What are Mergers and Acquisitions (M&A)?
M&A, short for Mergers and Acquisitions, refers to the acquisition of companies through various financial transactions. It can involve the merging of two or more companies to form a new entity, or the acquisition of one company by another.
M&A Explained in 10 Minutes
Types of M&A Deals & Examples
Below are some different mergers and acquisitions examples:
- Horizontal Mergers occur when companies operating in the same industry come together, often to increase market share and gain a competitive edge. For example, Microsoft, the owner of Xbox, announced in early 2022 its acquisition of Activision Blizzard, the world’s largest video game maker.
- Vertical Mergers involve companies at different stages of the supply chain. An example here was the merger between eBay and PayPal in 2002, with eBay providing a platform that allows people to sell items, while PayPal allows buyers to pay for these items.
- Conglomerate Mergers involve unrelated businesses uniting under one corporate umbrella, diversifying their product or service offerings. LVMH is a good example of this, with the company formed in 1987 through the merger of fashion house Louis Vuitton with premium drinks producer Moët Hennessy.
- Cross-border acquisitions involve companies from different countries, enabling market expansion and global reach. A prominent example of this is the acquisition of Refinitiv by London Stock Exchange in 2021.
- Companies may pursue hostile takeovers to acquire another firm against their will. An example of this is when Euro-Brazilian beverage company, InBev, made an unsolicited bid for American beer brewer, Anheuser-Busch, as both sides traded lawsuits and accusations.
- Leveraged Buyouts (LBOs) are where a company’s management or a group of investors acquires the firm using a significant amount of borrowed money, which is collateralized by the target’s operations and assets. Our favorite example of this is the Glazer family’s controversial leveraged buyout of Manchester United in 2005.
What is the Difference Between a Merger and an Acquisition?
Put simply, a merger involves the merging of two or more companies to form a new entity. An acquisition involves the acquisition of one company by another.
Types of M&A Buyers
M&A buyers can be separated into strategics (or corporations), and financial investors, which include private equity, family offices, and venture capital, among others. Corporations will typically acquire or merge with companies for economies of scale, diversification, or consolidation, while financial investors tend to acquire and exit companies to realise a financial return.
Why Do Companies Engage in M&A?
- Expand or Consolidate Market Share: Acquiring another company allows a business to instantly expand its market presence. By merging with or acquiring a competitor or a company operating in the same industry, a company can gain a larger share of the market, reaching more customers and potentially increasing revenues.
- Diversify Product/Service Offering: M&A can be a powerful means for companies to diversify their product or service offerings. By acquiring a company with complementary products or services, a business can broaden its portfolio, reducing reliance on a single product line and mitigating risks.
- Unlock Synergies: Synergies can be realised through M&A, leading to enhanced efficiency and cost savings. When two companies combine their operations, they may streamline processes, eliminate redundancies, and enjoy economies of scale, resulting in improved profitability.
- Gain Access to New Technologies, Talent, Management, or Intellectual Property: M&A can serve as a gateway for companies to access new technologies, talent, management, or intellectual property. Such acquisitions can strengthen a company’s competitive advantage, innovation capabilities, and market positioning.
Typical M&A process
The M&A process, though comprehensive, can be broken down into steps. Let’s imagine a company is looking to sell itself and is considering potential buyers. If we assume an auction process with multiple potential buyers, this process typically occurs in two phases, with the process lasting around 9 to 12 months on average.
In the first phase, the company seeks the assistance of M&A advisors by sending out a ‘Request for Proposal.’ Once advisors are formally engaged, the company proceeds to the ‘Pre-Marketing’ stage. The advisor approaches potential buyers with an ‘Investment Teaser,’ and confidentiality is ensured through ‘Non-Disclosure Agreements,’ or NDAs.
Once the interested buyers sign the NDAs, they gain access to a more detailed ‘Information Memorandum,’ which contains comprehensive and important data about the company to be sold. They will also have access to a ‘Data Room’ with comprehensive financial reports, models, and important company filings. Here, they can find vendor due diligence reports, as prepared by technical, commercial, financial, and legal advisors on behalf of the seller. This helps buyers to prepare a ‘Non-Binding Offer’ (or NBO) to express their initial interest.
The seller reviews all NBOs, and shortlists the most promising bidders. The selected bidders are invited into the second phase of the M&A process. One key part of this process is a ‘Management Presentation’ where potential buyers can ask additional questions and gain further insights directly from the management team of the selling company.
As the process advances, the seller and buyers move towards finalising a deal. A ‘Sale and Purchase Agreement’ or SPA, is drafted, outlining all the terms and conditions of the acquisition. Finally, buyers submit their ‘Binding Offers,’ committing to purchase the company.
The seller selects the best offer and may wish to proceed with final negotiations. Once both parties agree on all the details, they sign the SPA, making this a legally binding agreement.
Once the deal is announced, there are still post-deal procedures to follow. Regulatory approvals may be necessary to ensure compliance with legal requirements. Once approved, the deal is officially completed.
How do M&A advisors make money?
M&A advisors make money through various types of fees charged.
The success fee, also known as a performance fee, is a contingent payment made to M&A advisors upon the successful completion of the transaction. It is typically a percentage of the deal’s total enterprise value, or a pre-determined amount agreed upon in the engagement.
The ratchet fee is a unique fee structure that links the success fee to the achievement of specific performance targets or milestones. It acts as an incentive for M&A advisors to drive the best possible deal terms and outcomes for their clients.
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Download the M&A cheat sheet a quick guide to types of M&A deals, sell side M&A process, key financial metrics, and key formulas.