What is Mergersand acquisitions
Mergers and acquisitions
You must have come across these headlines, “Tata Group has acquired Air India”, Walmart acquires Flipkart”, or “The telecom giants Vodafone and idea have now merged as one business”. Now mergers and acquisitions may sound like a synonym but aren't, so what are mergers and acquisitions? Or why does a company decide to merge?
Mergers and acquisitions definition
Acquisitions and mergers are generally described as taking over or combining two or more companies or assets through various financial transactions, such as consolidations, tender offers, purchasing assets, and management buying companies.
Mergers happen when two separate business entities of similar size and nature join their workforce, financial resources, and tangible and intangible goods as one business entity rather than being owned and operated individually.
Acquisitions happen when one company purchases another company and establishes itself as the new owner.
For example:
The TATA group took over (acquisition by TATA) Air India and continued its operations.
What are the reasons behind mergers and acquisitions?
Firms decide to merge and acquire because of many reasons, some of them are:
Maximizing synergies: Combining companies (M&A) is often motivated by the desire to generate synergies that increase an organization's value. This may result in cost reductions and higher revenue.
Better Growth opportunities: M&As unlock new doors for both firms for growth. It can be in the terms of sales, profits, audience reach etc.
Stronger market control: When two firms of a similar nature combine it results in obtaining a higher market share and forms also gain market power to control prices and retain customers.
What are the forms of integration of Mergers and Acquisitions?
Consolidation: In such type of amalgamation, the parties involved cease to exist completely and a completely new entity is established and operated.
Statutory: The goal of a statutory merger is for the acquirer to buy out the target's assets and liability, following which the target company no longer exists.
Subsidiary: An acquisition by a subsidiary involves the target becoming a subsidiary of the acquirer, but continuing to do business as usual.
Why do companies keep acquiring other businesses?
The key reason behind M&A is growth and competition. If an enterprise faces stiff competition it must innovate and cut costs at the same time. M&A brings the resources of two firms together that help a business sustain itself in the market.
What are the methods of payment in M&A?
During a merger or acquisition firms buy out other firms via:
stocks
cash
a mixed offering of stocks and cash
How are companies valued for an M&A deal?
The valuation process is conducted by the acquirer as well as the target. These valuations are majorly done by the following methods:
Disclaimer: This content is authored by an external agency. The views expressed here are that of the respective authors/ entities and do not represent the views of Economic Times (ET). ET does not guarantee, vouch for or endorse any of its contents nor is responsible for them in any manner whatsoever. Please take all steps necessary to ascertain that any information and content provided is correct, updated and verified. ET hereby disclaims any and all warranties, express or implied, relating to the report and any content therein.
You must have come across these headlines, “Tata Group has acquired Air India”, Walmart acquires Flipkart”, or “The telecom giants Vodafone and idea have now merged as one business”. Now mergers and acquisitions may sound like a synonym but aren't, so what are mergers and acquisitions? Or why does a company decide to merge?
Mergers and acquisitions definition
Acquisitions and mergers are generally described as taking over or combining two or more companies or assets through various financial transactions, such as consolidations, tender offers, purchasing assets, and management buying companies.
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what exactly is merger and acquisition (M&A) if they are not the same?Mergers happen when two separate business entities of similar size and nature join their workforce, financial resources, and tangible and intangible goods as one business entity rather than being owned and operated individually.
Acquisitions happen when one company purchases another company and establishes itself as the new owner.
For example:
The TATA group took over (acquisition by TATA) Air India and continued its operations.
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Vodafone and Idea joined (Merger) as Vi India to form one company.What are the reasons behind mergers and acquisitions?
Firms decide to merge and acquire because of many reasons, some of them are:
Maximizing synergies: Combining companies (M&A) is often motivated by the desire to generate synergies that increase an organization's value. This may result in cost reductions and higher revenue.
Better Growth opportunities: M&As unlock new doors for both firms for growth. It can be in the terms of sales, profits, audience reach etc.
Stronger market control: When two firms of a similar nature combine it results in obtaining a higher market share and forms also gain market power to control prices and retain customers.
What are the forms of integration of Mergers and Acquisitions?
Consolidation: In such type of amalgamation, the parties involved cease to exist completely and a completely new entity is established and operated.
Statutory: The goal of a statutory merger is for the acquirer to buy out the target's assets and liability, following which the target company no longer exists.
Subsidiary: An acquisition by a subsidiary involves the target becoming a subsidiary of the acquirer, but continuing to do business as usual.
Why do companies keep acquiring other businesses?
The key reason behind M&A is growth and competition. If an enterprise faces stiff competition it must innovate and cut costs at the same time. M&A brings the resources of two firms together that help a business sustain itself in the market.
What are the methods of payment in M&A?
During a merger or acquisition firms buy out other firms via:
stocks
cash
a mixed offering of stocks and cash
How are companies valued for an M&A deal?
The valuation process is conducted by the acquirer as well as the target. These valuations are majorly done by the following methods:
- Discounted Cash Flow(DFC) method where they assess future cash flows of the business.
- Comparable company analysis that helps in determining the current value of the targets via relative valuation metrics
- Comparable transaction Analysis where the value of the target is calculated based on previous comparable transactions in the industry.
Disclaimer: This content is authored by an external agency. The views expressed here are that of the respective authors/ entities and do not represent the views of Economic Times (ET). ET does not guarantee, vouch for or endorse any of its contents nor is responsible for them in any manner whatsoever. Please take all steps necessary to ascertain that any information and content provided is correct, updated and verified. ET hereby disclaims any and all warranties, express or implied, relating to the report and any content therein.
