What Are Mergers and Acquisitions?
Mergers and acquisitions (M&A) are transactions between two or more companies that involve them being combined and consolidated into a single entity. M&As usually occur when one company purchases another through stock options or purchases the entire company for an agreed-upon sales price.
Table of Contents
- Are Mergers and Acquisitions the Same Thing?
- What Are the Different Types of M&As?
- How Long Does a Merger Or Acquisition Take?
- What Is the Merger and Acquisition Process?
Are Mergers and Acquisitions the Same Thing?
Although the two terms are often used interchangeably, mergers and acquisitions describe two separate processes.
Mergers combine two separate businesses into a new entity. This involves combining all assets, such as branded logos and employees. While some employees may be laid off due to redundancies, a large portion of the acquired company’s workforce may be retained.
Acquisitions happen when one company gets fully absorbed into the acquiring company. In many cases, the acquired company will continue to operate as usual but will simply work under new management. In other instances, acquired companies may be completely liquidated.
What Are the Different Types of M&As?
Mergers can take many different structures.
- Horizontal mergers: Two companies that are direct competitors merge. Nike’s acquisition of Converse is a prime example of this.
- Vertical mergers: Two companies that do not directly compete but complement one another’s products merge. An example would be a car manufacturer joining a tire manufacturer.
- Congeneric mergers: Two companies that serve the same audience in different ways join together. This type of M&A might occur if the acquiring company wishes to develop a product line offered by the acquired company.
- Conglomerations: Two companies that have no common business relations combine. Many large companies, such as Proctor & Gamble or Alphabet (Google), are conglomerates.
How Long Does a Merger or Acquisition Take?
The time it takes to complete a merger and acquisition can vary significantly, ranging from a few months to several years. But there is a way to know approximately how long mergers and acquisitions take.
The more assets and variables each company has to manage and organize, the longer it will take to complete the merger. Each company will need to obtain approvals for changes in ownership, which can often lead to complex situations. The complexity is more significant if more assets and variables apply to the purchased company.
On the other hand, the fewer assets and resources an acquired company has, the faster the M&A process.
What Is the Merger and Acquisition Process?
The merger and acquisition process follows the steps outlined here (or a similar approach, depending on the complexity of the M&A).
1. Planning and Preliminary Discussions
A company begins to consider whether an M&A would be beneficial, weighing the pros and cons of acquiring another company. It will also research current industry trends and competitors and assess how an M&A could help them surpass future barriers to growth.
After identifying a few potential companies that could be acquired or merged, the acquiring company will reach out to these companies. This phase is an exploratory one where companies can discuss how they might fit into one another’s business models.
2. Risk Assessment and Evaluation
Before companies strike a deal with one another, they’ll identify and assess all potential risks and issues that may arise during the M&A. Issues include details like how the company will develop its new brand and how it will be able to position itself in the marketplace.
It’s also beneficial to take a deep dive into the other company’s financials. Examining financial forecasts will help a company better estimate an accurate valuation of the company it wishes to purchase.
3. Initial Agreement and Due Diligence
Once the two companies identify and assess the risks, they’ll reach an initial agreement on the M&A. Then the due diligence phase begins, where the acquiring company will analyze and scrutinize all financial aspects of the target company. The analysis should examine balance sheets, supply chains, employees, operational procedures, and other business processes.
If all aspects of a company still seem desirable, the two companies will continue forward with the deal.
4. Regulatory Approval
Depending on the size and scope of the two businesses, you may need additional regulatory approval from the U.S. government, or others, depending on where the companies are based. When approvals are required, the M&A process can take longer.
5. Contract Signing and Integration
Once everything is approved and agreed upon, both companies will sign a contract signifying the sale as final. Then, the companies will integrate their assets and become a single entity in the coming months and years.