Mergers and Acquisitions (M&A): Types, Structures, Valuations

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Mergers and Acquisitions: An Introduction

The terms merger and acquisition (M&A) are widely used in business to refer to two different but related types of deals. Businesses frequently take part in mergers and acquisitions to quicken growth and achieve strategic objectives (M&A).

Mergers and acquisitions (M&A) have become more popular as a way to run a business in recent years. This article will cover all you need to know about mergers and acquisitions (M&As), including what they are, why they are essential, and the different types of mergers and acquisitions that exist. Further, we will discuss how mergers and acquisitions are valued and the standard 3-stage M&A model. We will also give some examples of mergers and acquisitions from the real world to help you understand the topic better.

What Are Mergers and Acquisitions (M&A)?

Mergers and acquisitions are two types of business transactions that can significantly affect a company’s growth and market position. A merger is the joining of two or more companies into one. When a new business begins operations, it typically has different offerings, different top-level management, and an altogether different brand. Contrarily, an acquisition occurs when one company purchases another to leverage better and coordinate their respective resources and operations.

Mergers and acquisitions (M&A) are complicated business deals with many moving parts, such as financial, legal, and strategic factors. The rationale behind a merger or acquisition is called “synergy,” It refers to the belief that the combined company will be more valuable than the original one. Moreover, M&A can help organizations grow into new markets, acquire cutting-edge tech access, and reduce market rivalry.

The Importance of Mergers and Acquisitions

Mergers and acquisitions are important business strategies that can significantly impact a company’s growth and success. They can help companies:

• Achieve economies of scale: Merging two or more enterprises allows for economies of scale, enabling the merged business to produce goods or services more efficiently and at lower costs. The merged enterprise can optimize its operations and increase profitability by consolidating resources, expertise, and technology.
• Increase market share: By buying or merging with other companies in the same industry, M&A can help companies get a bigger market share.
• Enter new markets: Mergers and acquisitions (M&A) allow businesses to expand into new markets by acquiring competitors that have already established themselves there.
• Gain access to new technology or intellectual property: With mergers and acquisitions, businesses might acquire cutting-edge equipment or valuable intellectual property to better compete in their industry.
• Reduce competition: M&A can help companies reduce competition by acquiring or merging with other companies in the same industry.

Types of Mergers and Acquisitions

There are several different types of mergers and acquisitions, each with its own unique characteristics and goals. The most common types of mergers and acquisitions include:

1. Horizontal Merger

A horizontal merger occurs when two companies in the same industry merge. A horizontal merger aims to gain market share and reduce competition.

Example: In 2015, brewing giants Anheuser-Busch InBev and SABMiller merged to create the world’s largest beer company.

2. Vertical Merger

A vertical merger occurs when two companies in different stages of the supply chain merge. For example, a company producing raw materials may acquire a company manufacturing finished products.

Example: In 2019, retail giant Walmart acquired online retailer Flipkart to expand its e-commerce capabilities.

 3. Conglomerate Merger

A conglomerate merger occurs when two companies in completely different industries merge. A conglomerate merger aims to diversify the company’s product offerings.

 Example: In 1965, the conglomerate company ITT acquired the Sheraton hotel chain to diversify its business portfolio.

 4. Reverse Merger

A reverse merger occurs when a private company acquires a public company. This allows the private company to become publicly traded without going through the initial public offering (IPO) process.

Example: In 2019, fitness company Peloton completed a reverse merger with the special-purpose acquisition company (SPAC) Highland Merger Corp to become a publicly traded company.

5. Leveraged Buyout

 A leveraged buyout occurs when a company is acquired using a significant amount of debt. The goal is to use the target company’s assets to pay off the debt.

 Example: In 2007, private equity firm Kohlberg Kravis Roberts & Co. (KKR) completed a leveraged buyout of the Texas utility company TXU Corp.

The Valuation of Mergers and Acquisitions

1. Market Value Approach

This strategy compares the price offered by the firm making the acquisition is being offered by the firm doing the acquiring to the current market value of the company that is the target of the acquisition. The purpose of this analysis is to establish whether or not the acquisition will be profitable for the acquirer as an investment.

 2. Income Approach

This approach looks at the possible future profits of the company in question and figures out how much money those profits are worth. The objective is to ascertain the equitable valuation of the subject organization. 

 3. Asset-Based Approach

This approach centers on evaluating the worth of the intended corporation’s resources, including material assets like land and machinery and immaterial assets like intellectual property and brand equity.

 4. Discounted Cash Flow (DCF) Analysis

DCF analysis strategy involves investigating the potential monetary inflows that will be received by the targeted entity in the future and determining the value that these inflows have at present. This exercise aims to determine whether or not the firm has been fairly valued, taking into account its potential earnings in the future.

Real-World Examples of Mergers and Acquisitions

Over time, mergers and acquisitions have become a strategy that many companies want to use. There are several remarkable instances of this business strategy:

1. LinkedIn by Microsoft for a staggering $26.2 billion in 2016. 
2. Another remarkable event was the merger of Dow Chemical and DuPont in 2017, which created DowDuPont, a conglomerate later separated into three independent entities. 
3. Also noteworthy was Disney’s acquisition of Pixar Animation Studios in 2006 for an astounding $7.4 billion. 
4. Lastly, the amalgamation of American Airlines and US Airways in 2013 led to the formation of the world’s most extensive airline, an impressive feat.

Final Thoughts

At AEGIS Law, we have a team of experienced lawyers who can help guide and support you through the merger and acquisition process. We can help with all parts of M&A, such as due diligence, negotiating contracts, and integrating the two companies after the merger. Contact Scott Levine today via e-mail or (314) 454-9100 x101 to schedule an appointment and learn more about how we can help with your M&A needs.  Or click on the chat icon in the lower right hand corner of your screen for immediate assistance.