Mergers and Acquisitions

Financial Dictionary -> General Finance -> Mergers and Acquisitions

Mergers and acquisitions deal with the buying, selling, taking over and combining of different companies to facilitate a company's market growth and development without having to establish a separate business entity.

An acquisition refers to the buying of the target entity by another company. This process is also known as a takeover. It can be public or private, hostile or friendly. Hostile transactions occur when the target company is not aware of the offer or does not want to be bought. Eventually they turn friendly - in most cases. A friendly acquisition, understandably, is when the companies negotiate in a friendly tone and cooperate along the process. Acquisitions usually involve a bigger company buying a smaller one. In some cases, a smaller business entity acquires control of a long established or bigger firm and sustains its name for the combined establishment. This is referred to as a reverse takeover. Reverse mergers take place when a private company with good prospects buys a public one with limited assets and no business. The publicly traded entity is known as a 'shell' because only its organizational structure is left out of the original firm. The shareholders in the private company take control over the management body (Board of Directors) and receive the majority of the public company's shares. This transaction can take place over a period of several weeks. Reverse mergers come with several benefits but most important, they allow private companies to become public through an IPO, with less stock dilution, and at a lesser cost.

The terms 'merger' and 'acquisition' are usually used interchangeably, but there is a key difference. A merger is completed when two companies of about the same size agree to go forward as a new company instead of being separately operated. In practice, pure mergers of equals are quite rare. With acquisitions, a company buys another and establishes itself as the new owner. Legally, the bought company ceases to exist. If the target company does not want to be bought, the deal is always an acquisition. A common reason to opt for a merger is to increase the market share of one's company. The process is typically kept secret when it comes to the company's employees and the general public. For this reason, it is difficult to tell how many mergers take place every year.

Evaluating the business one wishes to acquire or merge with is of paramount importance. The most common means of evaluation involve an assessment of historical earnings, relative evaluation, evaluation of projected earnings, evaluation of assets, and assessment of discounted cash flow using the concept of the time value of money - what the money is actually worth at a given point in time. The data acquired through evaluations is usually expressed in an LOV - Letter of Opinion of Value.

Mergers and acquisitions are financed in either cash or stock. When financed in cash, they are usually referred to as acquisitions: the stockholders of the target company do not play a role and the latter comes to be controlled by the stockholders of the takeover company.

The biggest mergers and acquisitions in history are the purchase of Mannesmann by Vodafone in 1999, of Time Warner by America Online in 2000 and of Warner-Lambert by Pfizer in 1999. Their values were 183,000 million, 164,747 million and 90,000 million US dollars respectively.