Mergers and Acquisitions: A Definitive Guide

In 2016, the Indian market hit a record high of more than USD 64Billion worth of mergers and acquisitions deals. How much goes to investment bankers, you ask?

Suppose we use 3% fee, investment banks would receive USD 1.9 Billion or more than 120 Billion rupees!

No wonder aspiring bankers are on the lookout to become a big name in the M&A field.

In order to help you get a head start, here are some of the most common topics discussed in the M&A field.

What are Mergers and Acquisitions?

Mergers and Acquisitions are strategic moves made by companies, whereby two companies act as one.  It involves one company buying the shares of another company.

There are different reasons why M&As are done:

  1. Increasing market base – When Facebook attempted to buy Snapchat, the target was to increase the market reach of Facebook. Facebook realized that Snapchat is beating them in the market of the teen generation. In order to cover both young and older generation, Facebook wants Snapchat under its belt.
  2. Acquisition of new technology – Bayer AG’s move to buy Monsanto is to enable Bayer to gain access to agricultural technologies of Monsanto. This would enable Bayer to be a giant in both pharmaceutical and agricultural areas.
  3. Economies of Scale – The bigger the company, the bigger are its opportunities. This is what is in India's Tata Steel's mind when it bought Corus in 2007. Corus is the second largest steel company in Europe by that time.
  4. Reduced workforce – All mergers involves reduction of staff deemed as redundant. Mergers of similar companies result in bigger downsizing than mergers of unrelated companies.

Mergers and acquisitions difference

A merger happens when two companies cease to exist, and one new entity is created. The new entity now represents the two companies.

On the other hand, an acquisition happens when both companies are still existing, but the target company is now part of the umbrella of the acquiring company.

Mergers and Acquisitions

Types of Mergers and Acquisitions

If you are studying M&A, you need a visual guide to help you remember.

Here's a quick guide to the common types of mergers and acquisitions. Print this and paste on your wall. In no time, you’ll surely remember the different kinds.

Types of Mergers and Acquisitions

There are different kinds of mergers and acquisitions.

#1. Horizontal Mergers:

Horizontal mergers usually happen with direct competitors. One company will merge with a company that has similar products and services.

Why do they do this merger?

Horizontal mergers are done in order to decrease or eliminate competition. In a lot of cases, horizontal mergers are blocked by anti-competition laws, that is, governments want free competition in the market. These kinds of mergers could result in higher prices for products and services because there is just one or few that offers such to the market.

Companies also this kind of merger in order to reduce costs through economies of scale. If for example, both companies manufacture air conditioners, one company can eliminate one of its plants and instead outsource it to the plant of the other company. This is easy to do because they have similar products.

Example: Facebook acquires Instagram

#2. Vertical Mergers:

Vertical mergers happen when two companies in the same value chain, but a different stage of production, merge. An example would be a computer hardware company buying a chip manufacturing company.

Why do they do this kind of merger?

Vertical mergers are done in order to reduce costs of the final product. Naturally, if both companies are owned by the same entity, the supplier company will have to reduce its costs. The result is an overall reduction in the product price and better position in the market.

They also do this kind of merger in order to ensure enough supply of a critical raw material. If a company owns the supplier itself, there’s no danger that the supplier will supply to another to the point of putting the manufacturer in a critical position.

Example: eBay acquired PayPal

#3. Concentric mergers:

These happen when two companies that merge, target the same sector of the market, but they don't have similar products.For example, a mobile company can have a concentric merger with a mobile software company. Both companies are not competitors, but rather their products are complimentary – all mobile phones need mobile software.

Why do they do this kind of merger?

Companies undergo concentric mergers in order to offer products or services that are ‘complete packages’. Each product would benefit one another because it’s easier to sell both items together than separately.

Example: Citigroup acquires Travel Insurance

#4. Conglomerate Mergers:

Mergers of this kind involve companies that are totally unrelated in terms of products or value chain. If a food chain business merges with a financial services company, this is a conglomerate merger.

Why do they do this kind of merger?

They do this in order to diversify risks. If for example, a food chain business’ industry is flailing, but the real estate is booming, risk diversification would dictate that the food chain should ride on the growth of real estate in order to reduce overall risk.

Example: Disney acquires Pixar

#5. Low-touch ownership:

This happens when a company acquires another company, but the target company maintains its own identity. It is symbolized by the idea “Don’t merge with a company, partner with it.”

Why do they do this kind of merger?

They do this kind of merger when the target company is doing good on its own. Both companies think that maintaining the identity of the target company is the best thing to do.

Example: Microsoft acquires LinkedIn

#6. Take Over:

A merger which involves the complete purchase of all the shares of the target companies. This type of acquisitions sometimes involves hostility.

Why do they do this kind of merger?

This M&A transaction is done despite criticisms because the buyer company deems that the deal is necessary for it to grow. In 2000, Warner-Lambert's board of directors fought Pfizer's takeover bid for three months.

Ultimately though, the deal was closed at USD 82 Billion.

Example: HP acquires 100% of Compaq

#7. Reverse Merger:

This is when a public company is being bought using a privately held company. When both companies merger, the resulting company is a public company without even undergoing an Initial Public Offering.

Why do they do this kind of merger?

This merger is done in order to have a public company without the difficulties of raising funds through IPOs. Some companies don’t like to issue new shares that’s why they do this merger. In reverse mergers, you can encounter the term ‘backdoor listing’.

Backdoor listing is a method of public listing wherein the company becomes public through reverse mergers.

Example: Merger of ICICI merged with its arm ICICI Bank in 2002

Merger and acquisition process flow chart

 stages involved in M&A

Stages involved in M&A

An M&A transaction involves a lot of preparation before it is being realized.

  1. Company analysis – the first step in an M&A process is to understand the company first. Identify its strengths and weaknesses. What kind of company does it need? Under what merger or acquisition can it thrive?

This also the time to prepare the objective statement with regards to why the company wants an M&A.

  1. Prepare M&A Strategy. The company will now prepare a plan on how the M&A will be pursued. Which industry would they be looking for? What are the criteria?

Here’s a quick view of the things that should be considered in structuring an M&A deal.

Issues to consider when structuring and M&A deal

  1. Prepare a list of targets. Based on the chosen criteria, potential targets will be chosen. Financial and nonfinancial highlights of each company will be presented.
  2. Comparison and valuation of the target companies. Each company will be valued and compared. In this stage, the final target company will be chosen.
  3. Present the proposal to target company. The company will present an executive summary of the proposed transaction to the target company. The executive summary is sort of the teaser for the transaction.
  4. Negotiation of the deal. After the initial communication, negotiations will start. This part is usually the longest stage in an M&A transaction. This could take months and even years.
  5. Due Diligence. Due diligence is the audit of accounting. Due diligence is done in order to verify all the facts presented during the negotiation process. It could include simple verification of financials, calling of customers of the target company or verification of legal documents.
  6. The signing of M&A contracts and other documents. After negotiation and due diligence, the parties are now ready to undertake the merger or acquisition.
  7. Preparation of financing method for the transaction. After determination of final price, the buyer company will determine its financing method. It could either issue debt securities or use its own money.
  8. Closing and settlement of the deal. This is the last stage of the M&A process where all obligations are settled.

Mergers and acquisitions in India

M&A activities in India reached USD 27.62 in 2016. But, this is small when compared with the USD 61.26 Billion of 2017. What contributed to the increase in M&As are more relaxed government rules on M&A and Foreign Direct Inflows.

The Companies Act of 2013 favored M&As, especially that most or all of its provisions are already impacting in 2016. The 2013 Act repeals the 1956 Companies Act. The 2013 Act also provided an easier process of corporate restructurings.

Following were some of the biggest M&A deals in India:

 1. Tata Steel – Corus (USD 12.02 Billion) – 2007 marked the year Tata Steel acquired European steel company Corus. Tata Steel is the largest steel company in India while Corus is number two in Europe.

The acquisition made Tata Steel the fifth largest steel company n the world.

The main target for the acquisition is to give Tata Steel a big access to the European markets. They also intend to have synergies in terms of steel technology.

2. Vodafone-Hutchison Essar (USD 10 Billion) – In the same year Tata Steel bought Corus, 2007, Vodafone bought 52% of Hutchinson Essar.

Vodafone is a leading British telecommunications company. It is also the biggest revenue-producing telecom company in the world. On the other hand, Hutchison is one of the biggest telecom company in India.

Vodafone’s acquisition of Hutchison is to enable Vodafone to enter the emerging market of India.

3. Hindalco – Novelis (USD 6 Billion)– Novelis is Canada’s biggest rolled aluminum manufacturer. When it agreed to be acquired by Hindalco, Hindalco became the largest rolled aluminum manufacturer in the world.

Hindalco is a subsidiary of the Aditya Birla Group.

Mergers and acquisitions Case Study

M&A deals have different reasons why they are pursued. Here are some case studies you can look at in order to understand M&A as a sound business strategy.

Studying actual deals will help you appreciate M&A and its processes. If you can research deeper into these case studies, the better.

  1. Capturing More Synergies in Less Time Spells Success for Global Merger in the Coatings Industry
  2. Expanding Through A Major Acquisition Puts Ingredients Solutions Firm on Path to Global Growth
  3. Taking on Market Leaders Pays Off for Two Giants in the Telecom Industry
  4. Joining Forces Gives Global Prescription Drug Companies a Lock on the Market

Mergers and acquisitions examples

Over the years, a lot of big M&A deals were pursued by companies. Here are some of the world’s biggest M&A deals ever to be made in history.

1. Vodafone’s acquisition of Mannesmann (USD 180.95 Billion)

In 2000, UK based company Vodafone AirTouch PLC bought the German telecom Mannesmann. Despite resistance from German businesses, the deal was ultimately completed. It is now one of the biggest M&A deal in the telecom history.

2. AOL acquired Time Warner (USD 164 Billion)

This M&A ultimately fell apart after 9 years. Time Warner Inc. spun off AOL, Inc. as an independent company in 2009. During that year, AOL, Inc. is failing, one of the reason is that it failed to establish a quality online presence.

3. Pfizer acquires Warner-Lambert (USD90 Billion)

Considered one of the most hostile takeovers in history, Pfizer, Inc. dealt USD 90 Billion in order to buy Warner-Lambert in 2000. For three months, the board of directors of Warner-Lambert fought of the takeover. There was also resistance from the public and government for this merger.

Before Pfizer took over, Warner-Lambert was supposed to be bought by American Home Products Corp. Ultimately, Warner-Lambert walked out, and paid USD 1.8 Billion penalties for breaking-up.

After the merger, Pfizer became the second biggest pharmaceuticals company in the world.

4. AT&T purchases BellSouth (USD 86 Billion)

In order to increase its reach in the rural areas of the US, AT&T acquired BellSouth in 2006. This allowed AT&T to created packaged services that include mobile services, internet connection, and televisions. The merger increases AT&T's foothold in both mobile and wireless arena.

Suggested: Read more about investment banking careers here.

5. Exxon Corp and Mobil Corp merges (USD 81 Billion)

One of the most successful M&A in history, Exxon Mobil Corporation was a merger created in 1999. This merger made the company the biggest one in the world during that time.

The merger was pushed through because of dropping oil prices and increasing competition. In order to survive, both companies deemed the need to be bigger. Despite concerns that the price is too high, Exxon still ultimately bought shares of Mobil Corp.

Just after the merger, the companies estimated savings worth USD 2.8 Billion.

We talked here of the biggest M&A deals. If you want the opposite side, here are some of the Top 10 Disastrous Mergers and Acquisitions in history.

Are you going to M&A?

M&A is surely a lucrative industry to work on. There are lots of profits to be made, especially if you succeed in making a big name.

Here’s another little assignment for you, find a list of M&A transactions and know why the M&A deals were done. This will increase your appreciation of the subject.

Got more questions in your head? Don’t let them stock up there!

Leave your comments below!

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