Michael's M&A Playbook: A Brief Introduction to Mergers and Acquisitions
Mergers and acquisitions can be complex and challenging. Many people are involved in M&A transactions, lawyers sometimes develop complicated legal and tax structures, and the financial terms and calculations are another issue. To make it easier for you, here is a brief introduction to some of the M&A terms.
Difference between Mergers and Acquisitions
Many people often use the words mergers and acquisitions interchangeably; however, they have different meanings. Mergers are transactions when two or more companies merge and create a new company. Acquisitions are the purchase of a stake in another company (share deal) or assets (asset deal) from another company. The percentages can vary, but an acquisition means that there is somebody new who decides. Otherwise, it is just a financial investment. Combining both mergers and acquisitions, we talk about all transactions where a material ownership and control change happens.
Different Phases of the Mergers and Acquisitions Process
There is a pre-acquisition period from the M&A target pipeline development and LOI to the due diligence and negotiation and a post-merger period for integrating the M&A target and post-closing adjustments. Here is a link to one of my articles about the five phases of the M&A process map.
Different Types of M&A Transactions
M&A transactions can be horizontal, i.e., at the same value chain level, e.g., between competitors, or vertical, i.e., at different levels of the value chain. A vertical acquisition occurs when, e.g., a company buys its client or supplier.
A SPAC is a listed Special Purpose Acquisition Company with the sole purpose of acquiring private companies and merging with them. The acquired company, thereby, becomes a public entity without going through the regular IPO process. Read more about SPACs here.
A reverse takeover (RTO) is a transaction in which a much smaller private company acquires a significantly bigger one on the stock exchange. It is similar to the SPAC, but both companies have an operational business in this case.
A buy-side M&A transaction is when you acquire another company. It is a sell-side deal when you sell a company.
Different Motivations for M&A
Industry consolidation: When companies acquire a competitor, i.e., a company in the same market, the main goal is to consolidate the market and achieve economies of scale.
Diversification: By buying companies with different products/services from another industry or a company at a different level of the value chain in the same industry, the acquirer wants to expand its product/service portfolio and get economies of scope.
Geographic growth: Growing in a different country or on another continent by acquiring a target company is a form of geographic expansion.
Talent acquisition: People and processes are at the heart of all companies. Some companies start M&A to get talent and better processes.
Agnostic approach for financial gain: In the end, M&A transactions want to increase the value of a company. If you focus on improving your market value and financial performance independent of the market/industry of the target, M&A can be the right tool for this agnostic approach.
Turnaround: Another approach, e.g., from many private equity companies, is to buy companies that have the potential to improve their financial results with restructuring. Read more about performance improvement plans here.
Time-to-market: Companies can grow in new geographies and with new products/services by themselves; however, it will take longer and is usually more complicated. M&A significantly improves the time-to-market.
Tax optimization: Depending on the countries and financial situation of the acquirer and target company, some M&A transactions significantly improve the group's tax position.
You Can Make It Work
There are many other types and reasons for mergers and acquisitions, but this summary gives you a general idea. Let me know if you want to see any different M&A terms here. Feel free to contact me to discuss specific mergers and acquisitions examples.
My M&A Playbook goes more into the details and will help you to make your next M&A transaction successful. It includes mergers and acquisitions examples from my transactions.
