Mergers and Acquisitions Guide

What Are Mergers and Acquisitions?

Mergers and Acquisitions (M&A) refer to transactions where two or more companies combine to form a new entity or one company assumes control of another. A merger involves multiple companies pooling assets and liabilities to create a new entity, often with shared equity and board representation. An acquisition occurs when one company takes over another’s business, typically paying a control premium. Companies pursue M&A to accelerate growth, enter new markets, acquire technology or talent, or realize synergies, such as cost savings or revenue boosts from the combination. For buyers, M&A offers a faster alternative to organic growth; for sellers, it can unlock shareholder value or align with a stronger partner.

This guide provides financial analysts with a clear, professional, and accessible overview of the M&A process from start to finish, covering strategies, valuation, negotiation, and integration.

Understanding the Difference Between Mergers and Acquisitions

The distinction between a merger and an acquisition lies in structure and intent. A pure merger involves equal companies combining assets and liabilities to form a new entity with shared equity and board representation, aiming to harness synergies like cross-selling and market share growth without paying a control premium. In practice, true equality is rare, and the “merger” label is often used for public relations to ease transitions, reassure employees, or gain regulatory approval. An acquisition involves one company dominating, often paying a premium for control.

Examples

1. Lafarge-Holcim, 2014: A near-pure merger created Lafarge-Holcim, with Holcim holding a 55% stake and Lafarge 45%. The combined entity had annual sales of about $40bn and a market value exceeding $50bn. Though not perfectly equal, it aligned with merger principles.

2. Exxon-Mobil, 1999: Structured as an all-stock merger at a combined deal value of $81bn, Exxon’s 70% stake and operational dominance made it closer to an acquisition.

3. Facebook-WhatsApp, 2014: A clear acquisition, with Facebook paying $16bn, including $4bn in cash and $12bn in stock, for WhatsApp

Types Of Mergers and Acquisitions

M&A transactions are categorized into three types:

Horizontal M&A

Companies in the same industry combine to boost market share, reduce competition, or achieve economies of scale.

For example, in May 1998, Daimler signed a contract to acquire Chrysler for a deal value of ~US$39bn. This transaction supplemented them with new products and services, and improved the competitive position in global terms for the group as a whole.

Vertical M&A

A vertical M&A occurs when companies at different supply chain stages merge, such as suppliers or distributors. This is further divided into forward and backward integration:

Forward Integration

Forward integration is pursued in M&A to acquire businesses that are downstream in the value chain. This enables control over distribution channels, ensures a steady market for products, and enhances control over the end-user experience.
For example, in Mar 2017, Toyota acquired material handling supplier Vanderlande for €1.2bn. This acquisition allowed Toyota to broaden its range of materials-handling equipment and systems globally beyond lift trucks, marking a significant step in expanding the materials-handling solutions business.

Backward Integration

Backward integration in M&A involves acquiring businesses that are upstream in the value chain. This helps to gain control over key inputs, ensures a stable supply of crucial materials, and potentially reduces dependency on external suppliers.
For example, in Jun 2021, Hyundai acquired a controlling 80% stake in Boston Dynamics, with a deal value of US$1.1bn. This transaction was expected to propel the development of future technologies, encompassing autonomous driving, artificial intelligence, Urban Air Mobility, smart factories, and robots.

Conglomerate M&A

A conglomerate M&A occurs when companies in unrelated businesses combine. This is further divided into pure and mixed:

Pure Conglomerate M&A

Pure Conglomerate M&A occurs when two companies with completely unrelated business activities combine, without any direct interest or overlap in their operations, supply chains, or customer bases. These mergers are rare because they typically offer no immediate synergies in terms of product bundling or shared customers. Such mergers usually happen when a company, often a diversified conglomerate, has access to inexpensive capital and sees an opportunity to acquire an unrelated business that can be revitalized through restructuring and improved financial management. The acquiring company often acts as a holding company with a proven track record of effective capital allocation across a diverse range of businesses.
For example, Berkshire Hathaway is a prime example of a successful conglomerate that has repeatedly engaged in pure conglomerate mergers. Unlike other conglomerates, Berkshire Hathaway has maintained strong investor appeal by acquiring companies across a wide range of industries, including insurance, energy, railroads, real estate, industrial, retail, food and beverages. Its success is driven by a strategy of acquiring and managing diverse businesses, each contributing to its steady cash flow and overall growth. List of major acquisitions by Berkshire Hathaway over the years:

Mixed Conglomerate M&A

Mixed Conglomerate M&A involves companies from different industries merging to extend their product lines or expand their market reach. Unlike pure conglomerate mergers, these mergers often offer opportunities for cross-selling or geographic expansion, leading to potential synergies.
For example, in 2016, Samsung acquired Harman for approximately $8bn in equity value to strengthen its presence in the rapidly growing connected technologies market, especially in automotive electronics. This strategic move was expected to capitalize on the automotive market’s growth potential, projected to exceed $100bn within a decade. Samsung aimed to leverage Harman’s audio capabilities and combine them with its consumer electronics expertise, enhancing user experiences across both its consumer and professional product lines.

What is Buy-Side and Sell-Side?

Every M&A transaction involves a buy-side, the buyer and their advisors, like investment banks and lawyers, and a sell-side, the seller and their advisors. The buy-side seeks favorable valuations and synergies, while the sell-side aims to maximize shareholder value. Each side faces unique challenges, requiring tailored strategies.

The M&A Process

The M&A process is typically divided into nine phases. Not all transactions follow every phase, as sudden changes in technology or economic conditions may lead to distressed sales or opportunistic acquisitions, which can bypass the full process. These phases generally apply to large organizations, involving investment banks, lawyers, industry consultants, and other advisors to ensure thorough due diligence, regulatory compliance, and strategic alignment. Smaller or opportunistic deals may follow a streamlined process with fewer steps or less formal involvement of external parties.

Phase 1: Building the M&A Strategy and Implementation Plan

This initial step involves the board creating a three-to-five-year strategic plan aligned with the company’s vision. The plan sets revenue and net income targets for each business segment, based on the competitive landscape and economic conditions.

• Buy-side: When the board determines that acquiring an asset or company is necessary to meet growth targets, it initiates the M&A strategy and implementation plan. This includes documenting the target sector, revenue size, geography, maximum valuation, and timeline for execution. No regulatory filings are required at this stage. Management may choose to discuss the strategy publicly in investor calls or press releases or work discreetly with an investment bank.
• Sell-side: When the board decides to divest a segment to maximize shareholder value, or the majority owner seeks to cash out through a sale, they engage investment banks to broker the deal. This involves due diligence, valuation, and creating a list of potential buyers and an outreach plan. No regulatory filings are required at this stage. Management may opt to share the strategy publicly in investor calls or press releases or collaborate confidentially with an investment bank.

Phase 2: The Search Process

In this phase, the company collaborates with investment banks to identify potential buyers (sell-side) or targets (buy-side), based on detailed screening criteria established in Phase 1.

Critical Role of Investment Banks: Bankers actively engage with CEOs and CFOs of various companies, giving them insight into active buyers and available targets. This non-public information enables them to create an initial list, which is then refined using the set criteria. Special emphasis is placed on cultural compatibility when selecting companies for the next phase.

Note: No regulatory filings are required for either buy-side or sell-side at this stage. 

Phase 3: Business Valuation – How would the Merger and Acquisition be valued?

Business valuation determines the worth of a company in an M&A transaction using valuation methods such as trading comparables, 52-week range, equity research targets, transaction comparables, and discounted cash flows including standalone and with synergies. Due to the inherent imprecision and uncertainties in valuation estimates, multiple methods are employed. A football field chart is used that displays the range of valuations from different methodologies in a single graph, helping reduce errors and guiding decision-makers in selecting the most appropriate valuation.

Given below is an example of a sample valuation football field:

• Buy-side: Using the list of potential targets from Phase 2, the investment bank creates detailed profiles for each and conducts valuations for all targets.
• Sell-side: The seller typically has a valuation range based on trading comparables. An investment bank validates this by incorporating transaction comparables and performing an intrinsic valuation using discounted cash flow, factoring in synergies with potential buyers.

Note: No regulatory filings are required for either buy-side or sell-side at this stage. 

Phase 4: First Contact Between the Buyer and the Seller

The initial contact in an M&A deal varies depending on existing board or executive-level familiarity, the target’s status as a public or private entity, and the deal’s timeline. This phase establishes trust, sets the stage for due diligence, and shapes deal structuring.

Step 1: Signing the Confidentiality Agreement

Once formal contact is established, both parties sign a Confidentiality Agreement with a termination date.

• Buy-side: The agreement may restrict the seller from sharing the buyer’s bid with other potential buyers.
• Sell-side: The agreement ensures discretion, which is critical to prevent employee uncertainty, supplier hesitation due to potential changes in agreements, or lenders reassessing credit terms over fears of instability. This helps stabilize the confidence of employees, suppliers, and lenders during negotiations.

Step 2: Sharing Term Sheet or Letter of Intent (LOI)

• Buy-side: The buyer expresses interest through a term sheet or LOI, outlining preliminary terms. A term sheet, typically two to four pages, includes the purchase price range, assets or stock being acquired, data use limitations, and a termination date. Many deals skip the term sheet for a more formal LOI, written as a letter with detailed legal language, specifying data exchange, due diligence scope, and cost-sharing for legal, consulting, or asset transfer fees.
• Sell-side: The seller evaluates the buyer’s offer against strategic goals, such as shareholder value or growth objectives. If the seller initiates contact, they share a Confidential Information Memorandum, a detailed and confidential overview of the business, to gauge buyer interest and support informed investment decisions.

Note: No mandatory filings are required at this stage for public companies, as no definitive agreement exists. However, if a buyer acquires more than 5% of a public company’s voting stock, they must file a Schedule 13D with the SEC within 10 days, disclosing intent that may signal M&A discussions. Private companies require no public filings but may need internal board or shareholder approvals, often documented in the term sheet or Letter of Intent.

Phase 5: Due Diligence and Deal Negotiation

This phase involves thorough due diligence to assess risks and detailed negotiations to finalize terms, which may proceed as a friendly deal with cooperative management or a hostile takeover bypassing the target’s board.

Step 1: Due Diligence

After signing the Confidentiality Agreement, the buyer initiates due diligence, reviewing audited and unaudited financial statements, supplier contracts, customer agreements, employee stock option plans, and litigation records. The scope is defined by the Confidentiality Agreement or subsequent agreements. Due diligence is critical, as material risks like undisclosed liabilities, overstated revenue, or pending lawsuits can result in price adjustments, renegotiated terms, or even termination of the deal.

Step 2: Deal Negotiation

If due diligence reveals no major concerns, both parties negotiate key terms. Negotiations vary depending on whether the deal is friendly, with cooperative management, or hostile, where the buyer directly approaches shareholders. Key elements include:

Purchase Price:

• Buy-side: Values the target using trading comparables, precedent transactions, and discounted cash flow models, focusing on industry multiples like EV/EBITDA or P/E ratios for financial prudence.
• Sell-side: Anchors expectations to the 52-week high for public companies or high-multiple peers for private firms, influenced by growth forecasts or recent investor discussions.

Deal Structure: Cash, Stock, or Hybrid:

• Buy-side: The buyer must decide how to finance the deal, weighing cash or stock options. A cash deal requires funds from existing reserves or acquisition debt, ensuring financial leverage remains within acceptable limits. Stock financing preserves cash reserves but is often costly, as the cost of equity typically exceeds the cost of debt, and issuing new shares can dilute existing shareholders.
• Sell-side: Sellers face a trade-off. Cash provides immediate liquidity but incurs capital gains taxes for shareholders. Stock defers tax liability, allowing shareholders to share in the merged entity’s future rewards, but also exposes them to post-deal operational risks, even with full disclosures.

The final structure is negotiated to balance the buyer’s financing constraints with the seller’s tax and risk preferences. For more details on the factors considered in finalizing a cash versus stock deal structure.

Board Representation:

• Buy-side: Seeks board control proportional to ownership, potentially limiting the seller’s seats to maintain strategic direction.
• Sell-side: Negotiates board seats to retain influence, especially in stock-based or near-equal mergers.

Management:

• Buy-side: Typically wants to install its own leadership to align with post-merger goals.
• Sell-side: Pushes for retention of key executives or specific roles to ensure continuity and protect culture.

 Employment Contracts:

• Buy-side: Reviews contracts to align with new policies, possibly restructuring or terminating roles.
• Sell-side: Seeks protections like retention bonuses or severance terms for key employees.

Vendor Contracts:

• Buy-side: Renegotiates or consolidates contracts to achieve synergies and better pricing.
• Sell-side: Ensures strategic vendors remain engaged to avoid abrupt changes.

Work Locations / Headquarters:

• Buy-side: May relocate operations for efficiency or integration.
• Sell-side: Negotiates phased transitions to minimize disruption.

Phase 6: Deal Announcement

At this stage, public companies in the U.S. file an SEC Form 8-K to disclose the definitive purchase agreement, outlining the deal’s price, structure, and strategic objectives. Press releases and investor calls further communicate the transaction to stakeholders, including employees and customers, to manage expectations and ensure transparency.

A key component of the definitive purchase agreement is the break-up fee clause, which requires the acquirer to pay the target a specified amount if the acquisition fails to close within the agreed timeline. This clause incentivizes the acquirer to fulfill commitments and meet deadlines.

For example, on February 19, 2014, when Facebook acquired WhatsApp, it filed the following documents:

Press release:

Source: SEC filings

Agreement and Plan of Merger and Reorganization:

Source: SEC filings

Excerpts of the break-up fee:

If the acquisition does not close by August 19, 2014, or by August 19, 2015, if extended under specific conditions, Facebook, as the acquirer, must pay a termination fee of $2bn. This includes $1bn in cash and an additional $1bn, either in cash or in shares valued at the average Class A stock price at that time.

Phase 7: Post Announcement Due Diligence and Creating Integration Plan

After the deal announcement, further due diligence verifies the target’s data, while integration planning aligns operations, systems, and culture. Teams address redundancies, technology integration, and employee retention to ensure a smooth transition. Public companies may file additional SEC Form 8-Ks in the U.S. to disclose material updates, such as changes in deal terms or significant findings during due diligence.

For example, following the Feb 2014 announcement of Facebook’s acquisition of WhatsApp, due diligence confirmed WhatsApp’s user base and financials. Integration planning focused on aligning WhatsApp’s messaging platform with Facebook’s infrastructure, retaining key talent like co-founder Jan Koum, and maintaining WhatsApp’s ad-free user experience. No additional SEC Form 8-K filings were required beyond the initial announcement, as no material changes to the deal terms were reported.

Phase 8: Deal Closure

The deal is finalized through signed agreements, regulatory approvals, and shareholder votes, with funds or stocks exchanged and ownership transferred. Public companies in the U.S. file an SEC Form 8-K to report the deal’s completion, including final terms and any material agreements. Regulatory bodies, such as the Federal Trade Commission or European Commission, may require approvals to address antitrust concerns.

For example, Facebook’s acquisition of WhatsApp closed on Oct 6, 2014, after securing U.S. Federal Trade Commission and European Commission approvals, which mandated user privacy protections. Facebook filed an SEC Form 8-K to confirm the deal’s closure, detailing the final stock issuance and cash payments.

Source: SEC filings

Phase 9: Implementing Post-Closing Integration and Evaluation

Integration executes the plan, consolidating operations, aligning cultures, and realizing synergies. The Stop, Assess, and Learn phase evaluates performance against strategic goals, identifying lessons for future deals. No mandatory filings are typically required post-closure unless material events such as significant integration issues, trigger an SEC Form 8-K for public companies.

For example, after Facebook acquired WhatsApp in 2014, it integrated WhatsApp’s messaging technology to strengthen its mobile platform, especially in fast-growing markets. Facebook kept WhatsApp’s lean setup, but faced challenges with its ad-free model, which didn’t fit well with Facebook’s usual advertising-based approach. This experience helped shape Facebook’s future strategy, leading it to explore different ways of monetizing platforms like Instagram without disrupting the user experience. No additional SEC filings were needed after the deal closed, as there were no major issues reported.

What are the Largest Mergers and Acquisitions in History?

Here are the top five largest M&A deals, based on nominal transaction values, as of 2025:

1.       China Shenhua Group and China Guodian Corporation, 2017:

Deal Value: ~$278bn

Deal Rationale: Merged to form National Energy Investment Group, consolidating coal and electricity assets to enhance operational efficiency, reduce overcapacity, and strengthen market dominance in China’s energy sector

2.     Vodafone-Mannesmann, 1999:

Deal Value: ~$190bn

Deal Rationale: Vodafone acquired Mannesmann to create a global telecom leader, expanding its European mobile market presence, though integration challenges and cultural differences led to significant write-offs

3.     AOL-Time Warner, 2000:

Deal Value: ~$165bn

Deal Rationale: Aimed to combine AOL’s internet dominance with Time Warner’s media assets to lead digital content, but the dot-com crash and cultural mismatches caused massive financial losses

4.     Dow Chemical-DuPont, 2015:

Deal Value: ~$130bn

Deal Rationale: Formed DowDuPont to achieve cost synergies and innovation, later splitting into three focused companies for agriculture, materials, and specialty products to maximize shareholder value

5.     Verizon-Vodafone’s stake in Verizon Wireless, 2014:

Deal Value: ~$130bn

Deal Rationale: Verizon acquired Vodafone’s 45% stake in Verizon Wireless to gain full control, streamline decision-making, and enhance its dominance in the U.S. wireless market, boosting operational flexibility and profits

Role of Investment Banking in M&A

Investment banks are key dealmakers in M&A, guiding both buy-side and sell-side. They identify targets or buyers using market insights and executive relationships. Banks perform valuations with comparables, discounted cash flow, and synergy analyses, creating football field charts to refine pricing. They structure deals, whether cash, stock, or hybrid, negotiate terms, and prepare documents like Confidential Information Memorandums or Letters of Intent. Banks also secure regulatory approvals and manage due diligence, ensuring strategic fit and deal success.

Conclusion

M&A is a powerful tool for growth, market expansion, and synergies, but success demands careful planning, valuation, and integration. From strategy and screening to negotiation and post-merger evaluation, each phase requires precision and collaboration with advisors like investment banks. By mastering the process and learning from historic deals, companies can navigate M&A to unlock value and achieve long-term goals.

Additional Resources

Investment Banking Courses

M&A Explained

Cash vs Stock Acquisition

Business Valuation Overview

Merger Structures

Conglomerate Merger

Forward Integration

Hostile Takeover

Overview of Corporate Restructuring