Mergers and acquisitions (M&A) take place when one organisation takes control of another organisation. The worldwide-agreed explanation of M&A arrangement is when one organisation has, in excess of, 50% ordinary shares (or voting privileges) of the acquired organisation – the transactions can be domestic, where an organisation in the United Kingdom acquires another United Kingdom organisation, or worldwide. M&A transactions are termed as ‘outward’ when a United Kingdom based organisation gains control of another organisation in a foreign country, whereas, inward M&A transactions are termed as ‘inward’ when an overseas organisation acquires an organisation in the United Kingdom.
Different kinds of mergers
Horizontal MergersHorizontal merger takes place when one organisation takes over or merges with another organisation that manufactures or deals with comparable services or products. Both the organisations taking part in a horizontal merger are from the similar industry and this means that organisations are direct competitors. For instance, if an organisation manufacturing cars merges with a different organisation, from a similar industry, manufacturing cars then such a merger is labelled as a horizontal merger. A horizontal merger dissolves competition, enables an organisation to upsurge its market share, and revenues.
Vertical MergersVertical merger takes place when both the organisation are in the similar trade, but either of the two offer goods or services that are mandatory for the other in order to complete the product cycle. For instance, if an organisation manufacturing shoes takes over another organisation that manufactures leather, then such as merger is labelled as a vertical merger, since the leather produced by one organisation is consumed by the other for manufacturing shoes. Such mergers primarily take place to secure supply of indispensable goods, and evade interruption in supply. Vertical mergers enable an organisation to save cost and attain a greater profit margin as intermediary cost is removed.
Concentric MergersConcentric merger takes place between organisations that offer services to the same client but the services and products offered are dissimilar. Here, the products might be complementary such as a computer system firm merging with an organisation that manufactures UPS.
Conglomerate MergersConglomerate merger takes place between two organisations operating in totally diverse industries and merger to form a new organisation. This is typically done to expand into other industries, thereby, minimising risk and leveraging workforce expertise.
Dissimilarity amongst Mergers & Acquisition (M&A)
|Explanation||Two companies merge to form a new firm which aims to achieve the desired objectives||The acquiring business takes over the bulk stake in the acquired company, and acquiring business comes to an end|
|Scale of companies||Both the organisations are of a similar size||Typically, a bigger firm acquires a smaller firm|
|Focus area||Two, similar sized, organisations merger to enhance their latent strength and business profits along with increase scale of trade||Two organisation come together to overcome the challenges of the deterioration of business|
|Examples||Pixar and Disney merged together to work together easily||In August 2005, Google acquired Android for $50 mn|
Merger and Acquisition strategies
Let’s understand this under three specific heads:
Importance of integration in M&A
Merger integration and restructuring is a composite exercise. It requires modifications in all functions, with inter-dependencies that have to be accomplished in a day-to-day work environment. Integration, during M&A process, involves the following:
Corporate bodies and acquisition approaches
With regards to private acquisitions, the purchaser is characteristically a limited liability corporation, private or public. In case, a limited liability corporation purchaser does not have adequate resources or is a recently formed corporation, the seller will usually request for a corporate assurance from the purchaser's owners. The seller is typically a public limited company or a private limited company.
Restrictions on share transfer
An articles of association and any stakeholders' contract, need to be verified for any privileges investors may have to make before transferring shares or additional constraints on share transfers. There is also a possibility of a drag and tag-along rights if the target has a number of stakeholders. Drag-along rights enables a specific selling stakeholder (typically the chief stakeholder) to call for all the other stakeholders to sell their stocks. A tag-along right enables stakeholders with the right to call for a selling stakeholder to take account of shares of that specific stakeholder while selling shares. Other requirements may allow some transfers between a set of stakeholders or permit stakeholders to offer some security interests without affecting any of the privileges mentioned previously.
In a two-sided deal, a ‘letter of intent’ may be negotiated, which largely defines the chief contractual conditions of the proposed sale.
These terms usually comprise:
- The acquisition price, and any modifications to the acquisition price, for instance through the usage of closing accounts or locked box.
- Types of guarantees that may be agreed
- Non-compete agreements that may be agreed
Letters of intent often comprises an indicative schedule, and exclusive and confidential (or non-disclosure) provisions. However, a letter of intent is not generally lawfully binding.
DNS Accountants and M&A
Strategic decisions around acquisitions, and mergers have continually been imperative for private equity (PE) investors, corporations, and financial institutions. Our clients have faith in our recommendation to help recognise and evaluate viable options, and accomplish their most composite deals. Our clients value our ground-breaking approach and high-degree of personalised attention. DNS Accountants aim to provide exceptional service, earn client’s trust and establish a long-term relationship. Our well-qualified workforce and know-how enables us to plan resourceful deal structures, win agreements, and implement dynamic strategies for acquisition targets acquirers, and sellers.
We assist clients across businesses, especially:
Any questions? Schedule a call with one of our experts.
Whether you prefer to meet and speak over the internet, or if you prefer an in person conversation we can help you with your preference.
Stay up-to-date with the latest news affecting small businesses, get business tips and tax saving advice.