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In
corporate finance Corporate finance is the area of finance that deals with sources of funding, the capital structure of corporations, the actions that managers take to increase the Value investing, value of the firm to the shareholders, and the tools and analysis ...
, mergers and acquisitions (M&A) are transactions in which the ownership of
companies A company, abbreviated as co., is a legal entity In law, a legal person is any person A person (plural people or persons) is a being that has certain capacities or attributes such as reason, morality, consciousness or self-consciousness ...

companies
, other business organizations, or their operating units are transferred or consolidated with other entities. As an aspect of
strategic management In the field of , strategic management involves the formulation and implementation of the major goals and initiatives taken by an 's managers on behalf of stakeholders, based on consideration of and an assessment of the internal and external ...
, M&A can allow enterprises to grow or downsize, and change the nature of their business or competitive position. From a legal point of view, a merger is a legal consolidation of two entities into one, whereas an acquisition occurs when one entity takes ownership of another entity's
share capital __NOTOC__ A corporation A corporation is an organization—usually a group of people or a company—authorized by the State (polity), state to act as a single entity (a legal entity recognized by private and public law "born out of statute"; ...
, equity interests or
asset In financial accounting Financial accounting is the field of accounting Accounting or Accountancy is the measurement, processing, and communication of financial and non financial information about economic entity, economic entities such a ...
s. From a commercial and economic point of view, both types of transactions generally result in the consolidation of assets and
liabilities Liability may refer to: Law * Legal liability, in both civil and criminal law ** Public liability, part of the law of tort which focuses on civil wrongs ** Product liability, the area of law in which manufacturers, distributors, suppliers, re ...
under one entity, and the distinction between a "merger" and an "acquisition" is less clear. A transaction legally structured as an acquisition may have the effect of placing one party's business under the indirect ownership of the other party's
shareholder A shareholder (in the United States often referred to as stockholder) of a is an or (such as another , a , a or ) that is registered by the corporation as the legal owner of of the of a or . Shareholders may be referred to as members of a ...
s, while a transaction legally structured as a merger may give each party's shareholders partial ownership and control of the combined enterprise. A deal may be
euphemistically A euphemism () is an innocuous word or expression used in place of one that may be found Profanity, offensive or suggest something unpleasant. Some euphemisms are intended to amuse, while others use bland, inoffensive terms for concepts that the us ...
called a ''merger of equals'' if both
CEOs Kea ( el, Κέα), also known as Tzia ( el, Τζια) and in antiquity Antiquity or Antiquities may refer to Historical objects or periods Artifacts * Antiquities, objects or artifacts surviving from ancient cultures Eras Any period before t ...
agree that joining together is in the best interest of both of their companies, while when the deal is unfriendly (that is, when the management of the target company opposes the deal) it may be regarded as an "acquisition".


Acquisition

An acquisition/takeover is the
purchase Purchasing is the process a business or organization uses to acquire Good (economics), goods or Service (economics), services to accomplish its goals. Although there are several organizations that attempt to set standards in the purchasing proces ...

purchase
of one business or company by another company or other business entity. Specific acquisition targets can be identified through myriad avenues including market research, trade expos, sent up from internal business units, or supply chain analysis. Such purchase may be of 100%, or nearly 100%, of the assets or ownership equity of the acquired entity. Consolidation/amalgamation occurs when two companies combine to form a new enterprise altogether, and neither of the previous companies remains independently. Acquisitions are divided into "private" and "public" acquisitions, depending on whether the acquiree or merging company (also termed a ''target'') is or is not listed on a public stock market. Some public companies rely on acquisitions as an important value creation strategy. An additional dimension or categorization consists of whether an acquisition is '' friendly'' or '' hostile''. Achieving acquisition success has proven to be very difficult, while various studies have shown that 50% of acquisitions were unsuccessful. "Serial acquirers" appear to be more successful with M&A than companies who make an acquisition only occasionally (see Douma & Schreuder, 2013, chapter 13). The new forms of buy out created since the crisis are based on serial type acquisitions known as an ECO Buyout which is a co-community ownership buy out and the new generation buy outs of the MIBO (Management Involved or Management & Institution Buy Out) and MEIBO (Management & Employee Involved Buy Out). Whether a purchase is perceived as being a "friendly" one or "hostile" depends significantly on how the proposed acquisition is communicated to and perceived by the target company's board of directors, employees and shareholders. It is normal for M&A deal communications to take place in a so-called "confidentiality bubble" wherein the flow of information is restricted pursuant to confidentiality agreements. In the case of a friendly transaction, the companies cooperate in negotiations; in the case of a hostile deal, the board and/or management of the target is unwilling to be bought or the target's
board Board or Boards may refer to: Flat surface * Lumber, or other rigid material, milled or sawn flat ** Plank (wood) ** Cutting board ** Sounding board, of a musical instrument * Cardboard (paper product) * Paperboard *Corrugated fiberboard *Fiberbo ...
has no prior knowledge of the offer. Hostile acquisitions can, and often do, ultimately become "friendly", as the acquiror secures endorsement of the transaction from the board of the acquiree company. This usually requires an improvement in the terms of the offer and/or through negotiation. "Acquisition" usually refers to a purchase of a smaller firm by a larger one. Sometimes, however, a smaller firm will acquire management control of a larger and/or longer-established company and retain the name of the latter for the post-acquisition combined entity. This is known as a
reverse takeover A reverse takeover (RTO), reverse merger, or reverse Initial public offering, IPO is the acquisition of a private company by an existing public company so that the private company can bypass the lengthy and complex process of going public. Someti ...
. Another type of acquisition is the
reverse merger A reverse takeover (RTO), reverse merger, or reverse IPO An initial public offering (IPO) or stock market launch is a public offering A public offering is the offering of securities of a company or a similar corporation to the public. Generally ...
, a form of transaction that enables a
private company A privately held company or private company is a company which does not offer or trade its company stock In finance, stock (also capital stock) consists of all of the shares In financial markets A financial market is a market in whi ...
to be publicly listed in a relatively short time frame. A reverse merger occurs when a privately held company (often one that has strong prospects and is eager to raise financing) buys a publicly listed shell company, usually one with no business and limited assets. The combined evidence suggests that the shareholders of acquired firms realize significant positive "abnormal returns" while shareholders of the acquiring company are most likely to experience a negative wealth effect. The overall net effect of M&A transactions appears to be positive: almost all studies report positive returns for the investors in the combined buyer and target firms. This implies that M&A creates economic value, presumably by transferring assets to management teams that operate them more efficiently (see Douma & Schreuder, 2013, chapter 13). There are also a variety of structures used in securing control over the assets of a company, which have different tax and regulatory implications: *The buyer buys the shares, and therefore control, of the target company being purchased. Ownership control of the company in turn conveys effective control over the assets of the company, but since the company is acquired intact as a
going concernA going concern is a business Business is the activity of making one's living or making money by producing or buying and selling Product (business), products (such as goods and services). Simply put, it is "any activity or enterprise entered int ...
, this form of transaction carries with it all of the liabilities accrued by that business over its past and all of the risks that company faces in its commercial environment. *The buyer buys the assets of the target company. The cash the target receives from the sell-off is paid back to its shareholders by dividend or through liquidation. This type of transaction leaves the target company as an empty shell, if the buyer buys out the entire assets. A buyer often structures the transaction as an asset purchase to "cherry-pick" the assets that it wants and leave out the assets and liabilities that it does not. This can be particularly important where foreseeable liabilities may include future, unquantified damage awards such as those that could arise from litigation over defective products,
employee benefits Employee benefits and (especially in British English British English (BrE) is the standard dialect of the English language English is a West Germanic languages, West Germanic language first spoken in History of Anglo-Saxon England ...
or terminations, or environmental damage. A disadvantage of this structure is the tax that many jurisdictions, particularly outside the United States, impose on transfers of the individual assets, whereas stock transactions can frequently be structured as like-kind exchanges or other arrangements that are tax-free or tax-neutral, both to the buyer and to the seller's shareholders. The terms "
demerger A demerger is a form of corporate restructuring in which the entity's business operations Business operations is the ''harvesting'' of value from assets owned by a business. Assets can be either ''tangible property, physical'' or ''intangible as ...
", "
spin-off A spin-off is something that was created as a byproduct of something else. Types of spin-offs include: *Spin-off (media), a new media product derived from an existing product or franchise *Corporate spin-off, a type of corporate transaction formin ...
" and "spin-out" are sometimes used to indicate a situation where one company splits into two, generating a second company which may or may not become separately listed on a stock exchange. As per knowledge-based views, firms can generate greater values through the retention of knowledge-based resources which they generate and integrate. Extracting technological benefits during and after acquisition is ever challenging issue because of organizational differences. Based on the content analysis of seven interviews authors concluded five following components for their grounded model of acquisition: #Improper documentation and changing implicit knowledge makes it difficult to share information during acquisition. #For acquired firm symbolic and cultural independence which is the base of technology and capabilities are more important than administrative independence. #Detailed knowledge exchange and integrations are difficult when the acquired firm is large and high performing. #Management of executives from acquired firm is critical in terms of promotions and pay incentives to utilize their talent and value their expertise. #Transfer of technologies and capabilities are most difficult task to manage because of complications of acquisition implementation. The risk of losing implicit knowledge is always associated with the fast pace acquisition. An increase in acquisitions in the global business environment requires enterprises to evaluate the key stake holders of acquisition very carefully before implementation. It is imperative for the acquirer to understand this relationship and apply it to its advantage.
Employee retentionEmployee retention refers to the ability of an organization to retain its employee Employment is a relationship between two party (law), parties, usually based on employment contract, contract where work is paid for, where one party, which may be ...
is possible only when resources are exchanged and managed without affecting their independence.


Legal structures

Corporate acquisitions can be characterized for legal purposes as either "asset purchases" in which the seller sells business assets to the buyer, or "equity purchases" in which the buyer purchases equity interests in a target company from one or more selling shareholders. Asset purchases are common in technology transactions where the buyer is most interested in particular
intellectual property Intellectual property (IP) is a category of property Property is a system of rights that gives people legal control of valuable things, and also refers to the valuable things themselves. Depending on the nature of the property, an owner of ...
rights but does not want to acquire liabilities or other contractual relationships. An asset purchase structure may also be used when the buyer wishes to buy a particular division or unit of a company which is not a separate legal entity. There are numerous challenges particular to this type of transaction, including isolating the specific assets and liabilities that pertain to the unit, determining whether the unit utilizes services from other units of the selling company, transferring employees, transferring permits and licenses, and ensuring that the seller does not compete with the buyer in the same business area in the future. Structuring the sale of a financially distressed company is uniquely difficult due to the treatment of non-compete covenants, consulting agreements, and business goodwill in such transactions.


Types

Mergers, asset purchases and equity purchases are each taxed differently, and the most beneficial structure for tax purposes is highly situation-dependent. One hybrid form often employed for tax purposes is a triangular merger, where the target company merges with a
shell company A shell corporation is a company A company, abbreviated as co., is a Legal personality, legal entity representing an association of people, whether Natural person, natural, Legal personality, legal or a mixture of both, with a specific obje ...
wholly owned by the buyer, thus becoming a subsidiary of the buyer. In a "forward triangular merger", the buyer causes the target company to merge into the subsidiary; a "reverse triangular merger" is similar except that the subsidiary merges into the target company. Under the U.S.
Internal Revenue Code The Internal Revenue Code (IRC), formally the Internal Revenue Code of 1986, is the domestic portion of federal statutory tax law in the United States, published in various volumes of the United States Statutes at Large The ''United States Sta ...

Internal Revenue Code
, a forward triangular merger is taxed as if the target company sold its assets to the shell company and then liquidated, whereas a reverse triangular merger is taxed as if the target company's shareholders sold their stock in the target company to the buyer.


Documentation

The documentation of an M&A transaction often begins with a
letter of intent A letter of intent (LOI or LoI, or Letter of Intent) is a document outlining the understanding between two or more parties which they intend to formalize in a legally binding agreement. The concept is similar to a heads of agreement, term sheet ...
. The letter of intent generally does not bind the parties to commit to a transaction, but may bind the parties to confidentiality and exclusivity obligations so that the transaction can be considered through a
due diligence Due diligence is the investigation or exercise of care that a reasonable business or person is normally expected to take before entering into an agreement or contract with another party or an act with a certain standard of care Standard may re ...
process involving lawyers, accountants, tax advisors, and other professionals, as well as business people from both sides. After due diligence is complete, the parties may proceed to draw up a definitive agreement, known as a "merger agreement", "share purchase agreement" or "asset purchase agreement" depending on the structure of the transaction. Such contracts are typically 80 to 100 pages long and focus on five key types of terms: *Conditions, which must be satisfied before there is an obligation to complete the transaction. Conditions typically include matters such as regulatory approvals and the lack of any material adverse change in the target's business. * Representations and warranties by the seller with regard to the company, which are claimed to be true at both the time of signing and the time of closing. Sellers often attempt to craft their representations and warranties with knowledge qualifiers, dictating the level of knowledge applicable and which seller parties' knowledge is relevant. Some agreements provide that if the representations and warranties by the seller prove to be false, the buyer may claim a refund of part of the purchase price, as is common in transactions involving privately held companies (although in most acquisition agreements involving public company targets, the representations and warranties of the seller do not survive the closing). Representations regarding a target company's net working capital are a common source of post-closing disputes. *
Covenant Covenant may refer to: Religion * Covenant (religion) In religion, a covenant is a formal alliance or agreement made by God with a religious community or with humanity in general. The concept, central to the Abrahamic religions The Abraha ...
s, which govern the conduct of the parties, both before the closing (such as covenants that restrict the operations of the business between signing and closing) and after the closing (such as covenants regarding future income tax filings and tax liability or post-closing restrictions agreed to by the buyer and seller parties). *Termination rights, which may be triggered by a breach of contract, a failure to satisfy certain conditions or the passage of a certain period of time without consummating the transaction, and fees and damages payable in case of a termination for certain events (also known as breakup fees). *Provisions relating to obtaining required shareholder approvals under state law and related SEC filings required under federal law, if applicable, and terms related to the mechanics of the legal transactions to be consummated at closing (such as the determination and allocation of the purchase price and post-closing adjustments (such as adjustments after the final determination of working capital at closing or earnout payments payable to the sellers), repayment of outstanding debt, and the treatment of outstanding shares, options and other equity interests). *An indemnification provision, which provides that an indemnitor will indemnify, defend, and hold harmless the indemnitee(s) for losses incurred by the indemnitees as a result of the indemnitor's breach of its contractual obligations in the purchase agreement Post-closing, adjustments may still occur to certain provisions of the purchase agreement, including the purchase price. These adjustments are subject to enforceability issues in certain situations. Alternatively, certain transactions use the 'locked box' approach where the purchase price is fixed at signing and based on seller's equity value at a pre-signing date and an interest charge.


Business valuation

The assets of a business are pledged to two categories of stakeholders: equity owners and owners of the business’ outstanding debt. The core value of a business, which accrues to both categories of stakeholders, is called the
Enterprise ValueEnterprise value (EV), total enterprise value (TEV), or firm value (FV) is an economic measure reflecting the market value Market may refer to: *Market (economics) A market is a composition of system A system is a group of Interaction, intera ...
(EV), whereas the value which accrues just to shareholders is the
Equity Value Equity value is the value of a company available to owners or shareholders. It is the enterprise value plus all cash and cash equivalents, short and long-term investments, and less all money market, short-term debt, long-term debt and minority inter ...
(also called
market capitalization Market capitalization, commonly called market cap, is the market value of a publicly traded company A public company, publicly traded company, publicly held company, publicly listed company, or public limited company A public limited compan ...
for publicly listed companies). Enterprise Value reflects a capital structure neutral valuation and is frequently a preferred way to compare value as it is not affected by a company's, or management's, strategic decision to fund the business either through debt, equity, or a portion of both. Five common ways to "triangulate" the enterprise value of a business are: #
asset valuation In finance, valuation is the process of determining the present value (PV) of an asset. Valuations can be done on assets (for example, investments in marketable securities such as stocks, option (finance), options, business enterprises, or intangi ...
: the price paid is the value of the "easily salable parts"; the main approaches to valuing these are
book value In accounting, book value is the value of an asset according to its balance sheet In financial accounting, a balance sheet (also known as statement of financial position or statement of financial condition) is a summary of the financial balances ...
and
liquidation valueLiquidation value is the likely price of an asset when it is allowed insufficient time to sell on the open market, thereby reducing its exposure to potential buyers. Liquidation value is typically lower than fair market value The term fair market va ...
#historical earnings valuation: the price is such that the payment for the business (or return targeted by the investor), would have been supported by the business' ''own'' earnings or cash-flow averaged over the previous 3-5 years; see also
EarnoutEarnout or earn-out refers to a pricing structure in mergers and acquisitions where the sellers must "earn" part of the purchase price based on the performance of the business following the acquisition. Description Earnouts are often employed when t ...
#future maintainable earnings valuation: similarly, but forward looking; see generally, Cash flow forecasting and
Financial forecast A financial forecast is an estimate of future financial outcomes for a company A company, abbreviated as co., is a Legal personality, legal entity representing an association of people, whether Natural person, natural, Legal personality, legal o ...
, and re "maintainability", and
Owner earnings Owner earnings is a valuation method detailed by Warren Buffett Warren Edward Buffett ( ; born August 30, 1930) is an American business magnate, investor, and philanthropist. He is currently the chairman and CEO of Berkshire Hathaway Ber ...
. #
relative valuationRelative valuation also called valuation using multiples is the notion of comparing the price of an asset to the market value of similar assets. In the field of securities investment, the idea has led to important practical tools, which could presuma ...
: the price paid per dollar of earnings or revenue is based on the same multiple for comparable companies and / or recent comparable transactions # discounted cash flow valuation (DCF): the price equates to the value of "all" future cash-flows - with synergies and tax given special attention - as discounted to today; see § Determine cash flow for each forecast period under
Valuation using discounted cash flows Valuation using discounted cash flows (DCF valuation) is a method of estimating the current value of a company based on projected future cash flows adjusted for the time value of money The time value of money is the widely accepted conjecture ...
, which compares M&A DCF models to other cases. Professionals who value businesses generally do not use just one method, but a combination. Valuations implied using these methodologies can prove different to a company's current trading valuation. For public companies, the market based enterprise value and equity value can be calculated by referring to the company's share price and components on its balance sheet. The valuation methods described above represent ways to determine value of a company independently from how the market currently, or historically, has determined value based on the price of its outstanding securities. Most often value is expressed in a Letter of Opinion of Value (LOV) when the business is being valued informally. Formal valuation reports generally get more detailed and expensive as the size of a company increases, but this is not always the case as the nature of the business and the industry it is operating in can influence the complexity of the valuation task. Objectively evaluating the historical and prospective performance of a business is a challenge faced by many. Generally, parties rely on independent third parties to conduct due diligence studies or business assessments. To yield the most value from a business assessment, objectives should be clearly defined and the right resources should be chosen to conduct the assessment in the available timeframe. As synergy plays a large role in the valuation of acquisitions, it is paramount to get the value of synergies right; as briefly alluded to re DCF valuations. Synergies are different from the "sales price" valuation of the firm, as they will accrue to the buyer. Hence, the analysis should be done from the acquiring firm's point of view. Synergy-creating investments are started by the choice of the acquirer, and therefore they are not obligatory, making them essentially
real options Real options valuation, also often termed real options analysis,Adam Borison (Stanford University , mottoeng = "The wind of freedom blows" , type = Private university, Private research university , academic_affiliations = Association of Ameri ...
. To include this real options aspect into analysis of acquisition targets is one interesting issue that has been studied lately.


Financing

Mergers are generally differentiated from acquisitions partly by the way in which they are financed and partly by the relative size of the companies. Various methods of financing an M&A deal exist:


Cash

Payment by cash. Such transactions are usually termed acquisitions rather than mergers because the shareholders of the target company are removed from the picture and the target comes under the (indirect) control of the bidder's shareholders.


Stock

Payment in the form of the acquiring company's stock, issued to the shareholders of the acquired company at a given ratio proportional to the valuation of the latter. They receive stock in the company that is purchasing the smaller subsidiary. See
Stock swap In corporate finance Corporate finance is the area of finance Finance is the study of financial institutions, financial markets and how they operate within the financial system. It is concerned with the creation and management of money and ...
, Swap ratio.


Financing options

There are some elements to think about when choosing the form of payment. When submitting an offer, the acquiring firm should consider other potential bidders and think strategically. The form of payment might be decisive for the seller. With pure cash deals, there is no doubt on the real value of the bid (without considering an eventual earnout). The contingency of the share payment is indeed removed. Thus, a cash offer preempts competitors better than securities. Taxes are a second element to consider and should be evaluated with the counsel of competent tax and accounting advisers. Third, with a share deal the buyer's capital structure might be affected and the control of the buyer modified. If the issuance of shares is necessary, shareholders of the acquiring company might prevent such capital increase at the general meeting of shareholders. The risk is removed with a cash transaction. Then, the balance sheet of the buyer will be modified and the decision maker should take into account the effects on the reported financial results. For example, in a pure cash deal (financed from the company's current account), liquidity ratios might decrease. On the other hand, in a pure stock for stock transaction (financed from the issuance of new shares), the company might show lower profitability ratios (e.g. ROA). However, economic dilution must prevail towards accounting dilution when making the choice. The form of payment and financing options are tightly linked. If the buyer pays cash, there are three main financing options: *Cash on hand: it consumes financial slack (excess cash or unused debt capacity) and may decrease debt rating. There are no major transaction costs. *Issue of debt: It consumes financial slack, may decrease debt rating and increase cost of debt.


Specialist advisory firms

M&A advice is provided by full-service investment banks- who often advise and handle the biggest deals in the world (called
bulge bracket The group of bulge bracket banks comprises the world's largest multi-national investment banks An investment bank is a financial services Financial services are the Service (economics), economic services provided by the finance industry, which ...
) - and specialist M&A firms, who provide M&A only advisory, generally to mid-market, select industries and SBEs. Highly focused and specialized M&A advice investment banks are called
boutique investment bank A boutique investment bank is a investment bank Investment is the dedication of an asset to attain an increase in value over a period of time. Investment requires a sacrifice of some present asset, such as time, money, or effort. In finance ...
s.


Motivation


Improving financial performance or reducing risk

The dominant rationale used to explain M&A activity is that acquiring firms seek improved financial performance or reduce risk. The following motives are considered to improve financial performance or reduce risk: *
Economy of scale 330px, As quantity of production increases from Q to Q2, the average cost of each unit decreases from C to C1. LRAC is the long-run average cost In microeconomics Microeconomics (from Greek prefix ''mikro-'' meaning "small" + ''economics'') ...
: This refers to the fact that the combined company can often reduce its fixed costs by removing duplicate departments or operations, lowering the costs of the company relative to the same revenue stream, thus increasing profit margins. * Economy of scope: This refers to the efficiencies primarily associated with demand-side changes, such as increasing or decreasing the scope of marketing and distribution, of different types of products. *Increased
revenue In accounting Accounting or Accountancy is the measurement ' Measurement is the number, numerical quantification (science), quantification of the variable and attribute (research), attributes of an object or event, which can be used to comp ...
or
market share Market share is the percentage of the total revenue or sales in a market Market may refer to: *Market (economics) *Market economy *Marketplace, a physical marketplace or public market Geography *Märket, an island shared by Finland and Swe ...
: This assumes that the buyer will be absorbing a major competitor and thus increase its market power (by capturing increased market share) to set prices. *
Cross-selling Cross-selling is the action or practice of selling an additional product or service to an existing customer. In practice, businesses define cross-selling in many different ways. Elements that might influence the definition might include the size o ...
: For example, a
bank A bank is a financial institution Financial institutions, otherwise known as banking institutions, are corporation A corporation is an organization—usually a group of people or a company—authorized by the State (polity), stat ...

bank
buying a
stock broker A stockbroker, share holder registered representative (in the United States and Canada), trading representative (in Singapore), or more broadly, an investment broker, investment adviser, financial adviser, wealth manager, or investment professiona ...
could then sell its banking products to the stock broker's customers, while the broker can sign up the bank's customers for brokerage accounts. Or, a manufacturer can acquire and sell complementary products. *
Synergy Synergy is an interaction or cooperation giving rise to a whole that is greater than the simple sum of its parts. The term ''synergy'' comes from the Attic Greek Attic Greek is the dialect of the of , including the ' of . Often called class ...
: For example, managerial economies such as the increased opportunity of managerial specialization. Another example is purchasing economies due to increased order size and associated bulk-buying discounts. *
Tax A tax is a compulsory financial charge or some other type of levy imposed on a taxpayer (an individual or legal entity In law Law is a system A system is a group of Interaction, interacting or interrelated elements that act accord ...
ation: A profitable company can buy a loss maker to use the target's loss as their advantage by reducing their tax liability. In the United States and many other countries, rules are in place to limit the ability of profitable companies to "shop" for loss making companies, limiting the tax motive of an acquiring company. *Geographical or other diversification: This is designed to smooth the earnings results of a company, which over the long term smoothens the stock price of a company, giving conservative investors more confidence in investing in the company. However, this does not always deliver value to shareholders (see below). *Resource transfer: resources are unevenly distributed across firms (Barney, 1991) and the interaction of target and acquiring firm resources can create value through either overcoming
information asymmetry In contract theory In economics, contract theory studies how economic actors can and do construct contractual arrangements, generally in the presence of information asymmetry. Because of its connections with both agency (law), agency and incentiv ...
or by combining scarce resources. *
Vertical integration In microeconomics Microeconomics (from Greek prefix ''mikro-'' meaning "small" + ''economics'') is a branch of economics that studies the behavior of individuals and Theory of the firm, firms in making decisions regarding the allocation o ...
: Vertical integration occurs when an upstream and downstream firm merge (or one acquires the other). There are several reasons for this to occur. One reason is to internalise an
externality In economics Economics () is a social science Social science is the branch A branch ( or , ) or tree branch (sometimes referred to in botany Botany, also called , plant biology or phytology, is the science of plan ...

externality
problem. A common example of such an externality is
double marginalization Double marginalization is a vertical externality that occurs when two firms with market power (i.e., not in a situation of perfect competition In economics Economics () is the social science that studies how people interact with value; in ...
. Double marginalization occurs when both the upstream and downstream firms have monopoly power and each firm reduces output from the competitive level to the monopoly level, creating two deadweight losses. After a merger, the vertically integrated firm can collect one deadweight loss by setting the downstream firm's output to the competitive level. This increases profits and consumer surplus. A merger that creates a vertically integrated firm can be profitable. *Hiring: some companies use acquisitions as an alternative to the normal hiring process. This is especially common when the target is a small private company or is in the startup phase. In this case, the acquiring company simply hires ("acquhires") the staff of the target private company, thereby acquiring its talent (if that is its main asset and appeal). The target private company simply dissolves and few legal issues are involved. *Absorption of similar businesses under single management: similar portfolio invested by two different mutual funds namely united
money market fund A money market fund (also called a money market mutual fund) is an open-ended mutual fund that invests in short-term debt securities such as US Treasury bills and commercial paper. Money market funds are managed with the goal of maintaining a h ...

money market fund
and united growth and income fund, caused the management to absorb united money market fund into united growth and income fund. *Access to hidden or nonperforming assets (land, real estate). *Acquire innovative intellectual property. Nowadays, intellectual property has become one of the core competences for companies. Studies have shown that successful knowledge transfer and integration after a merger or acquisition has a positive impact to the firm's innovative capability and performance. *Killer Acquisitions: Incumbent firms may acquire innovative targets solely to discontinue the target’s innovation projects and preempt future competition. *Exit Strategy: Some start-ups in technological and pharmaceutical industries explicitly cite a potential future acquisition as an “exit strategy” when seeking early VC funding. The potential for an acquisition therefore leads to higher levels of funding for risky or innovative projects. Megadeals—deals of at least one $1 billion in size—tend to fall into four discrete categories: consolidation, capabilities extension, technology-driven market transformation, and going private.


Other types

So, on average and across the most commonly studied variables, acquiring firms' financial performance does not positively change as a function of their acquisition activity. Therefore, additional motives for merger and acquisition that may not add shareholder value include: * Diversification: While this may hedge a company against a downturn in an individual industry it fails to deliver value, since it is possible for individual shareholders to achieve the same hedge by diversifying their portfolios at a much lower cost than those associated with a merger. (In his book ''One Up on Wall Street'', Peter Lynch termed this "diworseification".) * Manager's hubris: manager's overconfidence about expected synergies from M&A which results in overpayment for the target company. The effect of manager's overconfidence on M&A has been shown to hold both for CEOs and board directors. * Empire-building: Managers have larger companies to manage and hence more power. *Manager's compensation: In the past, certain executive management teams had their payout based on the total amount of profit of the company, instead of the profit per share, which would give the team a
perverse incentive A perverse incentive is an incentive that has an unintended and undesirable result that is contrary to the intentions of its designers. The cobra effect is the most direct kind of perverse incentive, typically because the incentive unintentionally r ...
to buy companies to increase the total profit while decreasing the profit per share (which hurts the owners of the company, the shareholders).


Different types


By functional roles in market

The M&A process itself is a multifaceted which depends upon the type of merging companies. *A horizontal merger is usually between two companies in the same business sector. An example of horizontal merger would be if a video game publisher purchases another video game publisher, for instance,
Square Enix is a Japanese entertainment conglomerate and video game company best known for its ''Final Fantasy is a Japanese video game, Japanese anthology science fantasy media franchise created by Hironobu Sakaguchi, and developed and owned by Squa ...

Square Enix
acquiring
Eidos Interactive Square Enix Limited (trade name, trading as Square Enix Europe; formerly Domark Limited and Eidos Interactive Limited) is a British video game publisher, acting as the European subsidiary of Japanese video game company Square Enix group. It manage ...
. This means that synergy can be obtained through many forms such as; increased market share, cost savings and exploring new market opportunities. *A vertical merger represents the buying of supplier of a business. In a similar example, if a video game publisher purchases a video game development company in order to retain the development studio's intellectual properties, for instance,
Kadokawa Corporation , formerly , is a Japanese media conglomerate that was created as a result of the merger of the original Kadokawa Corporation and Dwango (company), Dwango Co., Ltd. on October 1, 2014. History The holding company known today as Kadokawa Corp ...
acquiring
FromSoftware FromSoftware, Inc. is a Japanese video game development company founded in November 1986 and a subsidiary of Kadokawa Corporation. The company is best known for their ''Armored Core'' and ''Souls (series), Souls'' series, including the related ...
. The vertical buying is aimed at reducing overhead cost of operations and economy of scale. *Conglomerate M&A is the third form of M&A process which deals the merger between two irrelevant companies. The relevant example of conglomerate M&A would be if a video game publisher purchases an animation studio, for instance, when
Sega Sammy Holdings (also known as the Sega Sammy Group and generally Sega Sammy, stylized as SSammy) is a Japanese holding company A holding company is a company whose primary business is holding a controlling interest in the securities of other companies. ...
subsidized
TMS Entertainment , formerly known as the , also known as or , is a Japanese animation studio An animation studio is a company producing animated media. The broadest such companies conceive of products to produce, own the physical equipment for production, emplo ...
. The objective is often diversification of goods and services and capital investment.


By business outcome

The M&A process results in the restructuring of a business' purpose, corporate governance and brand identity. *A statutory merger is a merger in which the acquiring company survives and the target company dissolves. The purpose of this merger is to transfer the assets and capital of the target company into the acquiring company without having to maintain the target company as a subsidiary. *A consolidated merger is a merger in which an entirely new legal company is formed through combining the acquiring and target company. The purpose of this merger is to create a new legal entity with the capital and assets of the merged acquirer and target company. Both the acquiring and target company are dissolved in the process.


Arm's length mergers

An arm's length merger is a merger: # approved by disinterested directors and # approved by disinterested stockholders: ″The two elements are complementary and not substitutes. The first element is important because the directors have the capability to act as effective and active bargaining agents, which disaggregated stockholders do not. But, because bargaining agents are not always effective or faithful, the second element is critical, because it gives the minority stockholders the opportunity to reject their agents' work. Therefore, when a merger with a controlling stockholder was: 1) negotiated and approved by a special committee of independent directors; and 2) conditioned on an affirmative vote of a majority of the minority stockholders, the business judgment standard of review should presumptively apply, and any plaintiff ought to have to plead particularized facts that, if true, support an inference that, despite the facially fair process, the merger was tainted because of fiduciary wrongdoing.″


Strategic mergers

A Strategic merger usually refers to long-term strategic holding of target (Acquired) firm. This type of M&A process aims at creating synergies in the long run by increased market share, broad customer base, and corporate strength of business. A strategic acquirer may also be willing to pay a premium offer to target firm in the outlook of the synergy value created after M&A process.


Acqui-hire

The term "acqui-hire" is used to refer to acquisitions where the acquiring company seeks to obtain the target company's talent, rather than their products (which are often discontinued as part of the acquisition so the team can focus on projects for their new employer). In recent years, these types of acquisitions have become common in the technology industry, where major web companies such as
Facebook Facebook is an American online social media and social networking service owned by Meta Platforms. Founded in 2004 by Mark Zuckerberg with fellow Harvard College students and roommates Eduardo Saverin, Andrew McCollum, Dustin Moskovitz, an ...

Facebook
,
Twitter Twitter is an American microblogging Microblogging is an online Broadcasting, broadcast medium that exists as a specific form of blogging. A micro-blog differs from a traditional blog in that its content is typically smaller in both actu ...

Twitter
, and
Yahoo! Yahoo (, styled as yahoo''!'') is an American web services The term Web service (WS) is either: * a service offered by an electronic device to another electronic device, communicating with each other via the World Wide Web, or * a server run ...
have frequently used to add expertise in particular areas to their workforces.


Merger of equals

Merger of equals is often a combination of companies of a similar size. Since 1990, there have been more than 625 M&A transactions announced as mergers of equals with a total value of US$2,164.4 bil. Some of the largest mergers of equals took place during the dot.com bubble of the late 1990s and in the year 2000:
AOL AOL (stylized as Aol., formerly a company known as AOL Inc. and originally known as America Online) is an American web portal and online service provider based in New York City. It is a brand A brand is a name, term, design, symbol or a ...

AOL
and Time Warner (US$164 bil.),
SmithKline Beecham GlaxoSmithKline plc (GSK) is a British multinational pharmaceutical company headquartered in London London is the capital city, capital and List of urban areas in the United Kingdom, largest city of England and the United Kingdom. The c ...

SmithKline Beecham
and Glaxo Wellcome (US$75 bil.), Citicorp and Travelers Group (US$72 bil.). More recent examples this type of combinations are DuPont and Dow Chemical (US$62 bil.) and Praxair and Linde (US$35 bil.).


Research and statistics for acquired organizations

An analysis of 1,600 companies across industries revealed the rewards for M&A activity were greater for consumer products companies than the average company. For the period 2000–2010, consumer products companies turned in an average annual TSR of 7.4%, while the average for all companies was 4.8%. Given that the cost of replacing an executive can run over 100% of his or her annual salary, any investment of time and energy in re-recruitment will likely pay for itself many times over if it helps a business retain just a handful of key players that would have otherwise left. Organizations should move rapidly to re-recruit key managers. It's much easier to succeed with a team of quality players that one selects deliberately rather than try to win a game with those who randomly show up to play.


Brand considerations

Mergers and acquisitions often create brand problems, beginning with what to call the company after the transaction and going down into detail about what to do about overlapping and competing product brands. Decisions about what brand equity to write off are not inconsequential. And, given the ability for the right brand choices to drive preference and earn a price premium, the future success of a merger or acquisition depends on making wise brand choices. Brand decision-makers essentially can choose from four different approaches to dealing with naming issues, each with specific pros and cons: #Keep one name and discontinue the other. The strongest legacy brand with the best prospects for the future lives on. In the merger of
United Airlines United Airlines, Inc. (commonly referred to as United) is a major American airline headquartered in Willis Tower The Willis Tower (formerly known as and commonly referred to as the Sears Tower) is a 108-story Story or stories may refer t ...

United Airlines
and
Continental Airlines Continental Airlines was a Major airlines of the United States, major American airline founded in 1934 and eventually headquartered in Houston, Texas. It had ownership interests and brand partnerships with several carriers. Continental starte ...
, the United brand will continue forward, while Continental is retired. #Keep one name and demote the other. The strongest name becomes the company name and the weaker one is demoted to a divisional brand or product brand. An example is Caterpillar Inc. keeping the
Bucyrus International Bucyrus-Erie was an American surface and underground mining equipment company. It was founded as Bucyrus Foundry and Manufacturing Company in in 1880. Bucyrus moved its headquarters to in 1893. In 1927, Bucyrus merged with the to form Bucyrus- ...
name. #Keep both names and use them together. Some companies try to please everyone and keep the value of both brands by using them together. This can create an unwieldy name, as in the case of
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, which has since changed its brand name to "PwC". #Discard both legacy names and adopt a totally new one. The classic example is the merger of Bell Atlantic with
GTE GTE Corporation, formerly General Telephone & Electronics Corporation (1955–1982), was the largest independent telephone company An independent telephone company was a telephone company providing local service in the United States or Canada th ...
, which became
Verizon Communications Verizon Communications Inc., commonly known as Verizon, is an American multinational telecommunications conglomerate and a corporate component of the Dow Jones Industrial Average. The company is headquartered at 1095 Avenue of the Americas in ...
. Not every merger with a new name is successful. By consolidating into YRC Worldwide, the company lost the considerable value of both Yellow Freight and Roadway Corp. The factors influencing brand decisions in a merger or acquisition transaction can range from political to tactical. Ego can drive choice just as well as rational factors such as brand value and costs involved with changing brands. Beyond the bigger issue of what to call the company after the transaction comes the ongoing detailed choices about what divisional, product and service brands to keep. The detailed decisions about the brand portfolio are covered under the topic
brand architecture In the field of brand managementIn marketing Marketing refers to activities a company A company, abbreviated as co., is a Legal personality, legal entity representing an association of people, whether Natural person, natural, Legal persona ...
.


History

Most histories of M&A begin in the late 19th century United States. However, mergers coincide historically with the existence of companies. In 1708, for example, the
East India Company The East India Company (EIC), also known as the Honourable East India Company (HEIC), East India Trading Company (EITC), the English East India Company or (after 1707) the British East India Company, and informally known as John Company, Com ...
merged with an erstwhile competitor to restore its monopoly over the Indian trade. In 1784, the Italian Monte dei Paschi and Monte Pio banks were united as the Monti Reuniti. In 1821, the
Hudson's Bay Company The Hudson's Bay Company (HBC; french: Compagnie de la Baie d'Hudson) is a Canadian, now American-owned, retail Retail is the sale of goods In economics Economics () is the social science that studies how people interact with ...
merged with the rival
North West Company The North West Company was a fur trading business headquartered in Montreal Montreal ( ; officially Montréal, ) is the second-most populous city in Canada Canada is a country in the northern part of North America. Its Provinces and t ...
.


The Great Merger Movement: 1895–1905

The Great Merger Movement was a predominantly U.S. business phenomenon that happened from 1895 to 1905. During this time, small firms with little market share consolidated with similar firms to form large, powerful institutions that dominated their markets, such as the
Standard Oil Company Standard Oil Co. was an American petroleum, oil-producing, transporting, refining, and marketing company. Established in 1870 by John D. Rockefeller and Henry Flagler as a corporation in Ohio, it was the largest oil refiner in the world at its h ...
, which at its height controlled nearly 90% of the global
oil refinery An oil refinery or petroleum refinery is an industrial process Industrial processes are procedures involving chemical A chemical substance is a form of matter having constant chemical composition and characteristic properties. Some referen ...
industry. It is estimated that more than 1,800 of these firms disappeared into consolidations, many of which acquired substantial shares of the markets in which they operated. The vehicle used were so-called
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. In 1900 the value of firms acquired in mergers was 20% of
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. In 1990 the value was only 3% and from 1998 to 2000 it was around 10–11% of GDP. Companies such as
DuPont DuPont de Nemours, Inc., commonly known as DuPont, is an American company formed by the merger of Dow Chemical The Dow Chemical Company (TDCC) is an American multinational chemical corporation headquartered in Midland, Michigan, United Sta ...

DuPont
, U.S. Steel, and
General Electric General Electric Company (GE) is an American Multinational corporation, multinational Conglomerate (company), conglomerate incorporated in New York State and headquartered in Boston. Until 2021, the company operated through GE Aviation, aviat ...
that merged during the Great Merger Movement were able to keep their dominance in their respective sectors through 1929, and in some cases today, due to growing technological advances of their products,
patents A patent is a type of intellectual property Intellectual property (IP) is a category of property Property is a system of rights that gives people legal control of valuable things, and also refers to the valuable things themselves. Depe ...
, and
brand recognition Brand awareness is the extent to which customers are able to recall or recognize a brand A brand is a name, term, design, symbol or any other feature that identifies one seller's good or service as distinct from those of other sellers. Brands ...
by their customers. There were also other companies that held the greatest market share in 1905 but at the same time did not have the competitive advantages of the companies like
DuPont DuPont de Nemours, Inc., commonly known as DuPont, is an American company formed by the merger of Dow Chemical The Dow Chemical Company (TDCC) is an American multinational chemical corporation headquartered in Midland, Michigan, United Sta ...
and
General Electric General Electric Company (GE) is an American Multinational corporation, multinational Conglomerate (company), conglomerate incorporated in New York State and headquartered in Boston. Until 2021, the company operated through GE Aviation, aviat ...
. These companies such as
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International Paper
and
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saw their market share decrease significantly by 1929 as smaller competitors joined forces with each other and provided much more competition. The companies that merged were mass producers of homogeneous goods that could exploit the efficiencies of large volume production. In addition, many of these mergers were capital-intensive. Due to high fixed costs, when demand fell, these newly merged companies had an incentive to maintain output and reduce prices. However more often than not mergers were "quick mergers". These "quick mergers" involved mergers of companies with unrelated technology and different management. As a result, the efficiency gains associated with mergers were not present. The new and bigger company would actually face higher costs than competitors because of these technological and managerial differences. Thus, the mergers were not done to see large efficiency gains, they were in fact done because that was the trend at the time. Companies which had specific fine products, like fine writing paper, earned their profits on high margin rather than volume and took no part in the Great Merger Movement.


Short-run factors

One of the major short run factors that sparked the Great Merger Movement was the desire to keep prices high. However, high prices attracted the entry of new firms into the industry. A major catalyst behind the Great Merger Movement was the
Panic of 1893 The Panic of 1893 was an economic depression An economic depression is a sustained, long-term downturn in economic activity in one or more economies. It is a more severe economic downturn than a economic recession, recession, which is a slowdown ...
, which led to a major decline in demand for many homogeneous goods. For producers of homogeneous goods, when demand falls, these producers have more of an incentive to maintain output and cut prices, in order to spread out the high fixed costs these producers faced (i.e. lowering cost per unit) and the desire to exploit efficiencies of maximum volume production. However, during the Panic of 1893, the fall in demand led to a steep fall in prices. Another economic model proposed by Naomi R. Lamoreaux for explaining the steep price falls is to view the involved firms acting as
monopolies A monopoly (from Greek language, Greek el, μόνος, mónos, single, alone, label=none and el, πωλεῖν, pōleîn, to sell, label=none) is as described by Irving Fisher, a market with the "absence of competition", creating a situation whe ...
in their respective markets. As quasi-monopolists, firms set quantity where marginal cost equals marginal revenue and price where this quantity intersects demand. When the
Panic of 1893 The Panic of 1893 was an economic depression An economic depression is a sustained, long-term downturn in economic activity in one or more economies. It is a more severe economic downturn than a economic recession, recession, which is a slowdown ...
hit, demand fell and along with demand, the firm's marginal revenue fell as well. Given high fixed costs, the new price was below average total cost, resulting in a loss. However, also being in a high fixed costs industry, these costs can be spread out through greater production (i.e. higher quantity produced). To return to the quasi-monopoly model, in order for a firm to earn profit, firms would steal part of another firm's market share by dropping their price slightly and producing to the point where higher quantity and lower price exceeded their average total cost. As other firms joined this practice, prices began falling everywhere and a price war ensued. One strategy to keep prices high and to maintain profitability was for producers of the same good to collude with each other and form associations, also known as
cartel A cartel is a group of independent market participants who Collusion, collude with each other in order to improve their profits and dominate the market. Cartels are usually associations in the same sphere of business, and thus an alliance of r ...

cartel
s. These cartels were thus able to raise prices right away, sometimes more than doubling prices. However, these prices set by cartels provided only a short-term solution because cartel members would cheat on each other by setting a lower price than the price set by the cartel. Also, the high price set by the cartel would encourage new firms to enter the industry and offer competitive pricing, causing prices to fall once again. As a result, these cartels did not succeed in maintaining high prices for a period of more than a few years. The most viable solution to this problem was for firms to merge, through
horizontal integration Horizontal integration is the process of a company A company, abbreviated as co., is a Legal personality, legal entity representing an association of people, whether Natural person, natural, Legal person, legal or a mixture of both, wit ...
, with other top firms in the market in order to control a large market share and thus successfully set a higher price.


Long-run factors

In the long run, due to desire to keep costs low, it was advantageous for firms to merge and reduce their transportation costs thus producing and transporting from one location rather than various sites of different companies as in the past. Low transport costs, coupled with economies of scale also increased firm size by two- to fourfold during the second half of the nineteenth century. In addition, technological changes prior to the merger movement within companies increased the efficient size of plants with capital intensive assembly lines allowing for economies of scale. Thus improved technology and transportation were forerunners to the Great Merger Movement. In part due to competitors as mentioned above, and in part due to the government, however, many of these initially successful mergers were eventually dismantled. The U.S. government passed the
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in 1890, setting rules against
price fixing #REDIRECT Price fixing#REDIRECT Price fixing Price fixing is an agreement between participants on the same side in a market to buy or sell a product, service, or commodity only at a fixed price, or maintain the market conditions such that the pr ...
and monopolies. Starting in the 1890s with such cases as Addyston Pipe and Steel Company v. United States, the courts attacked large companies for strategizing with others or within their own companies to maximize profits. Price fixing with competitors created a greater incentive for companies to unite and merge under one name so that they were not competitors anymore and technically not price fixing. The economic history has been divided into ''Merger Waves'' based on the merger activities in the business world as:


Objectives in more recent merger waves

During the third merger wave (1965–1989), corporate marriages involved more diverse companies. Acquirers more frequently bought into different industries. Sometimes this was done to smooth out cyclical bumps, to diversify, the hope being that it would hedge an investment portfolio. Starting in the fifth merger wave (1992–1998) and continuing today, companies are more likely to acquire in the same business, or close to it, firms that complement and strengthen an acquirer's capacity to serve customers. In recent decades however, cross-sector convergence has become more common. For example, retail companies are buying tech or e-commerce firms to acquire new markets and revenue streams. It has been reported that convergence will remain a key trend in M&A activity through 2015 and onward. Buyers aren't necessarily hungry for the target companies’ hard assets. Some are more interested in acquiring thoughts, methodologies, people and relationships. Paul Graham recognized this in his 2005 essay "Hiring is Obsolete", in which he theorizes that the free market is better at identifying talent, and that traditional hiring practices do not follow the principles of free market because they depend a lot upon credentials and university degrees. Graham was probably the first to identify the trend in which large companies such as
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Google
,
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or
Microsoft Microsoft Corporation is an American multinational corporation, multinational technology company, technology corporation which produces Software, computer software, consumer electronics, personal computers, and related services. Its best-know ...

Microsoft
were choosing to acquire startups instead of hiring new recruits, a process known as
acqui-hiringAcqui-hiring or Acq-hiring (a portmanteau of "acquisition" and "hiring", also called talent acquisition) is a neologism which describes the process of Mergers and acquisitions, acquiring a company primarily to Recruitment, recruit its employees, rath ...
. Many companies are being bought for their patents, licenses, market share, name brand, research staff, methods, customer base, or culture. Soft capital, like this, is very perishable, fragile, and fluid. Integrating it usually takes more finesse and expertise than integrating machinery, real estate, inventory and other tangibles.


Largest deals in history

The top ten largest deals in M&A history cumulate to a total value of 1,118,963 mil. USD. (1.118 tril. USD).


Cross-border


Introduction

In a study conducted in 2000 by
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Lehman Brothers
, it was found that, on average, large M&A deals cause the domestic
currency A currency, "in circulation", from la, currens, -entis, literally meaning "running" or "traversing" in the most specific sense is money Money is any item or verifiable record that is generally accepted as payment for goods and services ...
of the target corporation to appreciate by 1% relative to the acquirer's local currency. Until 2018, around 280,472 cross-border deals have been conducted, which cumulates to a total value of almost 24,069 bil. USD. The rise of
globalization Globalization, or globalisation (Commonwealth English The use of the English language English is a of the , originally spoken by the inhabitants of . It is named after the , one of the ancient that migrated from , a peninsu ...

globalization
has exponentially increased the necessity for agencies such as the Mergers and Acquisitions International Clearing (MAIC), trust accounts and securities clearing services for Like-Kind Exchanges for cross-border M&A. On a global basis, the value of cross-border mergers and acquisitions rose seven-fold during the 1990s. In 1997 alone, there were over 2,333 cross-border transactions, worth a total of approximately $298 billion. The vast literature on empirical studies over value creation in cross-border M&A is not conclusive, but points to higher returns in cross-border M&As compared to domestic ones when the acquirer firm has the capability to exploit resources and knowledge of the target's firm and of handling challenges. In China, for example, securing regulatory approval can be complex due to an extensive group of various stakeholders at each level of government. In the United Kingdom, acquirers may face pension regulators with significant powers, in addition to an overall M&A environment that is generally more seller-friendly than the U.S. Nonetheless, the current surge in global cross-border M&A has been called the "New Era of Global Economic Discovery". In little more than a decade, M&A deals in China increased by a factor of 20, from 69 in 2000 to more than 1,300 in 2013. In 2014, Europe registered its highest levels of M&A deal activity since the financial crisis. Driven by U.S. and Asian acquirers, inbound M&A, at $320.6 billion, reached record highs by both deal value and deal count since 2001. Approximately 23 percent of the 416 M&A deals announced in the U.S. M&A market in 2014 involved non-U.S. acquirers. For 2016, market uncertainties, including Brexit and the potential reform from a U.S. presidential election, contributed to cross-border M&A activity lagging roughly 20% behind 2015 activity. In 2017, the controverse trend which started in 2015, decreasing total value but rising total number of cross border deals, kept going. Compared on a year on year basis (2016-2017), the total number of cross border deals decreased by -4.2%, while cumulated value increased by 0.6%. Even mergers of companies with headquarters in the same country can often be considered international in scale and require MAIC custodial services. For example, when Boeing acquired McDonnell Douglas, the two American companies had to integrate operations in dozens of countries around the world (1997). This is just as true for other apparently "single-country" mergers, such as the 29 billion-dollar merger of Swiss drug makers Sandoz and Ciba-Geigy (now Novartis).


In emerging countries

M&A practice in emerging countries differs from more mature economies, although transaction management and valuation tools (e.g. DCF, comparables) share a common basic methodology. In China, India or Brazil for example, differences affect the formation of asset price and on the structuring of deals. Profitability expectations (e.g. shorter time horizon, no terminal value due to low visibility) and risk represented by a discount rate must both be properly adjusted. In a M&A perspective, differences between emerging and more mature economies include: i) a less developed system of property rights, ii) less reliable financial information, iii) cultural differences in negotiations, and iv) a higher degree of competition for the best targets. * Property rights: the capacity to transfer property rights and legally enforce the protection of such rights after payment may be questionable. Property transfer through the Stock Purchase Agreement can be imperfect (e.g. no real warranties) and even reversible (e.g. one of the multiple administrative authorizations needed not granted after closing) leading to situations where costly remedial actions may be necessary. When the rule of law is not established, corruption can be a rampant problem. * Information: documentation delivered to a buyer may be scarce with a limited level of reliability. As an example, double sets of accounting are common practice and blur the capacity to form a correct judgment. Running valuation on such basis bears the risk to lead to erroneous conclusions. Therefore, building a reliable knowledge base on observable facts and on the result of focused due diligences, such as recurring profitability measured by EBITDA, is a good starting point. * Negotiation: "Yes" may not be synonym that the parties have reached an agreement. Getting immediately to the point may not be considered appropriate in some cultures and even considered rude. The negotiations may continue to the last minute, sometimes even after the deal has been officially closed, if the seller keeps some leverage, like a minority stake, in the divested entity. Therefore, establishing a strong local business network before starting acquisitions is usually a prerequisite to get to know trustable parties to deal with and have allies. * Competition: the race to acquire the best companies in an emerging economy can generate a high degree of competition and inflate transaction prices, as a consequence of limited available targets. This may push for poor management decisions; before investment, time is always needed to build a reliable set of information on the competitive landscape. If not properly dealt with, these factors will likely have adverse consequences on return-on-investment (ROI) and create difficulties in day-to-day business operations. It is advisable that M&A tools designed for mature economies are not directly used in emerging markets without some adjustment. M&A teams need time to adapt and understand the key operating differences between their home environment and their new market.


Failure

Despite the goal of performance improvement, results from mergers and acquisitions (M&A) are often disappointing compared with results predicted or expected. Numerous empirical studies show high failure rates of M&A deals. Studies are mostly focused on individual determinants. A book by Thomas Straub (2007) "Reasons for frequent failure in Mergers and Acquisitions" develops a comprehensive research framework that bridges different perspectives and promotes an understanding of factors underlying M&A performance in business research and scholarship. The study should help managers in the decision making process. The first important step towards this objective is the development of a common frame of reference that spans conflicting theoretical assumptions from different perspectives. On this basis, a comprehensive framework is proposed with which to understand the origins of M&A performance better and address the problem of fragmentation by integrating the most important competing perspectives in respect of studies on M&A. Furthermore, according to the existing literature, relevant determinants of firm performance are derived from each dimension of the model. For the dimension strategic management, the six strategic variables: market similarity, market complementarities, production operation similarity, production operation complementarities, market power, and purchasing power were identified as having an important effect on M&A performance. For the dimension organizational behavior, the variables acquisition experience, relative size, and cultural differences were found to be important. Finally, relevant determinants of M&A performance from the financial field were acquisition premium, bidding process, and due diligence. Three different ways in order to best measure post M&A performance are recognized: synergy realization, absolute performance, and finally relative performance. Employee turnover contributes to M&A failures. The turnover in target companies is double the turnover experienced in non-merged firms for the ten years after the merger. M&As involving small businesses are particularly problematic and have been found to take longer and cost more than expected with organisation cultural and effective communication with employees being key determinants of success and failure Many M&A fail due to lack of planning or execution of the plan. An empirical research study conducted between 1988-2002 found that “Successful acquisitions, as defined by return on investment and time to market, are more likely to involve complex products but minimal uncertainty about whether the product is functional and whether there is an appetite in the market.” Mandel, Michael and Carew, Diana (2011, November 11). Innovation by Acquisition: New Dynamics of High-Tech Competition. Progressive Policy Institute. https://www.progressivepolicy.org/wp-content/uploads/2011/11/11.2011-Mandel_Carew-Innovation_by_Acquisition-New_Dynamics_of_Hightech_Competition.pdf But failed mergers and acquisitions are caused by “hasty purchases where information platforms between companies were incompatible and the product was not yet tested for release.” A recommendation to resolve these failed mergers is to wait for the product to become established in the market and research has been completed. Deloitte determines most companies do not do their due diligence in determining whether a M&A is the correct move due to these four reasons: * Timing * Cost * Existing knowledge of the industry * Don’t see the value in due diligence Transactions that undergo a due diligence process are more likely to be successful. A considerable body of research suggests that many mergers fail due to human factors such as issues with trust between employees of the two organizations or trust between employees and their leaders. Any M&A transaction, no matter the size or structure, can have a significant impact on the acquiring company. Developing and implementing a robust due diligence process can lead to a much better assessment of the risks and potential benefits of a transaction, enable the renegotiation of pricing and other key terms, and smooth the way towards a more effective integration. M&A can hinder innovation by mismanagement or cultural differences between companies. They can also create bottlenecks when they disrupt the flow of innovation with too many company policies and procedures. Market dominant companies can also be their own demise when presented with an M&A opportunity. Complacency and lack of due diligence may cause the market dominant company to miss the value of a innovative product or service.


See also

*
Competition regulator A competition regulator is the institution that oversees the functioning of the markets. And the Law in which it takes cognizance of situations having any type of impediments and distortions on the markets and correct them is the competition law ...
*
Consolidation (business) In business Business is the activity of making one's living or making money by producing or buying and selling products (such as goods and services). Simply put, it is "any activity or enterprise entered into for profit." Having a busin ...
*
Contingent value rights In corporate finance, Contingent Value Rights (CVR) are Contractual rights, rights granted by an Mergers and acquisitions , acquirer to a company’s shareholders, facilitating the transaction where some uncertainty is inherent. CVRs may be separa ...
*
Control premium A control premium is an amount that a buyer is sometimes willing to pay over the current market price of a publicly traded company in order to acquire a controlling share in that company. If the market perceives that a public company's profit and c ...
* Corporate advisory *
Divestiture In finance Finance is a term for the management, creation, and study of money In a 1786 James Gillray caricature, the plentiful money bags handed to King George III are contrasted with the beggar whose legs and arms were amputated, in ...
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Factoring (finance) Factoring is a financial transaction and a type of debtor finance in which a business ''sells'' its accounts receivable (i.e., invoices) to a third party (called a factor (agent), factor) at a discounting, discount.O. Ray Whittington, CPA, PhD, "F ...
* Fairness opinion *
Initial public offering An initial public offering (IPO) or stock launch is a public offering A public offering is the offering of securities A security is a tradable financial asset. The term commonly refers to any form of financial instrument, but its legal defi ...
* List of bank mergers in United States *
List of largest mergers and acquisitions The following tables list the largest mergers and acquisitions In corporate finance Corporate finance is the area of finance Finance is the study of financial institutions, financial markets and how they operate within the financial s ...
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Management control Control is a function of management which helps to check errors in order to take corrective actions. This is done to minimize deviation from standards and ensure that the stated goals of the organization are achieved in a desired manner. According ...
* Management due diligence *
Mergers and acquisitions in United Kingdom law Mergers and acquisitions in United Kingdom law refers to a body of law that covers companies, labour, and competition, which is engaged when firms restructure their affairs in the course of business. Company law In company law, there are three mai ...
*Merger control *Merger integration *Merger simulation *Second request (law) *Shakeout *Successor company * Swap ratio *Transformational acquisition *Venture capital


References


Further reading

* Denison, Daniel, Hooijberg, Robert, Lane, Nancy, Lief, Colleen, (2012). Leading Culture Change in Global Organizations. "Creating One Culture Out of Many", chapter 4. San Francisco: Jossey-Bass. * * * * * * * * Douma, Sytse & Hein Schreuder (2013). "Economic Approaches to Organizations", chapter 13. 5th edition. London: Pearson. * * * * * * * * * * Reifenberger, Sabine (28 December 2012)
M&A Market: The New Normal
CFO Insight * * * {{DEFAULTSORT:Mergers and acquisitions Mergers and acquisitions, Accounting terminology Corporate finance Human resource management