Mergers and acquisitions are the life blood of investment banking divisions. Anyone working in M&A will inevitably be asked to do both. But what’s the difference? When should a company choose one over the other and how does the investment bank decide on a valuation?
A Merger takes place when two organisations come together to act, for all intents and purposes, as one single organisation. It is the unionization of two entities done with the intention of capitalizing on the strengths, meanwhile eliminating the weaknesses of the organisations in question. The consolidation, as the joining of two organisations is referred to, is not an exchange of interests between the organisations or their owners. No one is paying anyone since nothing is being bought or sold. It is, instead, a coming together of the assets and liabilities of the parties involved in an attempt to benefit from the concept of synergy. The ownership of the newly formed organisation is also shared between the previous owners with shares of ownership redefined as deemed appropriate by the owners of organisations involved.
With a merger, the organisations would usually be aiming for a better overall performance by the joint entity compared with what was being achieved individually by the organisations. While a merger is generally considered a friendlier venture than an acquisition and for good reason as the move is mutually beneficial for the majority of the stakeholders, it may leave a few groups at loss. While the newly formed merged organisation is likely to experience higher income, for example, each of the organisations will have to let go some of their employees in order to avoid duplication of roles. With the aim being increased efficiency, the sections of both organisations deemed lesser efficient will be eliminated. This elimination may be seen in terms of the employees let go by each of the organisations.
With every merger, it’s specific dynamics will determine the winners and losers. For example, if it’s a forward integration with a manufacturer and a retailer of the same industry joining forces, there may be little to no changes in the structures of the organisations as in such a scenario two smaller organisations are simply coming together to make one bigger organisation, that will subsequently have a better market performance. Whereas if a manufacturer is merging with another manufacturer, the production departments like other
departments of the merging organisations, will have to figure out a way of coexisting as a single department. This however couldn’t and wouldn’t mean that there will now be two production managers in the new organisation. So, the question arises who stays and who leaves?
The answer while simple is slightly grim and embedded in reality. As much as a merger is the joining of two groups, and a supposed symbol of blue and yellow coming together to make green, one of the organisations will still have the upper hand. As much as mergers seem beneficial, they are not an easy or desirable affair for any organisation, as most would prefer to snatch the success of their competitors than share it with them. One organisation will dominate the merger and therefore, the employees, the structure, procedures, policies and methods of this organisation are likely to prevail over those of it’s better half.
Acquisition, also known as a Takeover, is one organisation taking over another organisation. The organisation taking over is known as the acquiror and the organisation being taken over is known as the acquiree. An acquisition is more of a transaction than a merger, as the acquiror will pay a consideration to the owners of the acquiree. This consideration is the purchase price of the acquiree, usually comprising of shares and cash. The consideration may also have a contingent component which is only payable in case of the acquired organisation meeting a certain threshold performance, post acquisition.
Being acquired could mean one of two things for an organisation. Either the organisation ceases to exist and it’s assets and liabilities get absorbed into the acquiring organisation or, the organisation continues to operate as it was doing so, pre-acquisition, only now being recognized as a subsidiary of the acquiring organisation. This would mean that the acquired organisation is now controlled and managed by owners/directors of the acquiror. Apart from this, there are no
major changes expected in the middle and lower level structures of the organisation. If the acquiror is satisfied with the administrative and operational efficiency of the acquiree they may not introduce any changes at all.
An acquisition may take place as a result of an organisation facing financial problems, declining performance and/or withdrawing investors. Any of these circumstances would present an opportunity for an interested organisation to acquire the struggling organisation for a relatively low amount of consideration. The acquiror will usually do this in order to get a hold of the assets of the struggling company which could be useful to the acquiror. Examples of such assets including copyrights held by a media production company, research
papers, specialized machinery/equipment, permits, etc. Another reason for acquisition could be expansion by the acquiror into acquiree’s industry, as it would be easier for the acquiror to join the industry by acquiring an already established organisation with brand image and a loyal customer base, instead of starting from scratch.