What is a merger and what makes it different from an acquisition?
Most times, mergers and acquisitions are assumed to be the same thing, but the two are slightly different. In a merger, one company purchases another company completely and may change the acquired company’s operational procedures to be in tandem with how the new company operates since it has been taken over completely. In an acquisition, however, two firms combine to form one legal entity, but each maintains some level of autonomy going forward.
Reasons for mergers/ acquisitions
- Value creation: Sometimes two companies may join forces to increase the value of the company and subsequently the wealth of their shareholders. This is of course occasioned by the reduction in cost of manufacturing and an increase in revenue earned since the effort from both sides is felt.
- Relief on tax payable: The taxman is very unforgiving. In a situation where a company is generating a large amount of taxable income, a merger/ acquisition can be organized with a company that has a sizeable amount of tax losses carried forward. By linking up with the new company, the company with a high taxable income is bound to see that amount drop significantly due to the presence of the tax losses carried forward.
- Diversification: Mergers/ Acquisitions are also undertaken for purposes of diversification. There are several elements that can be diversified in this case, including risk, business operations, or goods and services.
- Increase in financial capacity: On average, a company always has the reality of only a certain amount of wiggle room when it comes to the capacity to finance its operations either through debt or equity markets. In such cases, a company may be limited as to how far it can stretch in way of growth or diversification. Should such a company go through a merger/ acquisition to acquire some more financial muscle to sustain its growth plans?
- Acquisition of assets: There are instances where a company desires to gain ownership of certain assets that cannot be obtained using other methods. In such a case, only a merger/ acquisition would be the probable way for the company to gain ownership of the desired assets.
- Incentives for managers: In certain cases, a merger/ acquisition may be championed by the top managers who stand to harvest bigtime through the process. It could be because of the prestige, power, and they may wield while at the helm of a large company, or the fact that they stand to reap huge remuneration following the merger/ acquisition.
Types of Mergers/ Acquisitions
Mergers/ Acquisitions vary in reason and nature and that is why they exist as different types. Here are three major examples:
Horizontal Merger / Acquisition
In this merger/ acquisition, two companies come together with similar products / services. Their reason for merging here is not necessarily to come up with something new but mainly to expand their range of products in the market. A good example of this would be Hewlett Packard which took over Compaq Computers in 2002 for $24.2 billion mainly because they needed to be the dominant personal computer supplier by combining the PC products of both companies.
Vertical Merger / Acquisition
A vertical merger/ acquisition happens when two companies operating at different levels of the supply chain combine forces. The result of such a symbiotic relationship is that the two companies become better positioned due to improved logistics, varied expertise, consolidated staff, and shortened marketing period and expenses for their respective products. A good example of this would be if a sugar retailer would buy a sugar manufacturing plant.
Concentric Merger / Acquisition
When two companies join forces to share customers but provide different services it is called a concentric merger. In 1989, Sony bought the Columbia Pictures movie studio. Sony manufactured DVD players by then, and in buying the movie studio, it was able to produce films to be played on their DVD players, capitalizing on the market share that Columbia Pictures had.
Conclusion
There are a number of compelling reasons for a company to initiate a merger/ acquisition. Should you decide to take your company down the path of a merger/ acquisition, be sure to do due diligence on your future partner to convince yourself beyond doubt on the viability of the venture.
