Finance

Mergers And Acquisition: Types And Examples Of Merger

You maybe asking what is mergers and acquisition as a financial student or person or maybe you are not, this post will give you a detailed guide on what is all about. With types and examples of mergers and acquisition.

WWhen one firm acquires another firm  it makes a capital investment. Just as we know, one of the objectives of a firm is maximization of wealth, the firm should proceed only if the capital investment will increase shareholders wealth. The acquisition investment is often substantial in relation to the acquirer’s size proir to the acquisition. Buying a firm is more complicated than buying a piece of equipment. Benefits and cost are more difficult to quantify, and there are special legal, tax and accounting consideration.

What is mergers and acquisition

Mergers and acquisitions

Mergers and acquisition better still merger involves the combination of two companies the acquirers and acquire. The acquirer absorbs all the assets and liabilities of the acquiree and assumes the acquiree’s business. The acquiree loses its independent existence, often becoming a subsidiary of the acquirer. A consolidation should be distinguished from a merger.

In consolidation, two or more companies combine to form an entirely new entity. The distinction between acquirer and acquiree becomes blurred because shares of each of the consolidated companies are exchanged for shares of the new firm. Each of the consolidating companies loses its independent existence often becoming a subsidiaries of the new firm, or in combination become the new firm. A merger involves the acquisition of an entire firm.

Types of Mergers

The following are the different types of Mergers.

  1. Horizontal Merger
  2. Vertical Merger
  3. Conglomerate Merger
  4. Concentric merger

Horizontal Merger

Two companies may decide to merge in order to achieve operating efficiencies or to take advantage of economics of scale. Achieving these operating efficiencies can come as a result of horizontal merger. Horizontal merger involves two companies in the same line of business.

Vertical Merger

A vertical merger involves integrating forward the source of supply in a particular line of business. That is where two or more companies combine and the output of one firm is the input of another. This is also done in order to achieve operating efficiencies.

Conglomerate Merger

A conglomerate merger involves firms in unrelated business. For example, a computer firm might have a skilled product engineering staff and one or more unique products but lack management expertise and software. A second computer firm  perhaps older and software but are not into hardware production. A merger could be mutually beneficial to each only if it enable each firm to obtain what it needed more cheaply than it could if it remained on its own. Conglomerate merger is all about diversification.

Concentric Merger

Concentric mergers take place between firms that serve the same customers in a particular industry, but they don’t offer the same products and services. Their products may be complements, product which go together, but technically not the same products. For example, if a company that produces DVDs mergers with a company that produces DVD players, this would be termed as concentric merger, since DVD players and DVDs are complements products, which are usually purchased together. These are usually undertaken to facilitate consumers, since it would be easier to sell these products together. Also, this would help the company diversify, hence higher profits. Selling one of the products will also encourage the sale of the other, hence more revenues for the company if it manages to increase the sale of one of its product. This would enable business to offer one-stop shopping, and therefore, convenience for consumers. The two companies in this case are associated in some way or the other. Usually they have the production process, business markets or the basic technology in common. It also includes extension of certain product lines. These kinds of mergers offer opportunities for businesses to venture into other areas of the industry reduce risk and provide access to resources and markets unavailable previously.

Examples of Merger

Below are the examples of merger;

1. The very good example of merger is that of exxonmobil. On November 30, 1999, Exxon merged with mobil to become a very popular and powerful multinational oil and gas firm. They are almost on all the oil producing countries.

2. Pfizer and Warner-Lambert. In 2000, pharmaceutical company Pfizer acquired Warner-Lambert for $90 billion. This merger is considered by some experts to be “one of the most hostile in history” because Warner-Lambert was originally to be purchased by consumer goods company American Home Products. However, American Home Products “walked away from the deal with $1.8 billion worth of break-up fees, one of the largest ever payouts for a failed deal,” according to Yahoo Finance.

When Pfizer acquired Warner-Lambert, the result was the second largest drug company in the world. The main reason for the acquisition was ownership of top-selling cholesterol medication Lipitor: “Pfizer had commercial rights to Lipitor, but Pfizer was splitting profits on it with Warner-Lambert, and in 1999, Warner-Lambert sued Pfizer to end their licensing pact,” Business Insider explains. By acquiring Warner-Lambert, Pfizer removed any risk associated with the lawsuit and gained sole control of Lipitor’s skyrocketing profits, which grew to more than $13 billion annually.

3. AT&T and BellSouth. In 2006, AT&T announced its plans to acquire BellSouth. This deal would ultimately cement AT&T’s place as a major player in the wireless industry. In purchasing BellSouth for $86 billion, AT&T was able to expand coverage into rural areas of the United States, giving AT&T an advantage as the mobile phone market expanded. “The firm used its new position to create bundled services that included mobile services along with television and internet connections in an effort to gain new subscribers and dissuade customers from switching to new providers,” Yahoo Finance explains.

What is Acquisition

Mergers and acquisitions

An acquisition is the purchase of one business or company by another company or other business entity. Specific acquisition targets can be identified through myriad avenues including market research, trade expos, sent up from internal business units, or supply chain analysis. Such purchase may be of 100%, or nearly 100%, of the assets or ownership equity of the acquired entity.

Acquisitions are divided into “private” and “public” acquisitions, depending on whether the acquiree or merging company (also termed a target) is or is not listed on a public stock market. Some public companies rely on acquisitions as an important value creation strategy. An additional dimension or categorization consists of whether an acquisition is friendly or hostile.

Whether a purchase is perceived as being a “friendly” one or “hostile” depends significantly on how the proposed acquisition is communicated to and perceived by the target company’s board of directors, employees and shareholders. It is normal for M&A deal communications to take place in a so-called “confidentiality bubble” wherein the flow of information is restricted pursuant to confidentiality agreements.

Examples of Acquisition

The examples of acquisition are;

1. Access bank Plc acquiring Intercontinental bank in 2011 and Diamond Bank in 2018.

2. Microsoft acquiring Skype, Facebook acquiring whatsapp and Instagram.

3. TransCanada acquiring Columbia Pipeline  Group etc.

Types of Acquisition

There are two major types of acquisition i will discuss here and the are;

  • Stock acquisition
  • Asset acquisition

Stock Acquisition

In stock acquisition, the acquirer buys the target’s stock of from the selling shareholders. However, all of the assets and liabilities of the seller are sold upon transfer of the seller’s stock to the acquirer. As such, no tedious valuation of the seller’s individual assets and liabilities is required and the transaction is mechanically simple. The acquirer does not receive a stepped-up tax basis in the acquired net assets but, rather, a carryover basis. Any goodwill created in a stock acquisition is not tax-deductible.

Asset Acquisition

Here, the acquirer buys some or all of the target’s assets/liabilities directly from the seller. If all assets are acquired, the target is liquidated.

In asset acquisition, individually identified assets and liabilities of the seller are sold to the acquirer. The acquirer can choose (“cherry pick”) which specific assets and liabilities it wants to purchase, avoiding unwanted assets and liabilities for which it does not want to assume responsibility. The asset purchase agreement between the buyer and seller will list or describe and assign values to each asset (or liability) to be acquired, including every asset from office supplies to goodwill. Determining the fair value of each asset (or liability) acquired can be mechanically complex and expensive; tedious valuations are costly and title transfer taxes must be paid on each asset transferred. Also, some assets, such as government contracts, may be difficult to transfer without the consent of business partners or regulators.

If the assets to be acquired are not held in a separate legal entity, they must be purchased in an asset sale, rather than a stock sale, unless they can be organized into a separate legal entity prior to sale. Subsidiaries of consolidated companies are often organized as separate legal entities, whereas operating divisions are usually not.

Diffrence Between Mergers and Acquisition

There is indeed a diffrence between merger and acquisition, cause if you read their meaning or definition, you will clearly see the difference. Merger occurs when two separate entities combine forces to create a new, joint organization. Meanwhile, an acquisition refers to the takeover of one entity by another.

merger requires two companies to consolidate into a new entity with a new ownership and management structure (ostensibly with members of each firm). An acquisition takes place when one company takes over all of the operational management decisions of another. The more common distinction to differentiating a deal is whether the purchase is friendly (merger) or hostile (acquisition).

Both mergers and acquisitions have pros and cons. Mergers require no cash to complete but dilute each company’s individual power. Acquisitions require large amounts of cash, but the buyer’s power is absolute.

In an acquisition, a new company does not emerge. Instead, the smaller company is often consumed and ceases to exist with its assets becoming part of the larger company. Acquisitions – sometimes called takeovers – generally carry a more negative connotation than mergers. Due to this reason, many acquiring companies refer to an acquisition as a merger even when it is clearly not.

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That’s all i’ve for now on mergers and acquisitions, types and examples of merger and acquisition and also the difference between the two words.

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