Tech companies, especially startups often go through mergers and acquisitions. It can become a lengthy process. Better understanding and synergy between buyers and sellers be beneficial for all parties involved. Mergers and acquisition are terms used to describe the integration of companies through various types of financial transactions. Some of these agreements or transactions are but not limited to tender offers, purchasing of assets, acquisitions, mergers, and management acquisitions. The term M&A refers to the department that actively deals with merger and acquisition operations in financial institutions.
In every case of a Merger and Acquisition, the involvement of two or more companies is required. A merger is when two or more companies consolidate into one new individual entity under new ownership and management. An acquisition, however, takes place when one organization undertakes the managerial operations of another company.
Overview of Mergers and Acquisitions
In the event of a merger, the board of directors from the two companies will look into the futuristic financial prospect of the merging companies. They will also seek approval of the shareholders to make the move. The acquiring company will play a more dominant decision-making role, while the acquired company will cease to exist or play a relatively minor role upon successful completion of a merger.
During an acquisition, the acquiring company will actively look into acquiring majority stakes in the acquired firm. This will not result in the change of its organizational and legal structure or the name of the company.
Types of Mergers
There are many different types of mergers in a business administration standpoint. Understanding what type of merger is suitable for an organization to survive and improve in the ever-changing and demanding market is crucial. Below we list down different types of mergers that can be differentiated by taking the natures of the companies into account:
● Vertical Merger
The merging between two entities that serve a single purpose through different objectives. It may be between a supplier and a company or a company and a client company. Simply think of a breakfast cereal company merging with the packaging company to understand this type of merger.
● Market Extension Merger
The merging of two entities that sell identical products in multiple different markets with the aim of creating a bigger and more powerful entity with a wider market share.
● Congeneric Mergers
The merging between two companies engaging in the sale of products that serves the same consumer base. A good example is a mobile phone manufacturer merging with a network provider.
● Purchase Mergers
As the name suggests, a merger of this kind occurs when one company buys another company. The purchase can be made by various means with the use of cash, debt instruments, etc. It’s important to highlight that this type of mergers is taxable.
● Product Extension Merger
The merging between two entities that engage in the sale of related but different products in the same market.
● Horizontal Merger
The merging between two companies that compete in the same market with similar products.
● Consolidation Merger
These mergers occur when two companies are bought and combined together to form an entirely new company.
Details of Acquisition
An acquisition can take place when a company acquires another company by using stock, cash or both. Another mode of acquisition is when a stakeholder decides to sell his or her assets to a more financially-willing and able organization. This process requires a lawyer.
A reverse merger is another type of acquisition. It occurs when a deal is put on the table where a privately owned organization can decide to become a publicly listed company. This kind of merger takes place when a privately owned company with a strong grasp of its current market needs high profile financing.
Such privately owned entities will look into the prospect of buying a publically listed company with rarely any business or assets. Then the private company will reverse merge with the public company and together will become a publically tradable company.
Potential for Success
During most cases, the acquiring company often pays a considerable amount on the value listed on the stock market. This justification is as a result of the notion of synergy; merging benefits shareholders when a company immediately sees an increase in the value of shares as a result of the merger.
Its highly unlikely for a business owner to sell their business if they would not benefit more by not selling their enterprise. This means potential buyers need to pay a substantial premium if they are seriously considering acquiring the said company.
As far as the seller is concerned, the offered price somewhat reflects the future financial prospects of the company. However, for the buyer, the offering price reflects the post-merger value of the organization and its potential.
The M&A software by DealRoom is a platform that takes into all factors that help spot deals full of potential. Users have the ability to consolidate their own processes with this software to keep up with the fast-paced world of mergers and acquisitions.
Why Do Companies Merge?
M&A operate from the common ground with no regard to their structure or category of the companies involved. M&A is meant to produce synergies that will ensure the merged companies are greater operating as one instead of two separate entities.
Most companies depend on M&A to grow larger and to get ahead of their competition. A company may take years or decades to achieve certain goals if it is to operate as a single entity. This time frame can be leapfrogged by merging with or acquiring a promising company.
The preempted competition factor serves as a great motivation for companies that are looking to merge. It still serves as one of the most sought out reasons for mergers and acquisitions. This feeding frenzy occurs when a large company looks at the possibility of merging with a company that has a pleasing portfolio of desirable clients and assets.
Most organizations are always in the lookout for any possible way of getting ahead from their competitors. So many companies often resort to mergers and acquisitions in the process. However, it must be noted that breaking away from public ownership may offer more distinctive disadvantages for some companies.
Some mergers do not succeed for various reasons. In general, companies that come out of merges often enjoy an overwhelming increase in performance due to redesigning management incentives. As a reason, more and more entities are looking at M&A and best practices.
Author’s Bio: Lori Wade is a writer who is interested in a wide range of spheres from business to entrepreneurship and new technologies. If you are interested in M&A or virtual data room industry, you can find her on Twitter & LinkedIn or find her on other social media. Read and take over Lori’s useful insights!