company purchases another, with the target company being absorbed. Acquisitions can be friendly or hostile.
• Takeover: A specific type of acquisition where a company buys another against its will, often through a hostile bid for its shares. So, all takeovers are acquisitions, but not all acquisitions are takeovers.

Purpose of M&A: The purpose of mergers and acquisitions (M&A) is typically to increase shareholder value, achieve synergies, diversify product lines, expand into new markets, reduce costs through economies of scale, or gain competitive advantages in the marketplace. Some specific reasons for pursuing M&A include:

1. Accessing new technologies or expertise
2. Acquiring valuable assets or resources
3. Enhancing distribution channels or customer base
4. Achieving greater market power or scale

Three Types of Mergers: There are several types of mergers, but three common ones include:

1. Horizontal Mergers: This involves the combination of two companies in the same industry or sector. The goal is to achieve economies of scale, reduce competition, or gain market share. An example would be a merger between two automobile manufacturers.
2. Vertical Mergers: This occurs when two companies operating at different stages of the same production process merge. The aim is to control more parts of the production process, reduce costs, or increase efficiency. An example would be a car manufacturer merging with a supplier of auto parts.
3. Conglomerate Mergers: This involves the combination of two companies in unrelated industries or sectors. The goal is to diversify the company’s product lines and reduce risks associated with relying on a single industry. An example would be a car manufacturer merging with a food company.

Difference between Merger, Acquisition, and Takeover:

1. Merger: In a merger, two companies of similar size come together to form a new single entity. The combination is usually friendly and consensual, with both companies’ management teams working together to negotiate the terms of the deal. The shareholders of both companies typically receive shares in the newly formed entity.
2. Acquisition: In an acquisition, one company takes over another, typically by purchasing a majority stake in the target company. The acquired company may be absorbed into the acquiring company or may continue to operate as a subsidiary. Acquisitions can be friendly or hostile, depending on whether the target company’s board of directors approves the deal.
3. Takeover: A takeover typically refers to a hostile acquisition, in which the target company’s management resists the acquisition attempt. In a hostile takeover, the acquiring company may make a tender offer directly to the target company’s shareholders, bypassing the board of directors.
4. Merger and Acquisition: M&A Meaning, Definition, Examples