What are mergers and acquisitions?

Mergers and acquisitions (M&A) have long been strategic tools used by companies to drive growth, expand market reach, and enhance competitiveness.

A merger is a process by which two or more companies combine to form a new organisation. Shares and controlling interests are distributed among all the parties involved.

An acquisition is a process in which one company acquires another. Following this, the acquired company ceases to exist as an independent organisational entity.

Types of mergers and acquisitions

  • A horizontal merger occurs between companies operating in the same market with the aim of increasing market share and enhancing competitiveness
  • A vertical merger combines companies operating at different production stages or within the same supply chain. For example, a manufacturer may purchase a distributor to gain control over the distribution process and ensure a more efficient supply chain
  • A conglomerate merger brings together companies from different industries with the aim of expanding business and the range of products or services. Such a merger allows business diversification, reducing risk by spreading it across different sectors and opening new opportunities for growth
  • A friendly acquisition happens by mutual agreement between the acquiring company and the target company, with the companies working together to successfully complete the process. A decision on a merger or acquisition is usually made based on mutual benefits, strategic alignment, and growth opportunities
  • A hostile takeover takes place when an acquiring company gains control over the target one despite resistance from the latter. This often involves acquiring a significant amount of the target company’s shares and replacing its management

Reasons for mergers and acquisitions

  • Synergy: M&A offer the potential for combined companies to create more value together than they could individually. Synergies are achieved through complementary product portfolios, expanded market presence, shared resources, and enhanced efficiency
  • Market expansion: Acquiring or merging with another company can provide access to new markets and customers. This strategic move allows companies to increase their capabilities and take advantage of emerging growth prospects
  • Cost savings: By combining operations, eliminating redundancies, and optimising processes, M&A can save costs while increasing efficiency. This can be achieved through the consolidation of administrative functions, procurement advantages, and economies of scale
  • Diversification: M&A can help companies to diversify their business portfolios by merging with or acquiring companies in different industries. This reduces the risk associated with dependence on a single market or product, improves resilience, and creates new opportunities for growth

Process of mergers and acquisitions

M&A transactions typically have the following stages:

  1. Planning: Companies initiate the M&A process by identifying potential targets, conducting due diligence, and assessing the feasibility of the merger or acquisition. This stage includes the assessment of strategic alignment, financial implications, and potential synergies
  2. Negotiation: This important stage involves determining the purchase price, payment structure, and post-merger integration plans. Both parties strive to make a deal that maximises value and aligns with their goals
  3. Due diligence: A thorough examination of the target company's financial, legal, and operational aspects is crucial to estimating its value and assessing risks. This process helps the acquiring company make an informed decision and identify potential obstacles
  4. Legal and regulatory approval: Mergers and acquisitions must comply with antitrust laws and obtain necessary regulatory approvals. This stage ensures fair competition and protects the interests of stakeholders
  5. Integration: Successful integration plays a key role in realising the expected benefits of M&A. It involves combining the operations, systems, cultures, and human resources of the merged or acquired companies to achieve synergies, increase efficiency, and drive growth

Consequences of mergers and acquisitions

  • Job losses or restructuring: Mergers and acquisitions often lead to redundancies and consolidation, which may result in layoffs or staff restructuring. However, in some cases, mergers and acquisitions can also create new employment and career opportunities
  • Changes in market dynamics: Mergers and acquisitions can alter industry competition and market concentration. The consolidation of companies can lead to increased market power and changes in pricing dynamics. It could also reshape the structure of the industry
  • Financial implications: The financial performance of the merged or acquired company may be affected, both positively and negatively. M&A can result in cost savings, economies of scale, and revenue synergies, but they can also present challenges of integration and increased debt, which may affect profitability
  • Stakeholder reactions: Different stakeholders, including shareholders, employees, customers, and suppliers, may react differently to mergers and acquisitions depending on their interests and expectations. The approach of shareholders may be to increase shareholder value, while employees and other stakeholders may experience uncertainty or changes in business relationships