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Successful Mergers and Acquisitions | What Are They?

Hello, my wonderful friends! Fairly successful mergers and acquisitions produce new organizations with greater influence, purchasing power, and technological capabilities than the ones that existed before the transactions. Here are a few successful mergers and acquisitions that affected the economy and the way of life of the populace. Additionally, we go into great detail about what mergers and acquisitions are. We will provide you with all the background information necessary to understand successful mergers and acquisitions in this blog!

What are Mergers?

A merger is an agreement that combines two current businesses into a single new business. There are various merger types, and businesses merge for various reasons. Mergers and acquisitions (M&A) are frequently carried out to broaden a company’s clientele, enter new markets, or increase market share. The goal of all of these actions is to raise shareholder value. Companies frequently have a no-shop clause during a merger to stop acquisitions or mergers by other businesses.

How does a Merger Work?

A merger is the voluntary comingling of two businesses under essentially equal conditions into a new legal entity. The businesses that agree to merge are roughly equal in size, customer base, and operational scope. The phrase “merger of equals” is used to describe this situation. Unlike mergers, which are typically not voluntary, acquisitions involve one company actively purchasing another.

The most frequent reasons for mergers are to expand into new markets, lower operating costs, bring together similar products, boost revenues, and boost profits—all of which should be advantageous to the shareholders of the merging companies. Following a merger, shares of the new company are given to the current owners of the two original companies.

The Merger Fund from Virtus Investment Partners is a mutual fund that was established due to a significant number of mergers and offers investors the opportunity to profit from merger deals. The fund captures the spread, or remaining sum, between the offer price and the trading price. It makes investments in businesses that have made a merger or takeover publicly known. Since the fund’s inception in 1989, it has averaged returns of 5.8% per year.

Types of Mergers | Successful Mergers and Acquisitions

Depending on the objectives of the companies involved, there are different types of mergers. Some of the most typical merger types given.

Conglomerate

This merger involves two or more unrelated businesses that were previously separate entities. The businesses may be active in various sectors of the economy or various geographical locations. Two independent businesses make up a pure conglomerate. On the other hand, a mixed conglomerate involves organizations that merge to expand their product or market offerings despite engaging in unrelated commercial endeavors.

Companies that do not share any similarities will only merge if doing so will increase shareholder wealth, which means the companies must be able to create synergy, which includes improving value, performance, and cost savings. The 1995 merger of The Walt Disney Company and American Broadcasting Company (ABC) resulted in the creation of a conglomerate.

Congeneric

A product extension merger is another name for a congeneric merger. This type involves merging two or more businesses that serve the same market or industry and have similar operations in terms of technology, marketing, production methods, and research and development (R&D). A merger that results in a product extension occurs when a new product line from one company is added to an already-existing product line from the other company. A product extension allows two businesses to merge, giving them access to a larger consumer base and market share. The 1998 union of Citigroup and Travelers Insurance, two businesses with complementary products, illustrates a congeneric merger.

Market Extension

Companies that sell the same products but compete in different markets sometimes merge. Companies that merge in a market extension transaction aim to expand their clientele by gaining access to a larger market. Eagle Bancshares and RBC Centura merged in 2002 to broaden their markets.

Horizontal

A horizontal merger takes place between businesses engaged in the same sector. The merger usually occurs as part of a consolidation between two or more businesses that provide the same goods or services. The goal of these mergers, common in sectors with fewer companies because of the higher level of competition among smaller firms, is to grow the business and gain a larger market share. A horizontal merger was the union of Daimler-Benz and Chrysler in 1998.

Vertical

Vertical mergers occur when two businesses that produce components or provide services for a product merge. A vertical merger is when two businesses that operate at various levels of the same industry’s supply chain combine their operations. Such mergers are carried out to increase the synergies created by the cost savings brought about by merging with one or more supply companies. The merger of media conglomerate Time Warner and internet service provider America Online (AOL) in 2000 is one of the most well-known instances of a vertical merger.

Examples of Mergers | Successful Mergers and Acquisitions

An illustration of how mergers function and bring businesses together is Anheuser-Busch InBev (BUD). The business is the outcome of various market extensions, mergers, and consolidations in the beer industry. Three significant international beverage companies—Interbrew (Belgium), Ambev (Brazil), and Anheuser-Busch (United States)—merged to form the newly named company, Anheuser-Busch InBev.

The world’s third- and fifth-largest brewers combined after Ambev and Interbrew merged. The world’s top two breweries came together when Ambev and Anheuser-Busch merged. This example exemplifies a horizontal merger and market expansion because it consolidated an industry while expanding the global reach of all the brands owned by the combined company.

merger

Each of the biggest mergers in history costs over $100 billion. To become the biggest mobile telecommunications company in the world, Vodafone purchased Mannesmann in 2000 for $181 billion. The $164 billion vertical merger between AOL and Time Warner in 2000 is one of the biggest failures in history. Verizon Communications paid $130 billion in 2014 to acquire Vodafone’s 45% stake in Vodafone Wireless.

What Is a Horizontal Merger?

When rival businesses that offer the same goods or services merge, this is referred to as a horizontal merger. The T-Mobile and Sprint merger is an example of a horizontal merger. A vertical merger, like the union of AT&T and Time Warner, involves businesses that produce distinct products.

What Is a SPAC Merger?

A special-purpose acquisition company (SPAC) merger typically occurs when a publicly traded SPAC raises funds to acquire an operating business through the public markets. By merging with a SPAC, the operating company becomes publicly traded.

What Is a Reverse Merger?

A reverse merger or reverse takeover (RTO) is the acquisition of a publicly traded company by a private company. In 2006, Archipelago Holdings and the New York Stock Exchange (NYSE) completed a reverse merger.

What are Acquisitions? | Successful Mergers and Acquisitions

A company makes an acquisition when it buys the majority or all of the shares of another company to take over that business. The acquirer can make decisions regarding newly acquired assets without the consent of the target company’s other shareholders if they acquire more than 50% of the target company’s stock and other assets. Acquisitions, which are very common in business, may occur with or without the target company’s consent. With approval, there is often a no-shop clause during the process.

Due to the tendency of these massive and important transactions to dominate the news, we frequently hear about acquisitions of large, well-known companies. In reality, small- to medium-sized businesses merge and acquire one another more frequently than large corporations.

How do Acquisitions work?

For a variety of reasons, companies buy rival businesses. They might be looking for economies of scale, diversification, a bigger market share, more synergy, price cuts, or new niche products. The following are some additional justifications for acquisitions.

As a Way to Enter a Foreign Market

The simplest way to enter a foreign market for a business looking to expand operations is by purchasing an existing business there. The acquired company will enter a new market with a strong foundation because the acquired business will already have its employees, a brand name, and other intangible assets.

As a Growth Strategy

Perhaps a business ran out of resources or encountered logistical or physical challenges. When a company is burdened in this way, it is frequently wiser to acquire another company rather than grow its own. Such a business might search for promising young businesses to buy and add to its revenue stream as a new source of profit.

To Reduce Excess Capacity and Decrease Competition

Companies may turn to acquisitions to reduce excess capacity, eliminate the competition, and concentrate on the most productive providers when there is too much supply or competition.

To Gain New Technology

A company may find it more cost-effective to buy a rival that has successfully implemented a new technology than to invest the time and resources necessary to create the new technology from scratch.

acquisition

What Are the Types of Acquisition?

A business combination, such as an acquisition or merger, is frequently put into one of four categories:

  • Vertical: The parent company buys a business that is either upstream (like a vendor or supplier) or downstream (like a processor or retailer) in its supply chain.
  • Horizontal: At the same point in the supply chain, the parent company purchases a rival or another business in its industry sector. 
  • Conglomerate: a business where the parent company purchases a company that operates in a tangential or unrelated industry or sector. 
  • Congeneric: A market expansion occurs when the parent company acquires a company with a different set of business lines or products but operates in the same or a closely related industry.

Acquisition, Takeover, or Merger? | Successful Mergers and Acquisitions

Although, in theory, “acquisition” and “takeover” have nearly identical meanings, they have different connotations on Wall Street.

The terms “acquisition” and “takeover” generally refer to business transactions that are primarily friendly and cooperative, where both parties work together. A merger is when the purchasing and target companies come together to form a wholly new organization. The exact meaning of these terms overlaps in practice, though, because each acquisition, takeover, and merger is a special case with its peculiarities and reasons for completing the transaction.

Acquisitions: Mostly Amiable

Friendly acquisitions occur when the target company consents to be acquired, and the target company’s board approves the acquisition of directors. Friendly acquisitions frequently benefit both the target and acquiring companies. Both businesses create plans to make sure the acquiring firm buys the right assets. They check the financial statements and other valuations for any potential liabilities that might accompany the assets. The purchase is completed once all conditions are met, and both parties have agreed to the terms.

Takeovers: Usually Inhospitable, Often Hostile

A “hostile takeover” or an “unfriendly acquisition” is when the target company objects to the acquisition. In contrast to friendly acquisitions, hostile acquisitions require active participation from the acquiring firm in the form of large stake purchases in the target company to obtain a controlling interest and compel the acquisition.

Even if a takeover is not specifically hostile, it still suggests that the firms are not equal in one or more important ways.

Mergers: Mutual, But Creates a New Entity

A merger is a more than amicable acquisition because it involves the mutual fusion of two businesses into a new legal entity. Mergers typically occur between businesses that are comparable in terms of their fundamental attributes, such as size, clientele, operational scope, etc. The merging companies firmly believe that, as a whole, their new organization will be more beneficial to all parties (especially shareholders) than either of them could be individually.

Conclusion | Successful Mergers and Acquisitions

The primary distinction between the two is that during an acquisition, the parent company completely assumes control of the target company and incorporates it into the parent entity. When two companies merge, a brand-new organization is formed (perhaps with a new name and logo that combines traits from the two). I hope this blog covered Successful Mergers and Acquisitions and you have all the information needed to understand them!

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David Scott
David Scott
Digital Marketing Specialist .
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