Mergers and acquisitions are deals where two or more companies combine their assets and resources to create a new entity. They can be beneficial to both parties involved, but also harmful. The process can be complicated and take years to complete.
M&As are common in today’s global economy. Companies often merge to compete with other businesses, expand into new markets, or simply improve efficiency. M&As can be good for shareholders, employees, customers, suppliers, and even society at large.
How do mergers and acquisitions (M&As) affect companies? What happens after they happen? How does the company change? And why should you care? Here are the answers.
What are M&A deals?
An M&A deal is when two or more companies join together. These deals can come from any industry — it doesn’t matter if you work for a manufacturing firm or an online retailer. An M&A deal usually involves one of three things: merging companies, acquiring companies, or selling off parts of a business.
In a merger, two companies combine forces to form a new entity. This could mean that the parent company buys out the minority shareholder(s), or vice versa. A merger can lead to a number of benefits, including increased market share, improved financial performance, and cost savings. However, there may be some drawbacks as well, such as reduced diversity, job cuts, and higher prices.
Acquiring another company is similar to buying a house. You buy a property, renovate it, and sell it later on for a profit. In this case, the buyer acquires all the assets and liabilities of the target company. The goal here is to increase the size of the business. If you own a small restaurant chain, you might want to acquire a larger competitor so your restaurants can grow in size.
Selling off parts of a business is just like selling a home. You have a house that needs fixing up, and you decide to list it on the real estate market. You find someone who wants to buy the house, and then you negotiate a price. In this case, you sell off certain pieces of the business to pay for the renovations. For example, you might sell off part of the land, equipment, inventory, or customer base.
Why do companies get bought?
There are many reasons why companies get acquired. Some are based on economics, while others are driven by politics. Let’s look at each scenario separately.
Economics
The most obvious reason why a company gets bought is that its stock price has fallen too low. When investors lose faith in a company, they will often sell shares to raise money. But if the company continues to perform poorly, the value of those shares will fall further. Eventually, the company will reach a point where the value of its shares no longer justifies the investment made by the buyers. At that point, the company becomes vulnerable to takeover bids.
Sometimes, a company’s stock price falls because it is losing market share. If a company loses market share, it means that consumers are choosing to purchase products from competitors instead. Investors may see this as a sign that the company is failing. They may also think that the company is not innovative enough to stay ahead of the competition. As a result, the company’s stock drops, making it attractive to potential buyers.
Politics
Sometimes, companies get bought because their owners want to avoid being prosecuted for crimes committed by their subsidiaries. There are several types of criminal charges that can be brought against a company’s owner. Examples include money laundering, tax evasion, bribery, fraud, and embezzlement. These charges can carry serious penalties, including jail time.
If a company’s owners have been charged with a crime, they may choose to sell the company to an investor who will take over operations immediately. Or they may wait until the legal proceedings are completed before selling the company. Either way, they don’t want to be associated with the company anymore.
Other times, companies are bought because their owners want more control over their subsidiaries. For instance, one company may have a subsidiary that operates in a country where labor laws are stricter than in the parent company’s headquarters. This could mean higher wages for workers, which would hurt profits. So the parent company may want to move some of the subsidiary’s production back to its own headquarters.
What happens when a company gets bought?
When a company sells off parts of itself, it must deal with two major issues: how much cash it takes out of the business, and what changes occur in the company’s structure.
Cash Out
When a company sells parts of itself, it usually uses cash. It doesn’t need to borrow money because there isn’t any risk of default. The buyer pays the seller in full, so the seller doesn’t need any cash upfront.
In exchange for the cash, the seller receives a portion of the buyer’s assets. In general, these assets include all of the company’s physical property — buildings, vehicles, machinery, equipment, inventory, etc. In addition, the seller may receive ownership rights to certain intellectual properties like patents, trademarks, copyrights, software code, customer lists, and so on.
In many cases, the seller also receives a percentage of the buyer’s future earnings. This part of the transaction is called “earnings participation.” Earnings participation lets the seller profit from the growth of the buyer’s business.
Changes in Structure
The second issue that arises when a company sells off parts is what changes occur in the structure of the company. When a company buys another company, it typically adds the buying company’s name to the existing company’s title. For example, if Company A owns 100% of Company B, then Company A becomes Company B.
This is called a merger. Sometimes, however, the acquiring company keeps the original company’s name. This is called consolidation. If Company C acquires Company D, then Company C becomes Company D.
There are three main reasons why companies might decide to buy each other instead of merging. First, it’s cheaper. Second, it gives the acquiring company better access to the target company’s products and services. Third, it provides the acquiring company with additional resources.
Companies often merge to compete with others, expand into new markets or simply improve efficiency. But sometimes, companies get bought by investors who want more control over their operations. These transactions are called mergers and acquisitions.
If you want to learn more about M&As, our experts at Transworld Business Advisors will help you understand the basics. We’ll show you how to spot deals that make sense for your business. Then we’ll teach you how to analyze potential buyers, negotiate terms, and manage the sale process. Call us today and book an appointment!
