Merger and Acquisition is an integral part of a business. We can see lots of Mergers and Acquisitions going on in the market these days. They are beneficial for the market and maintain the competition in the market. Lots of famous companies either merge with small companies to make a better and stronger company. It is not surprising anymore that in 2022, large numbers of companies going for either merger or acquisition to perform better. In this article, we will discuss what are Mergers and Acquisitions and how they both differ from each other. 

What is a Merger?

In the corporate world, a merger means, when two or more companies join each other to make a separate company or a large company. Generally, it’s a voluntary action by companies. Commonly, companies go for a merger when they are unable to compete with competitors alone, but many mergers fall short of expectations. Any merger should be planned and implemented with care and precaution in order to achieve the desired results. There are other reasons as well, for mergers such as getting access to the latest technologies, financial resources, bigger markets, etc. 

The latest example of a merger is Vodaphone and Idea. They both merged and formed a new entity Voda-Idea or VI. Both were having a tough time competing with their biggest competitor JIO, so they joined hands to create a new entity. Merged companies also share the risk involved in the deal. The profit-sharing and investment ratios can vary depending on the company to company. 

Types of Mergers 

There are mainly three types of mergers. 

Horizontal mergers – 

It occurs when two merging firms manufacture a similar product in the same industry and wish to grow into a larger company. Voda-Idea is the greatest example, given both companies were telecom operators. 

Vertical mergers – 

It occurs when two companies, each functioning at a separate stage in the production of the same commodities, join forces for the better supply chain of the final product. 

Conglomerate mergers – 

When two companies operate in separate industries, they join to form a conglomerate. It usually happens when a firm wishes to expand into a new sector or combine with another company in the same industry.

Who benefits from mergers?

Usually, all the merger companies get the benefit of the merger equally. However, sometimes one company gets more benefits than another merged company depending on the type of merger. But ideally, both companies get benefits.

What is an Acquisition?

An Acquisition means when one company buys another company mainly a ‘target’ company. In some cases, a company buys part of the company instead of the whole company. 

For example, Pidilite Industries has acquired Huntsman Advanced Materials Solutions Private Ltd, a subsidiary of the Huntsman Group located in the United States (HAMSPL). The acquirer receives HAMSPL’s Indian subcontinent business as well as the trademark license for exporting the same items to the Middle East, Africa, and ASEAN nations.

Usually, in an acquisition, larger companies buy smaller companies. 

Types of Acquisitions

There are mainly two types of Acquisitions;

Friendly acquisition – 

In this type of acquisition, the acquiring company gives an offer, a price to the company which the acquiring company intends to buy and they can’t refuse because of the offer and are willing to sell the company. The selling company also negotiates for a better deal.

Hostile acquisition or takeover – 

In this type of acquisition, the target company is not willing to sell. But still, acquire company buys the majority shares of the target company from the open market. Also, the promotors are not majority shareholders, so other shareholders let the company be taken over by the acquired company for a better price. This is also, known as a hostile takeover.  

Who benefits from acquisitions?

As we see in the merger both companies get benefits from the merger. Unlike mergers, acquisitions can be beneficial only for one company. Sometimes, in an acquisition, an acquiring company offers a huge amount to the target company which turns out to be more beneficial for the target company than the acquiring company. For example, a giant start-up Face book paid a very high price to WhatsApp for an acquisition. Similarly, if acquiring company can get a target company at a low price then that could be more lucrative for acquiring company. Usually, it is the non-promoter shareholders of the target company that benefits the most.

How to invest in Mergers and Acquisitions?

After understanding Merger and Acquisition thoroughly, the question arises which is the better option for investment, whether mergers or acquisitions?

In a merger, both companies get benefits, but if we take the example of Vodaphone and Idea it was a forced merger by JIO. Both the companies were enjoying profits before JIO, but when JIO entered the market they had only two options either to go out of the business or merge and try to survive in the market. They chose the second option. So, one has to understand will the merged company make more money than what it was making before the merger. If you think it will, it is worth investing but not otherwise.

In the case of acquisitions, only one company makes profits, unlike mergers. It is depending on the price offered by acquiring company to the target company. For example, TATA steel bought Corus at a high price which turned out to be less lucrative on the other hand TATA bought Bhusan steel and that turned out to be a good deal.

The one thing that needs to be considered when making an acquisition is how the firm will pay for it. If it requires taking on too much debt, it might not be a good deal. However, if the corporation can buy with cash on hand and very little debt, it might be a highly profitable purchase. Mergers and Acquisitions can be good options for investment^[1], only if research can be done thoroughly before investing.

The main purpose of Mergers and Acquisitions is rapid profits and improvements in growth. However, there are other reasons as well;

1.     Enhancing the quality of products by enhancing the quality of raw material supply.

2.     Getting access to the latest technologies.

3.     Getting expertise in other areas.

4.     Elimination of competition.

Conclusion – Mergers and Acquisitions

Mergers and Acquisitions are two different forms of conducting business. Many Mergers and Acquisitions fail to live up to the hype. Any merger or acquisition should be planned and implemented with care and precaution in order to achieve the desired results. It is not an easy process, both of them require experience. An experienced person who has done the same before as well can help you achieve a profit with Mergers and Acquisitions. There are a lot of companies or start-ups who are providing the service, one of them is bizadvisor.io. one can take their help if he or she wants.

Read our article:All You Need to Know About Joint Venture Agreement