Ever since “the great merger movement” of 1893-1904, mergers and acquisitions have had an important impact on the global business landscape. Just in 2015, we saw the largest amount of money ever spent on M&A (over $3.8 trillion) along with some of the largest singular deals in history. M&A can simply be described as the consolidation of companies or assets. Generally, two types of consolidations, mergers and acquisitions, are the focus. There are various other types of professional services within M&A which we will discuss later. Historically, M&A occurs in waves noted by a few key characteristics such as similar sized companies joining forces, large companies acquiring smaller companies, risk reduction motives and so on. In this article, we will examine the various professional services within M&A, some trends for 2017, and general tips for a successful M&A endeavor.
Professional Services Within M&A
Many people view mergers and acquisitions as one in the same and overlook the nuanced differences between the two and the other services which fall under the scope of M&A. Here, I will define these services to provide a more detailed perspective on M&A.
In a merger, two separate companies will agree to combination with only one surviving. Typically, the smaller company, the acquired company, will cease to exist and leave its assets and liabilities to the larger, or acquiring company. The acquiring company retains intact, keeping its name.
An acquisition occurs when the acquiring company obtains enough or all the acquired company’s stocks to hold a majority stake. The acquired company retains its name and legal structure.
Consolidation occurs when two companies combine and an entirely new entity is formed. Assets and liabilities are merged, and all companies involved cease to exist.
Leveraged Buyout (LBO)
In a leveraged buyout, a group of investors will borrow funds to purchase the company. Assets and future earnings of the company are used to secure financial backing. The group of investors are sometimes comprised of the management of the company, in which case it would be considered a management buyout (MBO).
Divestitures are a partial or full disposal of a business unit through sale, exchange, closure or bankruptcy. Divestitures are implemented for many reasons. With regards to M&A, divestitures may be included in the terms of a merger or acquisition by one of the companies for several reasons, or by the government to avoid a monopoly and protect the consumer.
Hostile vs Friendly Combination
In any combination, the nature is important to note. A friendly combination is exactly how it sounds; both companies see value in the procedure and come to an agreement. A hostile combination, or takeover, occurs when one company’s management resists combination. This is where a tender offer occurs. The hostile company will bypass management and the board of directors of the other company, and offer to buy the outstanding shares of the company directly from shareholders. This offer is often substantially higher than the market price to attract shareholder attention.