Mergers and Acquisitions

Global M&A Market

To encourage growth, boost market power and increase profitability, companies implement a strategy known as mergers and acquisitions (M&A). Each company, no matter it size, has its own unique rationale for executing these strategies.

In 2020, the value of global M&A transactions amounted to 2.8 trillion US dollars. Becoming a competitive player in a cut-throat global market is not an easy task; companies can decide to grow organically by driving their internal marketing efforts, developing unique products and services, or expanding to new geographical regions. But this is a time and resource-consuming option.

To parachute into new market and products lines, access customer relationships, and become a driving force in the market, companies often choose the inorganic route by acquiring or merging with another firm.

Theoretically, both terms have different meanings, but in practice, they are often blended to account for individual cases. This guide will be discussing both terms separately to illustrate their differences, similarities and how they are carried out. However, both transactions are often pursued to achieve growth, financial stability, expansion, and other goals.

Defining an Acquisition

Acquisitions are strategies whereby a company (usually a large one) takes over another company, or parts of a company, and becomes the new owners. The acquirer will take over the target company, absorbing all its assets and liabilities (depending on the deal structure).

Acquiring high-value businesses is a strategic way to improve market share, reduce costs and expand into new product lines or geographical locations.

While acquisitions can be structured agreements, they can also be hostile. Sometimes, the board of a target company may not consent to the acquisition, but the acquirer will attempt to take control of it through a tender offer or by purchasing a significant amount of the target company’s stock.

Someone who wishes to sell a business (for multiple reasons), can also be acquired by a company that has the resources, cashflow, and business model to develop it.

Studies suggest that preparation, effective integration, economic certainty, and accurately valuing your target are the vehicles to a successful M&A transaction.

Acquisitions Types:

The two most common types of acquisitions are concerned with stock and assets.

A stock purchase is a lot simpler than an asset purchase, and it involves the acquirer purchasing stock of the target company, including all its assets and liabilities. Its simplicity derives from the ease of transferability; in a stock purchase, all leases, permits, licenses and so forth will be directly and automatically transferred to the new owner. Usually, the acquirer does not need to re-valuate or renegotiate the assets and liabilities of the target company.

An asset purchase is a bit more complicated, and these are usually carried out when the seller wants to remain a part of the company. The buyer will purchase selected assets (like equipment, goodwill, or customers), and they will also decide which liabilities they will assume. This flexibility to assume less liabilities is helpful when it comes to the due diligence phase. However, the acquirer may need to re-negotiate contracts and agreements, which can be a time and resource consuming process.

Acquisition Motives

Motives surrounding acquisitions are to tap into its benefits. Below are some common reasons companies acquire, which are directly linked to the advantages of acquisitions:

• Improve and increase market share and accelerate competitive advantage
• Take control of a supply chain, improving economies of scale and dividing resources
• Cost reduction and improving the value of a company or assets
• Geographical expansion, or product expansion to develop brand recognition
• Acquire innovate units of a company (instead of starting them from scratch) like IP, research, customer lists, brand, or unique technologies

The Cons of Acquisitions

Business transactions will always have benefits and downfalls. Before pursuing M&A, your advisory team should be familiar with these risks, and take steps to mitigate them. Likewise, a lot of disadvantages surface post-acquisition, so you should anticipate them:

• Friction and competition amongst management and staff
• Communication and social barriers if the target company is from a different geographical territory
• Risk of needing to eliminate underperforming assets, including employment contracts that will result in people losing their jobs
• Duplication, which may lead to retrenchments of valuable employees with operational knowledge
• Retraining and reskilling

Examples of Top Global Acquisitions

In the history of global M&A deals, there have been some transactions valued at colossal amounts, one of which achieves the title of the largest merger in global history as of 2021:

Vodafone and Mannesmann

Vodafone’s acquisition of German-owned industrial conglomerate Mannesmann occurred in 2000, and the takeover is valued at an impressive $203 billion. This deal paved the way for Vodafone to not only become the largest telecommunications company in the United Kingdom, but Vodafone became a leading example of M&A possibilities within the mobile telecommunications sector.

Facebook and WhatsApp

Most people with a smartphone are familiar with WhatsApp and Facebook. They are both leading apps within the social networking ecosystem. Facebook is a multinational technology company, and in 2014, it acquired WhatsApp for $19 billion. Facebook’s acquisitions have always been strategic. Since its launch, it has acquired 78 companies, including Instagram. To maintain a competitive lead in the race to new technologies that excite and provide real value to consumers, Facebook is no longer classified as a social media networking site that allows people to share content. It is an entire ecosystem that has multiple focus points, including artificial intelligence and virtual reality technology.

Funding Acquisitions

Acquisition finance is not cheap. Companies are often acquired for millions – even billions - of dollars. It is very rare for an acquisition to be funded entirely by cash, so companies often finance and acquisition using several methods. Some include:

• An earnout
• A leveraged buyout
• Loans (from banks or private equity investors)
• Seller financing
• Asset-backed loan

Explaining Mergers

A merger is when two companies fuse together to become one entity, usually carried out to achieve synergies or increase the value of both companies. Mergers are often cooperative agreements, but they can become sour if both parties do not manage and evaluate the risks involved in merging two entities. Mergers are an effective way to access a new business model, markets and increase value, but they can also result in internal clashes, disconnection, and disputes.

How are mergers structured?

Mergers are structured in different ways, and these will depend on the objectives and strategic profiles of the companies that wish to merge.

If the merger is horizontal, both companies likely share similar products or market segments. To eliminate competition and increase market share, they can decide to merge.

If a vertical merger is carried out, this usually involves customers or suppliers merging with a company in the same industry. This helps consolidate a strong position in the production chain. For example, a computer manufacturer and a computer parts supplier might merge to tap into higher profits and improve quality control.

On the other end of the spectrum, two businesses that have nothing in common can merge. This is known as a conglomerate merger, whereby two companies who are not in direct competition merge to diversify. Diversification is a strategic way to anticipate losses. For example, if one unit of the business performs poorly, other units that are performing optimally can compensate for those losses.

Considering the Pros and Cons of Mergers

The advantages and disadvantages of mergers share similarities with acquisitions. Some benefits of mergers include:

• Promoting economies of scale: increased output can reduce costs, both for the company and its customers
• Gaining a larger market share helps manage international competition, which is crucial in the current global market
• Improving efficiency and productivity
• Mergers can be helpful if a specific industry is in a crisis, or if a company is facing financial distress
• Expansion into new geographical territories

Of course, we’ll run through the disadvantages too:

• Internal clashes: the most common risk of mergers is corporate culture clashes. If a company with a non-hierarchal organizational structure mergers with a company that is significantly hierarchal, this will certainly bring difficulties to the table
• Risk of damaging reputation: customers may view the merger differently from the outside. For example, if a zero-waste, socially responsible company mergers with a manufacturer that does not share a similar ethos, it is likely that customers will stop supporting that company
• Loss of jobs: mergers are carried out to reduce costs and improve efficiency. Unfortunately, this can lead to duplication, which may result in retrenchments

Global Merger Examples

Royal Dutch Petroleum and Shell merger

Petroleum is a lucrative asset. To streamline management, develop a new strategy for oil and gas reserves, and increase asset bases, Royal Dutch Petroleum and Shell merged in 2004, the new entity being Royal Dutch Shell PLC. The merger is valued at approximately $95 billion. Close to 98% of Netherlands shareholders approved the synergy, and 96% of London shareholders shared the same view.

Pfizer and Warner-Lambert

M&A transactions happen in every sector, especially the pharmaceutical industry. The mammoth pharmaceutical company, Pfizer, merged with Warner-Lambert to fuse two of the fastest-growing leaders in the pharma world. Pfizer bought Warner-Lambert for $90.27 billion in stock and set a major competitive standard for the sector. Pfizer is now the largest research-based drug company in the world.

M&A Document Checklist

There are many phases of an M&A deal, and they require meticulous financial, legal, and corporate planning. A skilled M&A lawyer is advisable. Hiring an investment banker that understands the parameters of M&A law is also wise. There will be a buy-side of M&A and a sell-side of M&A, so you will need to vet specific professional advisors depending on the side you are on.

Some standard documentation that will be required in the M&A transaction include:

Articles of incorporation

This will include a new class of shares, any company brand changes, and details on the development.

Letter of Intent

This document will outline the commencement of the transaction. Although this document is non-binding, there may be clauses within it that are. Your financial and legal team should be aware of this.

Acquisition Agreement

The companies involved in the transaction will come into a binding agreement. This will include the terms of deal and primary clauses like conditions, descriptions, contracts, and warranties. This document should be drafted with intricacies to avoid conflict.

If you are unfamiliar with this documentation and you’re not sure where to start, a financial and legal analyst can support you. These documents will form the financial and legal basis of your transaction, so they must be carefully drafted, understood, and audited.

Closing Points: M&A Sellers and Buyers

Mergers and acquisitions are a way for companies to become big fish in a colossal pond – if executed correctly. There are multiple motives for M&A transactions. For buyers, the most common reasons are growth, access to a larger market share, and improving the operational structures of a company. For sellers, these motives are often driven by circumstances where the business is not achieving growth targets, it is unable to access new capital, or new competitors begin to emerge, amongst other reasons. Nonetheless, M&A is not an easy pursuit. It requires skilled lawyers and accountants who specialise in M&A, and it also requires planning, thought and clear goals for the future of your company.

While M&A transactions have their own specificities for each country, one thing is for certain: as our world moves toward digitisation, there has been a high demand for deals in technological sectors, especially with companies that have promising technologically innovative capabilities. While reducing costs does create value, long-term growth will always be interpreted alongside the economic nuances of our time.

If you have further questions, feel free to contact our dedicated team.