As we know Financial stability is one of the key aspects in maintaining a perpetual growth graph for an organisation to survive in this competitive environment and Merger & Acquisition plays an important role in the concerning extent. As once Stephen Moore said, “The historical evidence shows that shareholders usually greatly benefit from mergers”. Now let’s understand these terms in detail
An acquisition refers to an entity being controlled by another entity. In an acquisition, the small entity becomes part of the new entity. In an acquisition, one entity takes over the management of another entity, and then all other decisions are made together as a company. The merger structure is an agreement between the two parties to determine the rights and obligations of both parties. Establish the obligations and rights of all parties for the performance of the entity.
Different types of M&A structures:
- i. Horizontal fusion
- ii. Vertical fusion
- iii. Similar mergers
- iv. Conglomerate mergers
- v. Cash Merger
- vi. Triangular Consolidation
MERGERS & ACQUISITIONS THAT ARE BENEFICIAL FOR FINANCIAL STABILITY ARE
Horizontal fusion Also known as "horizontal integration", this type of merger occurs between entities engaged in competing businesses that are at the same stage of the industrial process. The horizontal merger took steps toward a monopoly by eliminating the competitors and establishing a stronger market presence. Other benefits of this form of the merger are the advantages of economies of scale and economies of scope
Triangular Consolidation For regulatory and tax reasons, triangular mergers are often used. As the name suggests, is a tripartite agreement in which the target merges with the acquirer's subsidiary. Depending on which entity the surviving after the merger belongs to, the triangular merger can be direct (when the target merges with the subsidiary and the subsidiary exists), or reverse (when the subsidiary merges with the target and the target survives
Financial benefits of merger and acquisition
Synergy
The primary benefit of mergers and acquisitions is that synergy provides additional power to improve performance and profitability. When two or more businesses come together and build together, the business results are sure to obtain great benefits in terms of financial returns and work efficiency.
Cost Efficiency
Profitability is another beneficial aspect of mergers and acquisitions. This is because any form of merger improves purchasing power as there is more negotiation with bulk orders. In addition, the reduction of personnel also contributed significantly to reducing costs and increasing the company's profit margin. In addition to this increase in production volume, the result is a reduction in the cost of production per unit, which ultimately leads to increased economies of scale.
Tax Benefits
One of the benefits of mergers is tax benefits and increased revenue through market share. Joint ventures often expect more value from separate companies after a merger. A good way to get through the current situation If a company is having a lot of financial or business problems, the best thing to do is to do a merger and acquisition. An acquiring company must have a good sustaining force in the market, where the acquisition is weak as part of a profitable deal. This benefits both the losing company and the acquiring company, as well as the start of a new strategy.
Reduced operating costs
Businesses can realize economies of scale, such as purchasing raw materials in bulk, which can lead to cost reductions. Investments in assets are now spread over a larger production, which leads to technical savings.
Effect of Merger and acquisition on the growth of the company
A business merger or acquisition can have a profound effect on a company's growth prospects and long-term prospects. But while an acquisition can literally transform the acquiring business overnight, it carries a significant degree of risk.
Businesses will buy or merge with another business in the hope of promoting the growth of their own business or fending off competition, among other reasons.
Mergers and acquisitions can affect a business in several ways, including capital structure, stock prices, and prospects for future growth.
Capital structure
Mergers and acquisitions clearly have longer-term ramifications for the acquiring company or dominant entity in a merger than for the target company in an acquisition or companies that are included in a merger.
For the target company, mergers and acquisitions offer the company's shareholders the possibility of a substantial premium, especially if the transaction is a cash transaction. If the buyer pays partly in cash and partly in his own shares, the shareholders of the target company will receive shares in the buyer and thus have a certain interest in the success. long term of that company. For the acquirer, the impact of a merger and acquisition transaction depends on the size of the transaction relative to the size of the business. The larger the potential target, the greater the risk for the buyer. A business can withstand the failure of a small acquisition, but the failure of a large acquisition can seriously affect its long-term success.
Market reaction
Market reaction to the announcement of a merger and acquisition transaction can be favourable or unfavourable, depending on the perception of market participants about the value of the transaction. In most cases, the target company's stock will rise to a level close to the buyer's offer, assuming, of course, that the offer represents a substantial premium over the share price. previous of the target. Recently, ZEEL announced a merger with SPNI and acquisition by HDFC with Exide in the Indian market led to a significant rise in their market shares and valuation for both of them surged in the past month (as of September 2021).
So, to finally strategize the overall growth by creating a synergy between two different organisations to cover up the weakness and strengthen the strengths combinedly is what mergers and acquisition are all about! Even the famous Tech article writer Mario Gabelli wrote- “How do you make money? Spinoffs, split-ups, liquidations, mergers and acquisition” and Famous author James Surowiecki quoted in one of his books – “Most corporate name changes are the result of mergers and acquisitions. But these tend to be unimaginative”. It’s not always about performing better individually but sometimes it's about forming opportunities for oneself through a plan of action and making the best out of it, which Mergers & Acquisition stances for in this new budding corporate world.
Author Details:
Name: Priyanshu Saxena
Batch: 2021-23
LinkedIn: https://www.linkedin.com/in/priyanshu-saxena-696153226
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