Standing still in business is a risky strategy. Organizations are always thinking of new ways to challenge industry competitors and optimize their products or services. One way to maintain or acquire dominance within a business sector is to combine resources with another company or buy them outright, which are commonly known as mergers and acquisitions respectively.
Mergers refer to the amalgamation of two or more existing companies into a new joint enterprise. Acquisitions see one company buy out another company’s stock or assets, often resulting in the liquidation of the bought-out business. Here are five important factors to consider about these business deals.
Why Mergers and Acquisitions Happen in Business
The obvious benefit of buying out another business is to acquire its assets, products or services, customers, and even staff. The seller will usually try to sell at the highest possible price, so the buyer must make sure that the risk is worth it. Mergers are more of a level playing field, with each company standing to benefit from the deal, but still involve negotiation and plenty of due diligence on the part of both parties.
Buying or merging with a competitor allows organizations to acquire a larger market share. Students in international finance training should note that even currently unprofitable businesses may be seen as attractive prospects for buyers. The value of the business could quickly grow if it’s bought by or merges with an industry-leading brand with high levels of consumer confidence.
International finance students learn how mergers are negotiated
How these Big Business Deals Happen
Advisors are very important in mergers and acquisitions to help buyers and sellers navigate the complexities of the process. Once initial contact is made between both parties, the buyer is usually presented with vital financial information about the seller’s company in an executive summary.
Both parties may also decide to sign a confidentiality agreement before an Indication of Interest is submitted by the buyer. The initial offer is outlined in a Letter of Intent, followed by intense negotiations, and the signing of a purchase agreement to legalize the deal.
Types of Merger Deals to Know About in International Finance Training
There are many different types of merger deals, but horizontal and vertical mergers are the most common. Horizontal merging refers to a deal between two companies in direct competition with each other. For example, car manufacturers Daimler-Benz and Chrysler joined forces in 1998 in a deal worth US$38bn.
Vertical merging is a bit more nuanced. The buyer recognizes that there are weaknesses within its own supply chain, so buys a company that will strengthen it. For example, a mayonnaise company could buy out an egg producer so it has consistent access to its most necessary ingredient.
The Difference Between Hostile and Friendly Acquisitions
When both negotiating teams come to an agreement about the acquisition of a company then the deal is deemed ‘friendly’. However, students in BBA school should be aware that failure to negotiate a deal doesn’t always mean that an acquisition can’t go ahead. If a company is funded through stocks, then the buyer could also acquire a controlling share of that stock without the approval of the Board of Directors. These are known as ‘hostile’ acquisitions.
One of the most infamous examples of this kind of takeover is the 2011 AOL Time Warner deal, which was worth US$164 billion at the time, but would eventually result in the newly formed company splitting after losing US$200 billion within two years.
Why Governments may be Concerned about these Deals
From a consumer’s perspective, competition between businesses is positive because it keeps prices low. For that reason, governments and state agencies keep a close eye on potential monopolies and could prevent mergers and acquisitions from proceeding. For example, US regulators blocked a merger in 2016 between office supply giants Staples and Office Depot because of its potential impact on the market.
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