Types of Mergers and Acquisitions
Inside the world of finance, mergers and acquisitions (called M&A) are a large, very important process. These kinds of transactions sometimes involve hundreds of millions of dollars, if not billions. These actions are such a big part of business, that investment banks often have departments just for managing strategies and guidelines for bringing two companies together. Here we have a basic look at these unions which so very often find their way into news headlines in Ireland.
Although lumped together, there is a distinction between mergers and acquisitions. Quite simply, when one company takes over another an acquisition is completed. Alternatively, when two companies, usually of the same size, decide to combine organizations and proceed as an entirely new company then a merger has been performed. In this case both companies' stock disappears and stock in the new company's name is issued.
For businesses, the idea behind acquisitions and mergers is that the joining the two companies will have more value than when they are separate. Both parties hope to become enhanced by combining resources after the union. For example, costs can be cut with staff reductions. Many times after mergers or acquisitions, there is an overlap in jobs throughout the different departments, such as accounting.
There are other ways to reach business synergy. This may include economics of scale. What does this mean? Well, the new, now bigger, company will most likely have greater purchasing power than the two old, smaller companies. This means the company can save on product parts, which means the cost of product production goes down. A business union may also be able to increase the efficiency of research and development, product visibility and market growth.
There are several types of mergers. Among the most common is the horizontal merger. This is where two companies selling the same product to the same market, in direct competition with each other, decide to come together.
Another type is called vertical merging. This is when two companies that have entirely different products combine efforts to create a new product altogether. For example, if an ice cream cone manufacturer and an ice cream manufacturer joined together to create an ice cream novelty item, that would be a vertical merger.
When buying a business, one can either buy it stock or its assets. This depends on which type of business it is. If it is a corporation then buying the stock is the way to go. Generally, those who want to dispose of their business or part of it prefer to sell the stock. This is unlike those who would want to get their hands on other business, this group prefers buying assets.
Depending on your needs, you can either go one way or the other. This is why a special team should be formed to handle the takeover. One of the most complicated issues to handle is tax. If you can find away of successfully navigating a merger or an acquisition with minimal tax returns, take it.
Such a tax reduction is only possible if you buy stock and not assets. In asset buying, you can pick and choose what you want and leave out the undesirables. This is not the case with stock buying. Asset buying, therefore, gives you the option of staying away from liabilities that might take your business down.
There are some instances, however, where it is advisable to purchase the stock rather than the assets. One of the instances is when there is an existing contract that you can only enjoy if you do so. This you can only know if you engage in due diligence when considering your acquisition.
There are two methods of purchasing the desired stock. You can directly buy them from shareholders offering them; alternatively, you can merge your business with the offering one. In either case, you have to be careful not to inherit a collapsing business regime. In rare cases, however, you can inherit a collapsing regime but engineer a complete turnaround.
If you want to unite with another business however, you have to be overly careful. This is because if you merge, your business as well as the other one is swallowed up and one company is formed. Mergers are governed by state laws and every bit should be followed to the letter.
The world of mergers and acquisitions is wide and sometimes pretty complex. They might be hostile or they may be cooperative. They might involve enormous cash purchases or stock swaps. They may ultimately boost the viability of the company. Yet if mismanaged, a merger or acquisition may bring about a company's decline.