What Are Mergers and Acquisitions (M&A)?
Mergers and acquisitions (M&A) refer to the strategic consolidation of companies or their significant business assets through financial transactions. Within M&A activities, a company can acquire another company outright, merge to form a new entity, acquire specific assets, make a tender offer for stocks, or pursue a hostile takeover.
Additionally, the term M&A is commonly used to characterize the financial sector divisions involved in these activities.
Key Takeaways
- The terms “mergers” and “acquisitions” are often used interchangeably but have distinct meanings.
- Acquisition entails one company buying another outright.
- In a merger, two similar-sized firms merge to form a new legal entity under a single corporate name.
- Valuing a company objectively involves analyzing industry peers and utilizing metrics.
Understanding Mergers and Acquisitions
While mergers and acquisitions are often used interchangeably, they have distinct interpretations.
In an acquisition, one company overtakes another and assumes ownership, whereas a merger involves two comparable firms forming a unified new entity, abandoning individual ownership. Notably, friendly or hostile takeover deals determine whether a transaction is classified as a merger or an acquisition.
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M&A deals can be exceptionally lucrative for the investment banking industry, yet not all deals come to fruition.
Types of Mergers and Acquisitions
Various transactions fall under the M&A umbrella, including:
Mergers
In a merger, both companies’ boards and shareholders approve the combination. For instance, Compaq absorbed the Digital Equipment Corporation in 1998 and later merged with Hewlett-Packard in 2002.
Acquisitions
In a simple acquisition, the acquiring company gains the majority stake in the acquired firm without altering its name or structure. For instance, Manulife Financial Corporation acquired John Hancock Financial Services in 2004.
Consolidations
Consolidation involves merging core businesses to create a new entity. Notably, stockholders from both companies must approve the consolidation, as seen with Citicorp and Travelers Insurance Group forming Citigroup in 1998.
Tender Offers
In a tender offer, one company directly offers to purchase the other firm’s outstanding stock at a specific price, as exemplified by Johnson & Johnson’s acquisition of Omrix Biopharmaceuticals in 2008.
Acquisition of Assets
Acquisition of assets involves one company directly acquiring another’s assets, common in bankruptcy proceedings.
Management Acquisitions
In a management acquisition or management-led buyout, executives purchase a controlling stake in another firm, often funded through debt. For example, Dell Corporation was acquired by its founder, Michael Dell, in 2013.
How Mergers Are Structured
Mergers can adopt various structures based on the relationship between the involved companies.
- Horizontal merger: Two direct competitors sharing the same product lines.
- Vertical merger: Involves a customer or supplier merging with a company.
- Congeneric mergers: Two companies targeting the same consumer base differently.
- Market-extension merger: Companies selling the same products in different markets.
- Product-extension merger: Companies selling related products in the same market.
- Conglomeration: Companies unrelated in business areas.