Understanding The Basics of Mergers and Acquisitions

Both mergers and acquisitions are a big and important part of the business world. Without them, large portions of the financial world wouldn’t exist, and Wall Street wouldn’t be as successful. These transactions are often newsworthy stories, and can be a huge benefit to the CEO overlooking the deal. 

Basics of M&A

M&A is a term that covers the deal when businesses consolidate their companies and assets through financial deals. M&A is much more than merely mergers and acquisitions, as it can also include consolidations, tender offers, management acquisitions, and purchasing assets. 

Mergers and acquisitions are synonyms and often used interchangeably, even though the mean different things. Mergers are deals when two companies of similar size and scope agree to merge and become a single entity. These companies are more or less equals, even though there are always details underneath that don’t exactly go as smoothly as possible. Acquisitions is when a larger company absorbs a smaller one, and the smaller company ceases to exist legally. All of the target company’s assets will belong to the buyer, and only the buyer’s stocks will continue to be traded.

Merger Variations

There is no one-size-fits-all type of merger that can cover every business out there. That’s why there are several types of mergers. They’re usually classified by the relationship between the merging companies.

  • Vertical Merger – this type of merger happens with types of businesses like production and supply. A prime example would be an ice cream maker with a cone supply company merging.
  • Horizontal Merger – when two companies that are direct competition in the same field and have similar products merge.
  • Conglomeration – this is a merger when two companies have no common business fields.
  • Congeneric Merger – a type of merger that happens when two companies operate in the same field, but in different ways. For example, a cable company and TV manufacturing.
  • Market-extension Merger – when two companies sell similar products but in a different market.
  • Product-extension Merger – when two companies operate in the same market, but different, yet related products.

Acquisition Details

A company can purchase another with cash, stocks, or both. Another example of acquisition is when the larger company only purchases the smaller one’s assets. Then the smaller company becomes a shell, and it will either liquidate or enter a different area of business. 

A reverse merger is when a private company wants to become publicly traded in a short amount of time. When that private company is eager for financing, it buys out a shell company with little to no business and assets, and then merges with it to become an entirely new publicly traded corporation. 

Breaking up

Larger businesses often desire to become smaller, even though that might appear counterintuitive on first glance. It’s another type of corporate restructuring, such as mergers and acquisitions, only this transaction is ended with the financial freedom of a business unit that was previously under the larger company. This is usually done so as the smaller company can focus on its core principles and operations, even if that move can be financially risky.