Mergers and Acquisitions: Growing Your Business

The three main types of mergers

Horizontal, vertical, and conglomerate. In a horizontal merger, companies at the same stage in the same industry merge to reduce costs, expand product offerings, or reduce competition

Types of Mergers

• Horizontal – a merger between companies with similar products.
• Vertical – a merger that consolidates the supply line of a product.
• Concentric – a merger between companies that have similar audiences with different products.
• Conglomerate – a merger between companies who offer diverse products/services

Mergers and Acquisitions – Forms of Integration

1. Statutory

Statutory mergers usually occur when the acquirer is much larger than the target and acquires the target’s assets and liabilities. After the deal, the target company ceases to exist as a separate entity.

1. Subsidiary

In a subsidiary merger, the target becomes a subsidiary of the acquirer but continues to maintain its business.

1. Consolidation

In a consolidation, both companies in the transaction cease to exist after the deal, and a completely new entity is formed.

Reasons for Mergers and Acquisitions.

1. Unlocking synergies
2. Higher growth
3. Stronger market power
4. Diversification
5. Tax benefits

Forms of Acquisition.

1. Stock purchase

Here, the target’s shareholders receive compensation and not the target.

• The acquirer absorbs all the assets and liabilities of the target – even those that are not on the balance sheet.
• To receive the compensation from the acquirer, the target’s shareholders must approve the transaction through a majority vote, which can be a long process.
• Shareholders bear the tax liability as they receive the compensation directly.

1. Asset purchase

• Since the acquirer purchases only the assets, it will avoid assuming any of the target’s liabilities.
• As the payment is made directly to the target, generally, no shareholder approval is required unless the assets are significant (e.g., greater than 50% of the company).
• The compensation received is taxed at the corporate level as capital gains by the target.

1. Method of payment-Stock and cash.

In many instances, M&A transactions use a combination of the two, a mixed offering.

Mergers and Acquisitions (M&A) – Valuation

The process of valuation is a critical stage in the merger and acquisition course. Both sides need a Professional evaluation. Skilled professionals are required in order to do the underwriting and the transaction.

Three major valuation methods are used to value the target:

• Discounted cash flow (DCF) method: The target’s value is calculated based on its future cash flows.
• Comparable company analysis: Relative valuation metrics for public companies are used to determine the value of the target.
• Comparable transaction analysis: Valuation metrics for past comparable transactions in the industry are used to determine the value of the target.