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The Nuts and Bolts of Mergers and Acquisitions


Mergers and acquisitions is a term that strikes fear into the heart of every marketing strategist or businessperson, guaranteed. In an ever-changing world, though, these business arrangements are becoming more accessible and more comfortable to do. Learn the buzzwords behind M&A, examples of successful acquisitions, and advice from industry professionals about your business’ next steps following a merger.

What Are Mergers and Acquisitions?

In short, mergers and acquisitions are corporate consolidations of assets, shares in a company, and entire companies. Although a merger and an acquisition are two different things, they both need two companies to complete and are sometimes synonymous in corporate circles. Mergers are when the board of directors at two companies decide to combine their assets to create a larger company. After the boards of management at both companies agree on the merger, shareholders must concur before the companies complete the merger.

Acquisitions, on the other hand, are when one company acquires the majority share in one firm, which continues to operate on its own. They also both differ in their intent—companies consider mergers to be “friendly” takeovers, while people see acquisitions as “hostile.” Equal mergers are generally uncommon– it is almost unheard of for two similar companies to merge.

Key Terms

Now that you understand the difference between mergers and acquisitions, here are some key terms that companies or business-people will often use when finalizing a deal. Although many people who write business deals fill them with useless jargon, this guide aims to increase transparency around the role of the corporate takeover. These terms describe nearly every aspect of corporate acquisitions, across all industries.

Consolidations

Consolidations are like mergers in that they involve two companies with their boards of directors. Consolidations occur when two companies decide to combine their assets into one company. This move requires the approval from all shareholders. Both companies end up receiving equal shares in the new company.

Tender Offers

Tender offers are when a larger company offers to buy any outstanding shares of a smaller company for a fixed price. Often, these business arrangements lead to mergers. But, especially in the face of dissent from the smaller company’s shareholders, the implication of mergers can be entirely avoided.

Acquisition of Assets

Acquiring the assets of another company generally happens in the face of bankruptcy. The company who is losing its assets must obtain permission from its shareholders before proceeding with the acquisition. In many cases, the company who was selling their stock frequently ends up wholly liquidated after the sale.

Management Acquisition

In this case, members of management within the company are responsible. They buy out controlling shares from within a company, making it private. One notable example of this style of company takeover was the Dell Corporation, whose CEM, Michael Dell, bought majority shares in 2013.

Common Industries for Mergers and Acquisitions

The most common industry for mergers and acquisitions (based on deal value) is the healthcare industry. These deals totaled a whopping 2.64 trillion dollars between 2000 and 2015. The least common sector for mergers and acquisitions is surprisingly retail, coming in at a mere 501 billion dollars over the same period.

Mixed Feelings in Mixed Businesses

When forming a merger or acquisition, be sure to follow what one expert prescribes as his top three rules, among other advice to management. His first rule? Both companies together have more value that they would otherwise have separately. This rule is arguably the most important one–although all three suggestions must be present, he writes. Why would you allow a merger in the first place if you didn’t believe that there was any possibility for combined value?

His second rule echoes the first– the combination of the company’s assets must be set up in such a way that there is potential for-profit generation. In business speak, this is often called synergy. Minimizing risk, increasing total value and combined business strategies are all crucial to understanding and implementing this rule.

Finally, his third rule is this: the monetary value paid to all recipients must motivate them to contribute to the partnership. If you’re not benefiting from a connection, you have no reason to participate. These benefits must be more than the separate companies would have made, for the best results with this rule.

Globalization and Mergers

While nearly 50 percent of mergers in the United States and Europe fail to see their goals come to fruition, companies in developing countries are using mergers to gain access to new markets. These companies are using smaller alliances as stepping stones before bursting onto the global stage. One such example is Indian aluminum manufacturing business Hindalco, which had made bids for companies in its home country, overseas in developing countries, and in Canada before purchasing an American company twice its size. Hindalco also maintains that it doesn’t just acquire assets, but talent as well, which is one way to reduce the perceived hostility of an acquisition.

The Big Explosion of Big Mergers

In the past eleven years, we have seen over 500,000 mergers– and in the last three years alone, we have seen over 150,000 mergers take place. Here’s why that’s important. In the healthcare industry, where most of the deals are taking place, mergers have traditionally been horizontal– hospitals merging with other hospitals, biopharmaceutical companies joining with other biopharmaceutical companies, and so on. However, the recent, 68 million dollars “vertical” purchase of health and dental insurance company Aetna by CVS, a drugstore, and retailer, adds an exciting element to the more traditional takeovers.

On the retail front, one of the industries with fewer takeovers, the battle between “bricks and clicks” is underway– but these mergers are not what you would think. Although the most famous acquisition out of last year was the purchase of upscale grocery retailer Whole Foods by online retailer Amazon, the brick and mortar establishments are fighting back. Walmart has bought jet.com, an online shopping site, and PetSmart recently acquired Chewy.com, a pet-specific shopping site. These remixed assets are proving to be an unusual reaction to the recent e-commerce phenomenon.

Do you have questions about mergers and acquisitions, or want to share your merger and acquisition story? Leave us a comment in the comments below!


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The Nuts and Bolts of Mergers and Acquisitions

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