Mergers and Acquisition (M&A) is a term that defines the event of combination of two or more companies into one. Normally, it has been seen that either people consider mergers and acquisition as one term or do not differentiate between the two. Though in both the cases the companies combine into one but the process and fundamentals are entirely different. The terminologies are important to understand to view a clear picture about companies future strategies.
Merger And Acquisition (M&A): Meaning
It is a tool through which two or more companies combine with mutual consent. Merger is done to increase the profitability and for better utilization of resources. If one of the merging companies exists and other are merged into it, this is known as Merger through Absorption. Whereas if all the merging companies combine to form a new company, it is named as Merger through Consolidation. The strategies of M&A differ from country to country based on government laws, culture, easiness in process and more. Here you can see some basic types of mergers taking place across the globe.
- Horizontal Merger: It is the process in which the merging companies are competitors and have the same product line. Horizontal Merger is done with the expectation to provide synergy and cost efficiency. The advantages like staff reduction and economies of scale help in decrease in the cost. Also, the market reach is increased.
- Vertical Merger: It is the process in which the merging companies are not competitors but the products are complementary or related to each other. Vertical Merger is done with the expectation to have benefits in terms of raw material, transportation and marketing etc.
- Conglomerate Merger: It is the process of merging of two unrelated firms where the products are not dependent or related to each other. Conglomerate Merger is done when the company is planning to increase the product lines.
- Co-Generic Merger: It is the process of merging of companies which are related on some grounds such as manufacturing tools, market strategies, technology etc. It is done to become the market leader on a particular basis.
Acquisition on the other hand is a different process. It is a process in which one company overtakes the other (one or more) company. It can be done with the mutual consent known as friendly acquisition. Or it can be done forcibly known as hostile acquisition. This is generally done to come over the competitive threats. Sometimes, the acquiring company comes to know about the process after acquisition, in case of hostile acquisition. Though in both the cases the process is carried out in two ways mentioned below:
Acquisition Through Asset Purchase: In this type of acquisition, some specific assets of the target company are bought by the acquiring company. The acquiring company does this where the buying of assets help in its existing business also. However, this process is not much supported as it is difficult to settle the issue, if any, on a later stage. And also target company has to pay tax on capital gains.
Acquisition Through Stock Purchase: Here the acquiring company buys all the equity of the target company. There is no change in the employees or the ongoing process. Just all the assets and liabilities are under the new owner. It is a very simplified and easy process.