Mergers and Acquisitions: Meaning, Types and Difference Between

Now that we've explored the ins and outs of various corporate actions, let's jump into the final segment – Mergers and Acquisitions, commonly referred to as M&A. 

Think of a strategic alliance, when two or more firms come together in what might be seen as an important business deal— that is the very basis for M&A. Such activities form a significant component of an overall strategy to grow, broaden the portfolio or achieve specified strategic business objectives.

So what are Mergers and Acquisitions? Is that a phrase, or are these two different corporate actions? How do they differ from each other? These and many such questions may arise in your mind upon the mention of these terms. In this chapter, we will answer all your questions and equip you with comprehensive knowledge about M&A.

Understanding Mergers

A merger takes place when two companies decide to join forces and create a new entity. It is a collaborative decision where both companies mutually agree to consolidate their operations, assets, and liabilities into a single, newly formed company. 

This teaming up of companies occurs when they wish to acquire a bigger market share, save on costs, explore new areas, bring together similar products, streamline revenues, and ultimately, increase profits for their shareholders.

As a prominent example, the merger of Vodafone and Idea remains a standout moment in the Indian telecom sector. This merger brought together two significant telecommunications players to form Vodafone Idea Limited. With a valuation of around $23 billion, this strategic move aimed to combine the resources of both companies for greater impact and achieve deeper market penetration for the merged entity. 

Why Do Mergers Happen?

Mergers are complex strategic decisions driven by a combination of factors such as shareholder value, market expansion, asset acquisition, tax considerations, competition reduction, and efficient financial resource management. Below are some primary reasons behind companies choosing to merge:

• Shareholder Benefits: One primary driver behind mergers is to deliver value to shareholders. When companies merge, shareholders from the original entities receive shares in the newly formed company, thereby benefiting from increased stock value.
• Market Expansion and Diversification: Mergers offer a pathway for companies to enter new markets or diversify product offerings. This diversification can lead to increased profitability as companies tap into previously untapped customer bases or expand their product/service portfolios.
• Efficient Asset Acquisition: Companies often opt for mergers as a means to swiftly acquire valuable assets. Merging with another company allows for a quicker and more efficient acquisition, which can be crucial in a fast-paced business environment.
• Tax Optimisation: By merging, companies can potentially lower their overall tax liability, resulting in significant cost savings. This becomes particularly relevant when one of the merging companies has substantial tax loss carry-forwards. 
• Competition Elimination and Price Reduction: Mergers can eliminate direct competition, reducing advertising and marketing costs. These cost savings can then be passed on to customers through lower prices. Customers can benefit from reduced prices and potentially increased sales, making mergers a win-win situation.
• Financial Resource Planning: Merging with another company can enhance the planning and utilisation of financial resources. This can result in more efficient management of funds, ensuring that capital is deployed where it can yield the highest returns.

Types of Mergers

Mergers can be categorised into different types:

• Horizontal Merger:

A horizontal merger is a union of companies that operate within the same industry and market segment. This strategic move aims to harness the potential for increased economies of scale within the markets where the merging entities are active. One of the key advantages of horizontal mergers is the potential for significant cost reduction. This reduction results from the merging companies' ability to collaborate on shared resources, such as production facilities, distribution channels, and human resources. For example, when Vodafone India and Idea Cellular merged, it was a horizontal merger in the telecommunications sector.

• Vertical Merger:

A vertical merger occurs when companies from different stages of the production or supply chain come together. This type of merger aims to cut costs within the value chain, which can benefit consumers through lower prices or enhance shareholder returns. For instance, the merger between Zee Entertainment Enterprises Limited (ZEEL), a broadcaster, and Dish TV India Limited, a distribution platform operator, is an example of a vertical merger as they operate in distinct stages of the production/supply chain.

• Conglomerate Merger:

A conglomerate merger involves the merging of companies from unrelated industries. There are two primary types: pure conglomerate mergers, where two firms with no commonalities in their business activities come together, and mixed conglomerate mergers, which occur when organisations, despite having unrelated core businesses, pursue the merger to achieve extensions in products or markets.

• Market Extension Merger:

Market extension mergers take place between companies that sell the same products but operate in different markets. The primary goal of these mergers is to gain access to a larger market and expand their customer base. An example of a market-extension merger is the merger between Mittal Steel and Arcelor Steel, a Luxembourg-based steel company, which aimed to tap into broader global markets while selling the same steel products.

• Product Extension Merger/Congeneric Merger:

Congeneric mergers occur when companies selling different but related products come together to broaden their product offerings. This type of merger typically involves adding a new product to one company's existing product line. An illustrative instance of a congeneric merger is the amalgamation of Thomas Cook India Limited and Sterling Holiday Resorts (India) Limited within the tourism industry. Although both companies operated in tourism, their customer bases and operational processes were unrelated, making it an example of a congeneric merger.

• Reverse Merger:

A reverse merger is a process in which a private company acquires a publicly traded company. In this transaction, the private company merges with the public company, leading to the private company becoming publicly traded without the need for the conventional Initial Public Offering (IPO) process. This approach is frequently employed as a quicker and less intricate method for private companies to gain access to the stock market and become publicly listed.

Understanding Acquisitions

An acquisition, also known as a takeover, is when one company buys a big chunk of another company, basically taking control of it. After the purchase, the company that was bought can either keep doing its own thing or join forces with the buying company. Think about how Mukesh Ambani's Reliance Industries made a big move by buying a bunch of Future Group's retail, wholesale, and logistics businesses, which were worth about $3.4 billion. 

This made Reliance a big player in retail and gave them a chance to grow across the country. Adani Enterprises has announced that their arm called AMG Media Networks has bought a 50.50% share of IANS India Pvt Ltd in December 2023. The market may understand this as an indication that Adani is working towards consolidating its position in the media sector.

Why Do Companies Consider Acquisitions?

Let's look into the reasons that propel companies towards acquisitions.

• Entering New Markets: Acquiring an existing company in a new country or market facilitates easy entry, leveraging the purchased business's personnel, brand, and assets.

• Growth Strategy: Acquisitions are a strategic move for companies facing constraints or resource depletion. This way, they embrace a pathway for sustained growth by incorporating promising firms.

• Capacity Management and Competition Reduction: Companies make acquisitions to address excess capacity and eliminate competition. This way, they optimise resources and focus on the most productive providers.

• Gaining Technology: Acquiring a company with successful implementation of new technology is often more cost-efficient than developing it internally.

• Value Addition and Profit: Companies acquire others with the intent of adding value, improving performance, and making a profit through selling or maintaining them as subsidiaries.

• Competitor Elimination and Market Efficiency: Acquisitions may aim to eliminate competitors, enhancing market efficiency and potentially benefiting consumers.

• Accessing Business Assets: Acquiring a company allows access to valuable assets such as staff, intellectual property rights, equipment, or property.

• Market Sector Expansion: Companies pursue acquisitions to enter or strengthen their position in specific market sectors or locations.
• Synergy with Products or Services: Acquiring companies with synergistic products or services allows for rapid development, leveraging skills to enhance offerings.

Types of Acquisitions

Having navigated the reasons behind acquisitions, let's look at the different types of acquisitions. Acquisitions can be classified based on various factors, including:

1) Relationship Between Acquirer and Target:

Below are the acquisition types based on the relationship between the acquirer and the target:

• Friendly Acquisition:

A takeover that occurs with the mutual consent and agreement of both the acquiring and target companies is termed a friendly acquisition.

• Hostile Takeover:

A hostile takeover involves the acquirer bypassing the target company's management to gain control. This type of acquisition is typically met with resistance.

2) Integration Level

Below are the acquisition types based on the integration level:

• Horizontal Acquisition:

When the acquisition occurs between companies operating in the same industry and market segment, it is called a horizontal acquisition.

• Vertical Acquisition:

An acquisition involving companies in the same supply chain but at different stages of production is called a vertical acquisition.

• Conglomerate Acquisition:

A conglomerate acquisition involves companies from unrelated industries.

• Congeneric acquisition:

When the acquiring company and the acquired company have different products or services but sell to the same customers, the acquisition is congeneric.

3) Payment Method:

Below are the acquisition types based on the payment method:

• Cash Acquisition:

An acquisition that involves cash payment to acquire the target company's shares is termed cash acquisition.

• Stock Acquisition:

A stock acquisition involves the exchange of acquiring the company's stocks for the target company's shares.

• Asset Acquisition:

A corporate action that focuses on acquiring specific assets of the target company rather than its shares is termed asset acquisition.

4) Buyout Strategies:

Below are the acquisition types based on the buyout strategies:

• Leveraged Buyout (LBO):

This acquisition type involves the acquisition of a company, often a public one, using a significant amount of borrowed funds, usually through loans or bonds. The assets of the acquired company are often used as collateral for the borrowed capital.

• Management Buyout (MBO):

A management buyout occurs when the existing management team of a company acquires a significant stake or the entire business. This often happens with the support of external financing, and the management team takes on a more significant role in decision-making and ownership.

Key Differences Between Mergers and Acquisitions

	Mergers	Acquisitions
Definition	Two or more companies combine together to form one entity	When one company takes over another company
Benefiting Party	Both organisations benefit from the union by continuing operations and leveraging collective resources to enhance overall processes in the new organisation.	The buyer gains benefits such as new inventory, increased capital, access to shareholders, new customers, and entry into a new market. The acquiring company usually benefits more, while the purchased company may either cease to exist or continue operating under the acquiring company's name.
Decision maker	A merger occurs through the mutual agreement of the involved parties.	An acquisition may not be mutual; it is termed a hostile takeover if the acquiring company takes over another enterprise without the latter's consent.
Issuing of new shares	The merged company issues new shares.	New shares are not issued.
Power	There is a dilution of power between the involved companies.	The acquiring company exerts absolute power over the acquired one.
Resulting entity	Many mergers result in a new organisation that incorporates the strengths of both original companies. In some cases, companies may blend the names of the two prior businesses, particularly if either is a family business to be used for the new company.	In acquisitions, one company absorbs another, allowing the purchasing company to retain its branding and selectively incorporate elements from the acquired company.

Advantages of Mergers and Acquisitions

M&A offers companies a myriad of advantages as they navigate the business environment. They are below:

• Rapid Expansion and Enhanced Net Worth: The M&A process facilitates swift growth in operations and an elevation of the company's net worth, which concurrently boosts share prices.

• Reduced Competition and Competitive Edge: The amalgamation of assets and capital in the newly formed company diminishes competition and provides a distinct competitive edge in the market.

• Market Dominance and Enhanced Performance: The synergy created by merging two companies positions the new entity to dominate the market, ensuring financial gains, improved performance, and simplifying customer base attraction.

• Tax Benefits: Mergers and acquisitions offer various tax advantages, as losses incurred by one entity can be offset against the profits of another, thereby minimising tax liabilities.

• Expanded Market Share: Collaborative efforts in M&A open doors to increased sales prospects and help expand the business's market reach.

• Access to Industry-Leading Talent: M&A provides an opportunity to acquire top-tier talent from both merging entities. This contributes to an enriched and skilled workforce.

• Exploring New Markets: Engaging in M&A activities allows companies to explore and enter new markets and broadens their geographical footprint.

• Cost Reduction and Increased Profit: The consolidated resources in a merged entity often result in lower costs and increased profitability, enhancing overall financial performance.

• Diversification: M&A facilitates diversification by combining different product lines, services, or market segments. This reduces the vulnerability of businesses to market fluctuations.

• Cornering Future Value: Companies involved in M&A strategically position themselves to capture future value by anticipating trends and adapting to market demands proactively.

• Support During Tough Periods: Mergers and acquisitions provide a supportive framework during challenging economic periods, thereby fostering resilience and adaptability.
• Competitive Edge Over Rivals: Through strategic M&A, companies can deny their rivals access to valuable resources, markets, or key talents. This helps them reinforce their competitive advantage.

Disadvantages of Mergers and Acquisitions

Now that we know the advantages that motivate businesses to consider mergers and acquisitions, let us look at the disadvantages of such decisions:

• Cultural Clashes: Merging two distinct organisational cultures can lead to conflicts, affecting employee morale and productivity.

• Integration Issues: The process of integrating systems, processes, and operations can be complex, leading to disruptions and inefficiencies.

• Uncertainty Among Employees: M&A activities often create uncertainty among employees regarding job security, roles, and the overall work environment.

• Financial Strain: The costs associated with M&A, including legal fees, restructuring, and severance packages, can strain the financial resources of the involved companies.

• Regulatory Challenges: Mergers and acquisitions may face regulatory scrutiny, requiring extensive approvals and compliance with various legal requirements.

• Customer Disruption: Changes in branding, product offerings, or service levels may disrupt existing customer relationships, leading to dissatisfaction and potential loss of business.

• Synergy Failures: The anticipated synergies, such as cost savings and revenue enhancements, may not materialise as expected, impacting the overall success of the merger or acquisition.

• Overvaluation Risks: Paying too much for the acquired company can result in overvaluation risks, negatively affecting the financial performance of the acquiring entity.
• Reputation Damage: Mergers and acquisitions that do not go smoothly may tarnish the reputation of the involved companies, impacting their relationships with stakeholders.

Wrapping It Up

To sum up, mergers and acquisitions are powerful tools for businesses. They help companies grow, become stronger, and do better in the business world. While they offer numerous advantages, the path is not without challenges. 

When undertaken thoughtfully, M&A can propel companies to new heights, fostering innovation and resilience. Despite a few disadvantages, M&A is a dynamic corporate action that, when approached wisely, contributes significantly to a company's growth and longevity.

This brings us to the end of the module. Head to the other modules to deepen your knowledge about the dynamic world of stock markets and investments.