Key Takeaways

  • A merger joins two companies into a single entity.
  • Acquisitions involve the takeover of one company by another by buying its shares or assets.
  • Acquisitions can be friendly if seen as producing value for shareholders or hostile if not.
  • M&As are highly regulated by antitrust laws

Mergers & acquisitions can be useful components of any business growth strategy. Here we look at how mergers and acquisitions work, and when it might be a useful part of your global expansion strategy. 

What are Mergers and Acquisitions?

Mergers and acquisitions (M&A) are actions taken by one business to obtain ownership of and control over another business (See Investopedia). A merger is when the two businesses are consolidated into one. In this case, both companies may cease to exist and instead combine and move forward as a new company altogether. In an acquisition, the equity and assets of one business are transferred to another. Generally, the acquiring company takes over ownership of the acquired company, which may continue under its own name and management or may be rebranded as a subsidiary of its parent company. Both mergers and acquisitions bring the assets and liabilities of the two companies under single ownership.

Types of mergers and acquisitions

For various strategic reasons, one company may decide to take over ownership of another company. It may achieve this takeover through various means. In general, the company can acquire its target by purchasing its shares, either fully or enough to control the target, or by buying its assets, which are then liquidated to pay shareholders. Acquisitions can be friendly or hostile depending on how the directors of the target company react.

  • Friendly takeover: When a company makes an offer to take over a target, and the target’s board of directors sees it as being in the best interests of the shareholders, the bid can be accepted. This is a friendly takeover, and the bid can be private or announced publicly, as in the form of a tender offer. A well-known example is Microsoft’s 2016 acquisition of LinkedIn for $26.2 billion.
  • Hostile takeover: A takeover bid may be rejected by the board of directors of the target company, who consider it against the best interests of the company, or undervaluing the company’s price. In this case, the acquiring company may appeal directly to shareholders to vote to replace the board with one that will approve the sale. A famous example is InBev’s 2008 hostile takeover of Anheuser-Busch, which did just that.

When companies are combined to form a single entity, these mergers are classified according to their economic benefits.

  • Horizontal merger: When two companies in the same industry merge to form one with a larger market share, this is a horizontal merger. Due to antitrust legislation, these mergers are often the most scrutinized.
  • Vertical merger: Vertical mergers occur when companies in the same value chain combine to produce a more vertically integrated company. This can often involve a company merging with a former supplier or a former customer.
  • Conglomerate merger: Conglomerate mergers occur when companies in different industries and unrelated value chains merge. These mergers are performed more for diversification or purchasing power reasons than competition strategies.
  • Triangular merger: In a triangular merger, a company uses a shell subsidiary to merge with its target, thus creating a new subsidiary under its ownership.
M&A Type Description Strategic Purpose
Horizontal Merger Two companies in the same industry combine Increase market share, reduce competition
Vertical Merger Buyer and supplier (same value chain) merge Lower costs, control production
Conglomerate Merger Unrelated businesses merge Risk diversification
Friendly Acquisition Target board supports the acquisition Smooth integration
Hostile Takeover Board resists acquisition Rapid control, market consolidation

Benefits of Mergers and Acquisitions

There are many reasons why companies choose to merge or take each other over. The benefits of M&A include:

  1. Diversification: By acquiring new businesses in different industries, a company can diversify both its risks and rewards.
  2. Economy of scale: When two businesses are combined into one larger unit, that entity can gain increased purchasing power and a stronger position in negotiations with supplies.
  3. Synergy: Combined companies may become more efficient than they were separately. This synergy can stem from cost reductions, combining talent, or sharing technology.
  4. Market expansion: A company may merge with or take over a competitor to gain a larger market share.
  5. Vertical integration: Vertical mergers allow a single company to control more of the processes and functions involved in its value chain, which can help it produce higher-quality products and services.

Challenges in Mergers and Acquisitions

While mergers and acquisitions are often beneficial for one or both businesses, they also include challenges like:

  • Integration issues: When two companies combine, they may find that their cultures and systems don’t mesh well. This can make it very hard for them to work together as a new, singular entity.
  • Regulatory challenges: Antitrust laws like the Clayton Act in the US ban M&As that seriously lessen competition or create monopolies. Companies may spend lots of time and money on planning M&As only to have them rejected by regulators.
  • Resentment: Many mergers and acquisitions can devalue companies or lead to mass layoffs and restructuring. These actions can greatly reduce staff morale and repel shareholders.

Best Practices for Successful Mergers and Acquisitions

Mergers and acquisitions are based on accurate business valuations. Acquiring companies must do their due diligence to ensure that they’re valuing their targets accurately, which means they need to collect as much information as possible. Target companies that receive bids must also perform due diligence to ensure that these bids offer reasonable value to shareholders.

Mergers and acquisitions in China involve navigating antitrust review (SAMR approval), foreign exchange controls (SAFE approval), industry-specific restrictions (telecom, media, finance), and valuation complexity due to limited financial transparency. M&A process timelines routinely extend 6-12 months due to regulatory gates. MSA Asia coordinates multi-agency approvals and manages corporate restructuring through acquisition closings. Have a conversation with us about your transaction.

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FAQ

Some M&As can create larger companies with greater market share. Others involve acquiring competitors to kill them off and prevent competition. While these practices benefit companies and their shareholders, they may also be limited by competition laws.

Bids that undervalue target companies will be rejected by their boards, and proposals that significantly reduce competition may be rejected by regulators. Others go through but fail because acquiring companies don’t learn enough about their target companies and either take on debt or fail to integrate successfully.