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Mergers and acquisition (M&As) is the process by which a business or company joined another by either combining/cooperating (merging) together or by one purchasing (acquisition) the other.
M&As is a general term that explained the combination of companies or assets via different types of financial transactions such as mergers, consolidation, acquisition, management acquisitions etcetera.
The term M&As also means a specific desk in any financial institution that deals with inactivity of such.
However, both terms (M&As) are often used interchangeably but, they differ in meaning.
While acquisition means a company total purchases of another company and makes itself the new owner of such business then,
A merger means the combination of two companies of the same size to form a new legal firm under the flag of one corporate name.
You might want to read this: "8 Tips For Successful Financial And Tax Due Diligence"
In most cases, the most common difference between M&As is about the size of the companies involved. If the size of one company is significantly larger than the other, then a smaller one will be integrated into the larger one in an acquisition. The smaller company though remains legal and still possesses its natural name and structure but is now under the control of a parent company.
In some instances, the smaller company may stop existing completely that is, if the larger company decides to have the total takeover of the smaller company.
When the companies are similar in size, they will consolidate together to form a new entity in order to improve their workforce. This is how a merger occurs.
While an unfriendly deal, the larger company may not have wished to purchase the small one but left with no choice to do, because it became necessary. This thus is considered an acquisition.
How the transaction is been presented to the shareholders and the board member will also play role in determining if the deal should be considered to be a merger or acquisition.
Recently, some larger businesses that have a hard-working corporate team used a particular term “target acquisition” to look for opportunities to acquire a smaller firm to support and grow their business.
M&As has different types which include vertical, horizontal, market extension, congeneric, product extension and conglomerate.
The outcome of each of these types of M&As differs and depends on the strategies implored like; establishing economies of scale, improving market share, reducing competition, expanding product lines, etcetera.
Each of these types of M&As also has some negative impact that may arise if they are not properly done. Thus, it is necessary to be very careful when choosing to either merge or acquire any business, firm, industry or company.
Therefore, knowing the best type of M&As will ensure your long term goals is achieved in line with the implored strategies through, carefully reviewing both the negative and positive outcome that may arise and as well, seeking the guidance of an expert that is experienced in that aspect.
All the companies on the both sides of an M&As transaction often value the company differently. The seller will always excruciate the value of the firm at the highest price while the buyer will move to bring down the price to the lowest price possible.
Fortunately, a company value can be done by evaluating and studying comparable companies in an industry and by using the following metrics explained below.
Price To Earnings Ratio
In using this metric, the acquiring company will make an offer that will be triple the target company. Evaluating the price to earn for all the stock that is available within the same industry group will then give the acquiring company perfect guidance for what the price to earnings multiple should be.
Discounted Cash Flow
This is another key evaluation metric in M&AS. This metric determines the current value of a particular company according to its total future cash flow.
Enterprise Value To Sales Ratio
This entails, the acquiring company offering multiple of the revenues while being aware of the price to sales ratio of the other companies in the industry.
Some of the most successful and famous examples of M&As deals that have occurred over the years are;
Access/Diamond Merger
The deal was worth $200 million and it was made in March 2019 thus making Access bank absorb Diamond bank to become one of the biggest commercials in Africa
Olam International/Dangote Flour Mills Acquisition
In November 2019, famous Food and Agribusiness company Olam International successfully acquired Dangote Flour Mills PLC through a deal worth N130 billion.
Prudent Energy/Forte Oil Acquisition
The oil and gas firm of Prudent Energy Services completed its acquisition of Forte oil PLC in a deal worth N64.38 billion in June 2019.
Canal+ And Rok Studios Acquisition
French television company, Canal+ in 2019 successfully bought Nigeria's largest production and online streaming company for $50 billion in other to hasten its growth in the African entertainment industry.
Ohara Pharmaceuticals/Fidson
In July 2019, Japanese pharmaceutical company, Ohara acquired a 21.75% worth N700 million stake in Fidson Health-Care.
Exxon And Mobil
The Exxon and Mobil deal is another example of a merger when Exxon and Mobil announce their plan to consolidate with each other in 1998.
The deal closed at a whopping $80 billion and after then, investors have made triple of their money and share has gone over 250%.
Google And Android
Google acquired Android in 2005 for an estimated cost of $50 million in 2005 a period when android is yet to breakthrough.
After the acquisition, Google now became relevant a market that is dominated by Amazon and Apple already.
AT&T And Time Warner
Both companies merged in 2018 to improve their workforce.
AT&T made the first move to purchase Time Warner in 2016 and the deal was completed for $85.4 billion.
Pfizer Acquisition Of Warner Lamber In 2000 For $90 Billion.
Heinz And Kraft
Merger Between Heinz And Kraft In 2016 In A Deal That Worth Approximately $100 Billion.
M&As brings a variety of change to the organization starting from the size of the organization, its stocks, assets, shares and sometimes, the ownership of the organization may change as well. M&As have a significant impact on organizational activities. Although, the impact of M&As ranges from entity to entity and it depends on the structure of the deal.
A corporate merger or acquisition can have a compounding effect on a company’s potential growth and long term objective. Companies buy or merge with another company with an expectation of improving growth, maximizing revenues and defeating competitors. However, M&As move has some significant risks such as, paying or inability to properly integrate the two companies that may lead to its failure.
Below are possible impacts of M&As in a different part of the company:
Mergers and acquisitions can have an economic impact on the workers of the organization especially if the company involved do not have enough financial capacity to sustain the entire employee, Therefore, there will be a need to lay off some staff.
Even the staff that was not affected by the company’s layoff exercised will have to endure an uncomfortable working environment as there will be a change in operation pattern and business procedure. They may suffer from emotional and physical distress.
The numbers of management that may lose their work may even be higher than that of the normal staff. This is because there will be a clash in the culture of the company as a result of M&As. majority of the managerial staff irrespective of their level must adopt this new corporate culture or policies of which the majority may be against.
This impact includes economic impact on the shareholders. The shareholders of the acquired company will benefit more from the acquisition as the acquiring company had to pay a huge amount for the purchase. While the shareholders of the acquiring company suffer a significant loss due to the acquisition premium and accrued.
Competition has been the main reason companies carry out an M&As. The hunger to snap up a company that has an attractive portfolio of assets before a competitor or rival does leads to feeding frenzy in the market.
Market reaction after successful completion of M&As may be positive or negative depending on how market participants perceived the deal and think of how advantageous it is to them. In many cases, the shares of the company usually rise to the level close to that of the acquirer’s offer, assuming of course that the offer represents a premium to the target previous stock price.
In other circumstances, the target company may trade below the announced offer price. This usually happens if part of the purchase consideration is to be made in the acquirer’s share and the stock will thus plummet when the deal is made official.
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Published origninally on 2nd Mar 2022 23:03:29
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