M&A usually describes a range of business strategies that are used to improve performance and profit. However, M&A is also associated with quite different measures. Mergers are the result of two companies of similar size agreeing to combine their assets and resources into one effective business. An acquisition is one business taking over another. Some may be conducted in unfriendly circumstances but many more are perfectly amicable. A business involved in an acquisition can sometimes be concerned over the apparent negative image it might imply. It’s then referred to as a merger although its correct description is an acquisition.
Different Types of Mergers
This refers to a merger between two businesses that operate in similar industries. They can sometimes be at different stages of the production chain or purchase and sale procedure.
Two businesses of similar size that offer the same type of services or products often merge together. By creating one company there is improved efficiency and economy through removing duplicated assets. However, horizontal mergers can be deliberately used to eliminate rivals. They are therefore strictly monitored by regulatory committees to ensure a competitive market is maintained.
Occasionally two companies that do not operate in a similar business sphere join forces in a conglomerate merger. There can be various beneficial reasons such as economizing or filling a gap in the production chain.
Some companies existing in the same business sphere but with quite separate customer bases or suppliers can choose a congeneric merger. They form one new, large company. It’s then able to offer double the amount of services and goods to twice as many customers.
This describes a merger resulting in a reduction of the earnings for each share within an acquiring company. However, it can occasionally have a positive effect if the diluted shares eventually recover their value. An alternative scenario can be when a small company with a low expansion rate, targets a business with both, a higher growth rate and earning capacity for individual shares.
An accretive merger describes the way a company’s earnings for each share can be significantly increased upon acquiring another business. The difference between the two sets of shares can be calculated by determining the price to earnings ratio. This is the comparison of the company’s price for each share and the amount each share earns in a year. The merger is considered to be accretive if the price to earnings ratio of the acquiring company is greater than that of its target. The earnings of the business that is the target, increases the acquiring company’s market value. Such a transaction might not necessarily be permanently accretive. It depends if the earnings and stock prices of the two companies subsequently alter.
This can also be referred to as a reverse takeover or reverse acquisition. It describes the strategy a private company pursues to become a public one. It’s used to avoid the lengthy procedures and costs of complying with regulations during the initial offering of public shares. It involves a private company merging or acquiring a public company that is often referred to as a shell. It then installs its own managerial systems while maintaining the other company’s public profile.
Mergers and acquisitions may have very different motivations at the beginning of any activity. However, they both result ideally in the same outcome of forming a larger and more effective company. Broadly speaking, a merger is always the result of a friendly agreement. An acquisition is sometimes more hostile than agreeable.