Mergers and Acquisitions in the United States

M&A Transactions in the United States

In the world of business, mergers and acquisitions are quite common, and they refer to the scenario in which two businesses combine. Along with the two companies, their business interests, goals, revenues, finances, policies, and much more gets fused together. Moreover, it can also open new business avenues for both parties, either geographically or in the context of new products and services.

The United States continues to be the region with the largest volume of mergers and consolidation in the world, with the value of deals surpassing the $500 billion mark every year. Although M&A is used interchangeably, there are multiple differences between them. This guide aims to enlighten readers about the fundamentals of mergers and acquisitions, as well as how they are used to achieve specific business goals.

The Definition of an Acquisition

An acquisition is when a company buys majority or all the shares of another company, and this gives them complete control. As the majority or complete owner of the second company, the first one also has the authority to make decisions regarding finances, assets, and other business decisions. Moreover, executives of the acquiring company don’t require the approval of the shareholders of the acquired company to make said decisions.

Acquisitions are quite common in the business sphere, and they usually involve a larger company taking over smaller companies, either due to their profitability, valuation, the quality of their products or services, or other variables. Companies that are looking to sell are often acquired and are facilitated by sell-side M&A advisors.

Specific Types of Acquisitions

When it comes to acquisitions, there are a few types that typically take place in the business sector. Here is a brief rundown of all of them.

Horizontal Acquisition

A horizontal acquisition occurs when a company takes over another company in the same industry or sector, mainly because the latter is a direct competitor. Usually, after a horizontal acquisition, the acquired company maintains its brand name and branding. For example, Facebook acquired WhatsApp and Instagram, but both platforms continued to run as they were before.

Vertical Acquisition

A vertical acquisition involves a company acquiring a supplier or distributor that provides it with raw materials or products. The basis of this acquisition is to strengthen the supply chain or to gain greater control over the sourcing and manufacturing process and accelerate the time to market.

Stock Acquisition

A stock acquisition is carried out when a company buys another company’s stock directly from shareholders who are selling it. In this move, the acquiring company becomes the owner of all assets and liabilities of the company, and they take over the business from the previous owner. In most cases, the business continues to go on like before.

Asset Acquisition

An asset acquisition involves a company buying assets of another company, rather than its stocks. Normally, this doesn’t involve any liabilities, but this depends on the jurisdiction and the local business law. Both parties can decide which assets will be acquired and the liabilities that will come along with them. Therefore, an asset acquisition is much more amicable and transparent in nature.

Conglomerate Acquisition

This acquisition occurs when a company acquires another company from a different industry or sector. This is mostly done when the acquiring company wants to diversify its portfolio or venture into a new industry. An example of a conglomerate acquisition is Berkshire Hathaway’s takeover of Heinz, or United Technologies’ acquisition of Goodrich Corporation.

Congeneric Acquisition

A congeneric acquisition involves a larger company acquiring another company when both have similar distribution sources or production methods, but not similar product lines. One of the most popular examples of this is when Citi Group acquired Travelers Insurance Company, which allowed it to provide travel insurance along with its existing services.

The Reasons for Acquisitions

There are numerous reasons why companies are acquired, and the one major reason is because it benefits the acquiring companies in a significant manner.

Entering New Markets

One of the key reasons why companies are acquired are for the acquiring firms to enter new or foreign markets, without having to set up the entire company structure and infrastructure from scratch in a new region. In most cases, the cost of acquiring a new company may be much lower than that of setting up the business in a new market, as you would have to deal with the region’s business regulations, tax structures, and hundreds of other requirements.

Growing the Business

Most companies are also acquired as a strategy to grow the business. As mentioned above, it may be much more cost-effective to take over a smaller company with a promising revenue stream and customer base than expanding your own operations. Moreover, since the acquired company comes with its own customer base, this gives your business a major boost. There are platforms such as MergerVault that businesses can use to find high-value acquisition targets.

Eliminating the Competition

Another major reason why companies are acquired is to quickly remove the competition and gain more control over the market. Moreover, the acquisition may also be done to gain a greater share and do away with excess capacity.

Acquiring New Technology

The value of a business increases significantly if it owns innovative products, especially technology and software. Your company may be doing well in its industry, but it may not have the latest technology. To make sure that you upgrade your systems, you can acquire a newer company that has the said technology. This way, you will be able to take over their systems without having to go through purchasing, implementation, onboarding, training, etc. You can make use of the acquired company’s existing infrastructure to upgrade your business.

This is one of the reasons why you see many startups being acquired while they are in the seed stage and have technology that can disrupt the industry. They don’t even need to have a customer base or revenue – their technology is sufficient to get them acquired by a major market player.

The Benefits and Weaknesses of Acquisitions

There are several benefits that companies enjoy from acquiring other companies, and it also works in the other direction – the acquired company becomes part of a larger corporation and enjoys more profits and an upgraded infrastructure. Here are some of the advantages, as well as the disadvantages of acquisitions.

Benefits

• Speed: Acquiring other companies is one of the fastest ways to grow your company and penetrate other markets, while also boosting your sales. Moreover, acquisitions allow you to incorporate technologies and infrastructures into your company that would otherwise take a much longer time.
• Greater Market Presence: Another one of the benefits of acquisitions is that they prepare the groundwork for you to penetrate the market or enter a foreign market. In addition, it is also suitable for the acquiring companies to get a leg up on their competitors by entering the market with a bigger presence.
• Gaining New Resources: Business acquire other companies to gain access to new or more advanced resources that would be otherwise quite difficult for them to get a hold of. This is often done in the case of a new or emerging company developing a patented technology that isn’t available on the market and can’t be obtained otherwise.
• Achieving Growth Milestones: Often, the stakeholders of a particular business place a lot of emphasis on growing exponentially, which can’t always be possible. Therefore, business owners come up with an acquisition strategy that converts the takeover into a business growth strategy.
• Increased Revenue: If you acquire a company that has a low share price but performs well financially, acquiring it would allow you to instantly experience a revenue boost with a small investment. Since you will be able to acquire the resources and the infrastructure of a well-performing company as well, you may also be able to experience lower production costs and cost savings in other aspects.
• Easier Entry into New Markets: One of the key benefits of acquisitions is that they provide you with the perfect conditions to penetrate a ew market without going through the entire process of conducting market research, finding suppliers and vendors, looking for a place for the office or factory, registering a new company, and other hurdles. An established company already has the resources and manpower to run the business, so it allows you to hit the ground running.

Weaknesses

• Unexpected Losses: No matter how sound your business intel may be, there is no telling how your acquisition will pay you back, and the returns may not be beneficial for the stakeholders as expected. One of the main reasons for this can be paying a higher price for the acquisition that would have been fair, or the acquisition process taking a longer time to complete.
• Higher Acquisition Costs: In most deals, the cost of acquisition that is initially agreed upon doesn’t stay the same when the process starts, mainly due to unexpected costs and overheads that push up the value of a business significantly. Therefore, it can be impossible to justify the cost of acquisition when the added costs are implemented. This can often lead to a failed acquisition.
• Clashes During Integration: When a company is acquired and the integration process starts, there can be a lot of challenges and hurdles. Since not all companies are the same or have a similar culture, employees may also resent the acquisition and find it difficult to adapt to the new organization. Moreover, there are a lot of things about the acquired company that the acquirer discovers after the acquisition, and they can cause problems.

Recent Notable Acquisitions

There is no better way to learn about acquisitions than to explore some of the acquisitions that have also made headlines. Let’s have a look at two notable acquisitions.

Facebook’s Acquisition of WhatsApp

One of the most popular acquisition that also caused a storm is Facebook’s takeover of WhatsApp in 2014, which was valued at a staggering $22 billion. At the time, nearly all experts termed the acquisition to be highly overpriced, Facebook has managed to use WhatsApp to further its mission and develop its other platforms.

Through this acquisition, Facebook managed to use WhatsApp and its huge user base to further its advertising platform, which resulted in thousands of businesses being added to its fold.

Salesforce’s Acquisition of Slack

Salesforce, one of the leading software and CRM companies in the world, has recently acquired Slack, another notable software company, for a huge sum of $27.7 billion. This makes it the second-largest acquisition by a software company, the first one being IBM’s acquisition of RedHat.

Salesforce has acquired Slack to combine it with Salesforce Customer 360, which is a customer data platform launched in 2018.

Financing Options

Typically, larger companies don’t use their revenue or annual income for the purposes of acquiring other companies. Rather, they maintain a fund or pool of resources for acquisition finance. Typically, the finances are secured through numerous methods, including bank loans, lines of credit, private lender loans, debt security, etc.

To secure financing from a bank or a loan provider, companies would be required to show all the details and feasibility of acquiring the target company. They need to show that they can pay back the loan through the revenue or profits received from the acquired company’s business. Companies that make use of their own capital for taking over companies are said to be on the buy-side M&A.

The Definition of a Merger

A merger is the name given to an agreement in which two companies are united into one new company. Just like acquisitions, mergers are also of different types and there are numerous reasons why two companies would choose to consolidate their assets and liabilities, but the main reason is to increase the shareholder value. It is a common practice that when a merger takes place, both companies include a “no shop clause” in the deal, so that any other companies can’t be merged into the new company.

Types of Mergers

There are numerous types of mergers that take place between two companies:

Horizontal merger:

Like horizontal acquisitions, a horizontal merger involves a unification of two companies that have a direct competition based on their product range or market.

Vertical merger:

This type of merger takes place between two companies that have the same supply chain, i.e., companies that supply raw materials for auto parts may merge with a company that manufactures those parts.

Market Extension Merger

A market extension merger involves an agreement between two companies that belong to different industries but sell similar products or services. The main purpose of this merger is to gain access to a larger market with a more extensive customer base.

Product Extension Merger

A product extension merger is done between two companies with similar products and belong to the same market or industry. This merger is performed to consolidate the revenues and customer bases of both companies, in order to receive higher profits.

Advantages and Disadvantages of Mergers

Just like acquisitions, mergers also have certain benefits and downsides that can’t be ignored, and you can have a look at some of them below.

Advantages

• Greater Market Control: One of the major reasons for mergers is to form a new company with the consolidated resources and infrastructure of both companies, so that it can enjoy a greater share and control over the market. This also translates to higher revenue and profits.
• Value Addition and Cost Savings By merging two companies, their value efficiency is also increased and when their resources, services, and workforce is consolidated, it allows them to decrease financial risk with cost savings and increased productivity.
• An Edge Over Competitors: When two companies undergo a merger and form a new company, their consolidated abilities and technologies are combined, and this gives them a greater edge over their competitors.

Disadvantages

• Displacement of Experienced Employees: One of the downsides of mergers is that it can cause most of the employees to lose their jobs, particularly if the new management decides to cut down on their collective workforce to cut down on overheads. If you lay off your prized employees and workers, it would put a burden on your new merged business.
• Reskilling: If you merge your business with a smaller or newer company, you will have to deal with employees that don’t have the skills required to work in the merged company, and you will also have to deviate from the timeline or spend extra resources in bringing them up to speed.

Recent Notable Mergers

Heinz and Kraft

Heinz and Kraft are two renowned food companies and in 2016, they merged to create the Kraft Heinz Company. Due to the magnitude of the two companies and the $100 billion that were invested into the merger, experts predicted that the new company would become one of the largest food companies. However, things didn’t pan out as expected, and the company didn’t receive the intended success.

Dow Chemical and DuPont

Another recent notable merger was the $130 billion deal between Dow Chemical and DuPont in 2017, which was done to create a joint venture towards agriculture, material science, etc. The merger was predicted to bring about roughly $4 billion to the new company, DowDuPont Inc.

Mergers and Acquisitions: Differences

M&A involves two companies joining together based on a predefined model, but there are quite a few differences between the two terms, even though they are used synonymously in corporate dialogue.

Fundamentally, mergers occur when an agreement combines two companies and results in the formation of a new organization, whereas acquisitions result in the takeover of one company by another. In the case of mergers, the newly formed company usually has the name of both companies, i.e. The Kraft Heinz Company, Exxon Mobil, or AOL Time Warner.

On the other hand, acquisitions usually result in the target company ceasing to exist. They also involve the transfer of large amounts of money, and the control of the operations is also handed over to the acquiring company. Moreover, mergers require two companies to pool together their resources into the new company.

According to a study, experts suggest that mergers and acquisitions can take many different forms, and research for M&A involves identifying the key stakeholders involved in the entire activity. Even so, exhaustive research and studies are being conducted on this topic to ensure business growth and competitive advantage.

Documents You’ll Need to Consider

Mergers and acquisitions require a lot of due diligence and research on the buyer’s end, and they should involve lawyers that specialize in evaluation of mergers and can help them navigate through the different processes and phases of the deal. Moreover, an analyst may also be required to help business owners understand how they can buy or merge with a new company.

Here are some items that should be documented:

• Financial matters and terms: The buyer should have access to the target company’s financial performance and records from the past two or three years, as well as revenue projections, working capital, etc.
• Technology or Intellectual Property: The target company would also need to provide complete information regarding their technology stack or intellectual property, including patents, confidentiality, trademarks, copyrighted products, etc.
• Customer Base and Sales: The target company will also provide details regarding its complete customer base and its sales figures, as well as revenues, customer satisfaction, sales terms, etc.
• Strategic Fit: The strategic fit refers to the extent to which the target company will fit into the acquiring company. This also involves employee and technology integration, retention, revenue enhancements, etc.
• Material Contracts: This part involves loans, credit lines, guarantees, customer contracts, equipment leases, employee agreements, purchase agreements, approvals, and much more.
• Employees and Management: The target company also discloses its company structure and management, which involves going through employee contracts, compensations, rewards, etc. This process also involves all the litigation details and legal requirements that would be involved in the mergers and acquisitions deal.
• Compliance and Regulatory Matters: Finally, you would need a lawyer to oversee the compliance and regulatory matters of the target company, as well as the M&A deal.

Final Points

Apart from these matters and requirements, there are quite a lot of points that both acquiring and target companies, or merged companies, must consider and take care of. Whether you are on the buy-side M&A or sell-side M&A and are looking for a platform that makes the process manageable, you can approach BusinessesForSale.com, which facilitates buyers and sellers through its accessible platform.

Whether you are looking for a business to buy or a buyer for your business, you can get in touch with us right away. We have more than two decades of dealing with problems and solutions that arise during the mergers and acquisitions process.