MERGER AND ACQUISITION

By CPA Robert Vedastus

Meaning of Merger and Acquisition

Merger and acquisition are business

transactions in which the ownership of
companies or their operating units is
transferred to another entity.
❖ Mergers and acquisitions (M&A) refer
to the combination of business firms.
❖ In a merger, two entities consolidate
into one.

❖ In an acquisition, one entity takes over

ownership of another.
❖ The goal of Merger and acquisition is to
achieve synergy, where the new
company is greater than the sum of its
parts.
❖ Merger and acquisition enables
organizations to grow, downsize, and
adjust their competitive position.
❖ Every merger has its own unique
reasons.

❖ The underlying principle behind

mergers and acquisitions is the creation
of additional value "synergy"
The creation of additional value (synergy)
that takes three forms including revenue,
expenses and cost of capital.
1. On the revenue side, merging
companies is likely to result to higher
revenue than it was realized before.
2. On the side of expenses, business
combinations result to cost saving due
to economies of scale and
economies of scope.
3. It is cheaper for the combined business
to raise capital.
Forms of Mergers and Acquisitions

Mergers and acquisitions may take various

forms including mergers, acquisitions,
consolidations, purchase of assets, tender
offers as well as management acquisitions.
1. Merger

Refers to the combination of two existing

firms into one new firm.
❖ With mergers, companies which
combines are usually of comparable
size to create a new firm that will
theoretically be equally owned by
both partners.
2. Acquisition

Under this arrangement, one firm retains its

legal structure and obtains the majority
ownership in the acquired firm, which does
not change its name or legal structure.
❖ One firm therefore dissolves after being
acquired by the other.
❖ It is simply a purchase of a small firm by
a large one and the small firm ceases
to exist, and its assets becomes part of
a larger firm.
3. Consolidation

The unification of two or more corporations

by dissolution of existing ones and creation
of a single new corporation.
4. Tender Offer

Under this arrangement, one firm offers to

buy the outstanding shares of the other firm
at a specific price.
❖ The firm that wants to purchase the
other firm communicates the offer
directly to the shareholders bypassing
management of the firm that is to be
purchased.
5. Acquisition of Assets

This normally occurs during bankruptcy

proceedings where other firms bid to
purchase the assets of the firm being
liquidated.
❖ The firm whose assets are being
purchased must get approval of its
owners.

❖ Acquisition of assets occurs when one

firm purchase assets of the other.
6. Management Buyout (MBO) or
Management Acquisitions
The management of the company
purchases enough shares that makes them
controllers of the company and makes the
firm a private one.
❖ It has an impact of unifying ownership
and control, an act that minimizes
agency costs.
Motives Behind Merger and Acquisition
1. Value creation
Two companies may merge or acquire to
increase the wealth of their shareholders
by creating synergies that increase the
value of the new company.
❖ Synergies can be achieved through
revenue enhancement or cost
reduction.
2. Diversification

A company may merge or acquire to

diversify its business operations by entering
into new markets or offering new products
or services.
❖ Diversification can also reduce the risks
associated with the company’s
operations.
3. Acquisition of assets

A company may merge or acquire to gain

access to certain assets that are unique or
hard to develop internally.
For example

A company may want to acquire new

technologies, patents, brands, or customer
bases.
4. Increase in financial capacity

A company may merge or acquire to

increase its financial capacity to finance its
operations or growth through debt or
equity markets.
❖ A larger company may have more
access to capital and lower cost of
capital than a smaller one.
5. Tax purposes

A company may merge or acquire to

reduce its tax liability by utilizing the tax
losses or credits of another company.
For example

A profitable company may merge with a

loss-making company to offset its taxable
income.
Types of Mergers and Acquisition

1. Horizontal

Two firms are merged across similar

products or services.
❖ This is integration in complementary
activities in a value system.

❖ It results in the production of substitute

products.
Horizontal integration is useful in the following
ways:
❖ Economies of scope
❖ Reduction in competition
❖ Fulfilment of customer expectations
❖ Availability of substitutes
❖ Economies of scale
2. Vertical

Occurs when two firms with adjacent

activities in a value system combines.

❖ For example, when a manufacturer is

merging with a supplier.
❖ Vertical mergers are often used to gain
a competitive advantage within the
marketplace.
Two Types of Vertical Integration

Forward Integration

This is expansion into activities which are

related with the organization’s outputs.
❖ This type of integration extends control
over downstream distribution
operations; those areas of the value
system which are closer to end users.
Backward Integration

This involves expansion into activities

related with the inputs into the
organisation’s existing business.
❖ This type of integration involves
extending control over upstream
operations; those areas of the value
system which are further from the end
user.
3. Conglomerate
It involves merging with a firm that offers
products or services beyond the current
capabilities or value.
❖ Firms which have united are in entirely
different fields.
Factors Determining Success of M&A
Merger and Acquisition
1. Industry relatedness

One of the aims of the M&A is to minimise

competition and to increase market share.
❖ To easily achieve this, M&A deal is
between companies operating in the
same industry.
❖ This will make the new company to
have an extensive previous experience
in M&As in the same industry.
2. Common marketing strategy
Creating a common marketing strategy
among the merged companies is very
important to ensure strategic adjustment
and brand name recognition on the
market.
3. Corporate culture convergence

The difficulties, the costs and the risks

associated with the cross-cultural contact
should be managed and harmonised to
bring about success of M&A.
4. Integrated technological processes

Compatibility of IT system determines

success of M&A strategy.
❖ A well-integrated IT system will result to
goal harmonisation and eventually
goal congruence for the newly formed
company.
5. Efficiency in managing synergy

Related to the strategic adjustment,

synergy takes place when two separate
entities can be managed more efficiently
together than separately.
6. Portfolio diversification

The key goal of M&A is to minimise risk in

order create competitive advantage.
When properly diversified, M&A strategy is
likely to result to this goal.
7. Retaining key executives post M&A
stage

Executive departures post-M&A stage has

a negative impact on the performance of
acquired firms.
8. Timing of M&A
Early positioning, that is companies that
react earlier in the M&A wave have an
advantage to their competitors because
they can benefit from information
asymmetry.
9. Mode of financing

Financing M&A from cheaper sources is

likely to make it a success than using
expensive sources.
❖ On the other hand, using external
sources such as raising new equity may
have a signaling impact on how
management perceive position of the
company.
10. Governmental participation

When a government participates in M&A

through say privatization, it brings about
the transfer of capital on the market and
hence a success of M&A
Advantages of Mergers and Acquisitions

1. Increase their market share by bringing

the existing customers together, and
attract other customers.
2. The benefits of synergy
The benefits arise because the result is
greater than the sum of their individual
effects or capabilities (synergy brings
about returns enrichment and cost
savings).
3. Economies of scope in contrast to
economies of scale.
An organisation may achieve economies
of scope by increasing its number of SBUs
so that its total costs are spread over a
greater number of business units.
4. Realization of economies of scale.
Uniting companies makes it possible to
operate in large scale resulting to
quantity discount and other cost
savings.
5. Ability to raise capital at cheaper cost.

6. Acquisition by another firm is one way

that shareholders can remove
managers whom they are unhappy
with.
Disadvantages of Mergers and Acquisitions

1. It is hard to estimate synergies using

discounted cashflow techniques.

2. Synergies projected for M & A's are not

achieved in most cases.
3. A small percentage of all M & A's will
earn their predetermined cost of
capital.
4. In the first six months of a merger,
productivity may fall by as much as
50%.
5. In acquired companies, there is likely to
be a high chance of employees’
turnover for the first years of operations.

6. There are complex accounting, tax, and

legal effects when one firm is acquired by
another.
Pitfalls Behind Merger and Acquisition
Deals
Merger and acquisition can also involve
some pitfalls that can jeopardize the
success of the deal or the performance of
the new company.
1. Overpaying

One of the biggest challenges in M&A is to

avoid overpaying for the target company,
which can erode the expected value and
return of the deal.
❖ Overpaying can result from
overestimating synergies, insufficient
due diligence, misunderstanding the
target company, or emotional bias.
2. Cultural Clash
Another major challenge in M&A is to
integrate the cultures of the merging or
acquiring companies, which can differ
significantly in terms of values, norms,
practices, and behaviors.
❖ Cultural clash can lead to conflicts,
misunderstandings, mistrust, resistance,
turnover, and loss of productivity
among employees and managers.
3. Lack of Strategic Plan

Without a strategic plan, the deal may

lack direction, focus, and purpose, and fail
to achieve the desired outcomes.
❖ A successful M&A deal requires a clear
and coherent strategic plan that aligns
with the vision, mission, and goals of
the new company.
4. Lack of Communication
Lack of communication can create
confusion, uncertainty, anxiety, and rumors
among stakeholders, such as employees,
customers, suppliers, investors, and
regulators.
❖ Communication is essential for ensuring
a smooth and effective M&A process,
both internally and externally.
5. Lack of Integration

Lack of integration can result in

inefficiencies, redundancies,
inconsistencies, conflicts, and waste.
❖ Integration is the process of combining
the operations, systems, processes, and
resources of the merging or acquiring
companies into a unified whole.
 THE END

THANK YOU

By CPA Robert Vedastus