Mergers
& Acquisitions

Mergers and acquisitions (M&A) is the consolidation of companies or assets through various types of financial transactions, including mergers, acquisitions, consolidations, tender offers, purchase of assets, and management acquisitions.

Although mergers and acquisitions (M&A) are used interchangeably, they come with different legal meanings. In a merger, two companies of similar size combine to form a new single entity.

On the other hand, an acquisition is when a larger company acquires a smaller company, thereby absorbing the business of the smaller company. M&A deals can be friendly or hostile, depending on the approval of the target company’s board.

Mergers and acquisitions (M&A) can take place for various reasons, such as:

The common rationale for mergers and acquisitions (M&A) is to create synergies in which the combined company is worth more than the two companies individually. Synergies can be due to cost reduction or higher revenues.

Inorganic growth through mergers and acquisitions (M&A) is usually a faster way for a company to achieve higher revenues as compared to growing organically. A company can gain by acquiring or merging with a company with the latest capabilities without having to take the risk of developing the same internally.

Horizontal merger occurs when companies operating in the same or similar industry combine together. The purpose of a horizontal merger is to more, the resulting entity will attain a higher market share and will gain the power to influence prices. Vertical mergers also lead to higher market power, as the company will be more in control of its supply chain, thus avoiding external shocks in supply.

Companies that operate in cyclical industries feel the need to diversify their cash flows to avoid significant losses during a slowdown in their industry. Acquiring a target in a non-cyclical industry enables a company to diversify and reduce its market risk.

Tax benefits are looked into where one company realizes significant taxable income while another incurs tax loss carryforwards. Acquiring the company with the tax losses enables the acquirer to use the tax losses to lower its tax liability. However, mergers are not usually done just to avoid taxes.