This post will guide you through mergers and acquisitions, types, purpose, advantage and examples of mergers and acquisitions(M&A).
All I need from you is to read this post from the beginning, until the very end of the post. It will be lot helpful especially if you’re a finance student. Mind you, I’ve tried to make it simpler and also easy to understand and comprehend.
What is merger
This question is very important, you need to first know and understand what merger is all about, before going into the later and which is acquisition.
A Merger or amalgamation is the fusion of two or more existing companies, the resultant single company being either on the name of the existing companies or a completely new company.
In the latter case, the fusion operation may be referred to as consolidation. A merger is normally brought about by an exchange of shares.
An acquisition is the purchase by one company of a controlling interest in the share capital of another existing company. Let’s take a look at the purposes of mergers and acquisitions;
Purposes Of Mergers and Acquisitions
Although the mechanics of combination differ to some extent between mergers and acquisitions, the objectives of the company playing the leading role are likely to be similar in all cases.
Before going into mergers and aquisitions, a company should take a first step towards successful negotiation. The acquiring company should also think out carefully and express in specific term of its own like the below;
1. Corporate Objectives – what it is aiming to achieve in particular as a result of the proposed combination.
2. Acquisition Criteria – what attributes it is looking for in the type of the company with which it seeks to combine.
Types of Mergers
Mergers may be differentiated on the basis of activities, which are added in that process to the existing products or service lines.
This is the combination of two or more firms in the same business or of firms engaged in certain aspects of production process.
Akin to the horizontal merger is concentric merger which involves combination of two or more business entities related by technology, production process of market.
Conglomerate merger is the combination of two or more business unit which are not closely related to each other in aspect of technology production process or market. This is Akin to vertical merger of firms.
Factors that motivate mergers and acquisitions
There are various factors that motivate mergers and acquisitions which i will state below.
1. To attain higher growth rate than ie possible through internal growth strategy.
2. To bring about an increase in the price, earnings ratio and market price of shares.
3. To purchase a limit for better use of investable funds.
4. To have quick access to resources already developed by another firm through innovative management.
5. To reduce competition by acquisition of competing firms.
Again before making a firm executives to agree to its acquisition or take over by another person, firm may be motivated by any of the following below.
1. To have access to resources to improve stability of operations and efficiency of management.
2. To secure increase in the value of owner’s investment in shares.
3. To extend the owing family’s involvement in other business fields by diversifying their holdings and investment.
4. To resolve management problems of dissension among senior executives, succession crisis.
5. To reduce the burden of wealth and property taxes of individual or family owned business or firm.
Advantages of Merger
1. Economic of large scale operation.
2. Better utilization of funds to increase profits.
3. Diversification of activities for stability and higher profit.
4. Achievement of progress and influence in industry.
5. Increased productivity by reason of a more efficient and effective utilization of all resources.
Examples of acquisitions
In 2014 Facebook bought whatsapp for $19 billion
In 2016 Microsoft bought LinkedIn for $26.6 billion
2012 Oando acquired ConocoPhillips for $1.55 billion
Examples of Merger
Access bank and Intercontinental bank merger in 2011
Reason for Merger Failure
1. Failure of management to establish merger objectives, which fit into the overall corporate strategy.
2. Manager’s failure to consider the relative merits of internal and external means of achieving corporate goals.
3. Lack of serious consideration of the financial state.
4. Insufficient familiarity of the management of acquiring firms with the business of the acquired firms.
5. Lack of preparedness with post-merger planning, organization and control.
Guidelines for Effective mergers
1. A separate plan and programmes should be drawn up so as to ensure a smooth transition from the pre-merger to the post merger stage.
2. Executives responsibilities should be realized for necessary implementation of the plan and programmes.
3.The management information system should be redesign for effective management control.
Difference Between Mergers and acquisitions
The difference between mergers and acquisitions is that merger means the fusion of two or more than two companies voluntarily to form a new company. While acquisitions is when one entity purchases the business of another entity.
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