Mergers and Acquisitions
Mergers and acquisitions are one of the biggest aspects of corporate finance. Mergers refer to companies that are purchased for the purpose of merging with other companies to create one large entity. Acquisitions refer to established companies that are taken over by another company.
Mergers and acquisitions are of particular interest to investors because they can cause stock values to rise or fall. They are also vital to business owners because they can result in positive or negative tax consequences when a company they own is merged or acquired.
A lot of people are familiar with the term 'hostile takeover' which refers to a company being taken over against their will. This occurs when a company is being purchased by another company, but the owner doesn't want to sell or doesn't want to be part of the parent company. Hostile takeovers only occur with companies that offer public stock that is purchased and sold via stock markets.
While there are countless reasons for taking over a company, essentially it all boils down to money. Large corporations are often interested in smaller companies that have exceptional technology, brand recognition, customer base, or distribution channels.
Mergers and acquisitions can be very beneficial to everyone involved if the transaction is considered friendly instead of hostile. Parent companies can acquire employees, customers, and technology from the company they purchase. However, takeovers often result in staff reductions and the first person out the door is usually the former CEO.
The changes that occur when two companies merge depend on the type of merger. Although there are many kinds of mergers a few of the more common include: horizontal, vertical, market-extension, product-extension, and conglomeration.
Horizontal mergers refer to companies that directly compete with one another. For example, if a large shoe manufacturer such as Nike or Reebok were to merge with an independently-owned shoe manufacturer, this would be a horizontal merger.
Vertical mergers refer to companies that sell or manufacture items that compliment one another. For instance, a sewing machine manufacturer might merge with a fabric company or a soft drink manufacturer might merge with a company that manufactures snacks.
Market-extension mergers refer to two companies that sell identical products in a different market. This could apply to companies that sell to different territories within the U.S. or abroad.
Product-extension mergers occur when two companies sell related products within the same market. An example would be if a snack company sold potato chips and merged with a company that sells a line of potato chip dips.
Conglomeration involves one company merging with another company that sells or manufactures unrelated products. This might be a camera manufacturer that buys out a boat building company.
The primary difference between mergers and acquisitions is acquisitions require a company to purchase another company by means of cash, stock, or a combination of both. There are also acquisitions that take place when one company purchases another company's assets.
The main purpose of entering into mergers and acquisitions is to create synergy between the two entities and increase the overall value. Historically, the intended synergy fails more often than it works due to devalued stock and differing management styles. However, when mergers are strong they can result in greater sales revenue and increased profits.
For investors to profit with mergers and acquisitions they must consider all the complexities associated with these kinds of deals. We invite you to learn more about the process and how to make the most of these deals via our personal finance and investing blog.
Published on February 20, 2012 at 03:02 PM