Mergers and acquisitions
Mergers and acquisitions (M&A) are business transactions in which the ownership of companies, business organizations, or their operating units are transferred to or consolidated with another company or business organization. This could happen through direct absorption, a merger, a tender offer or a hostile takeover.[1] As an aspect of strategic management, M&A can allow enterprises to grow or downsize, and change the nature of their business or competitive position.
For The Sopranos episode, see Mergers and Acquisitions (The Sopranos).
Technically, a merger is the legal consolidation of two business entities into one, whereas an acquisition occurs when one entity takes ownership of another entity's share capital, equity interests or assets. A deal may be called a "merger of equals" if both CEOs agree that joining is in the best interest of both of their companies. From a legal and financial point of view, both mergers and acquisitions generally result in the consolidation of assets and liabilities under one entity, and the distinction between the two is not always clear.
In most countries, mergers and acquisitions must comply with antitrust or competition law. In the United States, for example, the Clayton Act outlaws any merger or acquisition that may "substantially lessen competition" or "tend to create a monopoly", and the Hart–Scott–Rodino Act requires companies to notify the Federal Trade Commission and the U.S. Department of Justice's Antitrust Division about all mergers and acquisitions over a certain size.
An acquisition/takeover is the purchase of one business or company by another company or other business entity. Specific acquisition targets can be identified through myriad avenues, including market research, trade expos, sent up from internal business units, or supply chain analysis.[2] Such purchase may be of 100%, or nearly 100%, of the assets or ownership equity of the acquired entity.
A consolidation/amalgamation occurs when two companies combine to form a new enterprise altogether, and neither of the previous companies remains independently owned. Acquisitions are divided into "private" and "public" acquisitions, depending on whether the acquiree or merging company (also termed a target) is or is not listed on a public stock market. Some public companies rely on acquisitions as an important value creation strategy.[3] An additional dimension or categorization consists of whether an acquisition is friendly or hostile.[4]
Achieving acquisition success has proven to be very difficult, while various studies have shown that 50% of acquisitions were unsuccessful.[5] "Serial acquirers"[6] appear to be more successful with M&A than companies who make acquisitions only occasionally (see Douma & Schreuder, 2013, chapter 13). The new forms of buy out created since the crisis are based on serial type acquisitions known as an ECO Buyout which is a co-community ownership buy out and the new generation buy outs of the MIBO (Management Involved or Management & Institution Buy Out) and MEIBO (Management & Employee Involved Buy Out).
Whether a purchase is perceived as being "friendly" or "hostile" depends significantly on how the proposed acquisition is communicated to and perceived by the target company's board of directors, employees, and shareholders. It is normal for M&A deal communications to take place in a so-called "confidentiality bubble," wherein the flow of information is restricted pursuant to confidentiality agreements.[7] In the case of a friendly transaction, the companies cooperate in negotiations; in the case of a hostile deal, the board and/or management of the target is unwilling to be bought or the target's board has no prior knowledge of the offer. Hostile acquisitions can, and often do, ultimately become "friendly" as the acquirer secures endorsement of the transaction from the board of the acquiree company. This usually requires an improvement in the terms of the offer and/or through negotiation.
"Acquisition" usually refers to a purchase of a smaller firm by a larger one. Sometimes, however, a smaller firm will acquire management control of a larger and/or longer-established company and retain the name of the latter for the post-acquisition combined entity. This is known as a reverse takeover. Another type of acquisition is the reverse merger, a form of transaction that enables a private company to be publicly listed in a relatively short time frame. A reverse merger is a type of merger where a privately held company, typically one with promising prospects and a need for financing, acquires a publicly listed shell company that has few assets and no significant business operations.
The combined evidence suggests that the shareholders of acquired firms realize significant positive "abnormal returns," while shareholders of the acquiring company are most likely to experience a negative wealth effect.[8] Most studies indicate that M&A transactions have a positive net effect, with investors in both the buyer and target companies seeing positive returns. This suggests that M&A creates economic value, likely by transferring assets to more efficient management teams who can better utilize them. (See Douma & Schreuder, 2013, chapter 13).
There are also a variety of structures used in securing control over the assets of a company, which have different tax and regulatory implications:
The terms "demerger", "spin-off" and "spin-out" are sometimes used to indicate a situation where one company splits into two, generating a second company which may or may not become separately listed on a stock exchange.
As per knowledge-based views, firms can generate greater values through the retention of knowledge-based resources which they generate and integrate.[9] Extracting technological benefits during and after acquisition is an ever-challenging issue because of organizational differences. Based on the content analysis of seven interviews, the authors concluded the following components for their grounded model of acquisition:
An increase in acquisitions in the global business environment requires enterprises to evaluate the key stake holders of acquisitions very carefully before implementation. It is imperative for the acquirer to understand this relationship and apply it to its advantage. Employee retention is possible only when resources are exchanged and managed without affecting their independence.[10]
The documentation of an M&A transaction often begins with a letter of intent. The letter of intent generally does not bind the parties to commit to a transaction, but may bind the parties to confidentiality and exclusivity obligations so that the transaction can be considered through a due diligence process involving lawyers, accountants, tax advisors, and other professionals, as well as business people from both sides.[13]
After due diligence is complete, the parties may proceed to draw up a definitive agreement, known as a "merger agreement", "share purchase agreement," or "asset purchase agreement" depending on the structure of the transaction. Such contracts are typically 80 to 100 pages long and focus on five key types of terms:[16]
Following the closing of a deal, adjustments may be made to some of the provisions outlined in the purchase agreement, such as the purchase price. These adjustments are subject to enforceability issues in certain situations. Alternatively, certain transactions use the 'locked box' approach, where the purchase price is fixed at signing and based on the seller's equity value at a pre-signing date and an interest charge.
Specialist advisory firms[edit]
M&A advice is provided by full-service investment banks- who often advise and handle the biggest deals in the world (called bulge bracket) - and specialist M&A firms, who provide M&A only advisory, generally to mid-market, select industries and SBEs.
Highly focused and specialized M&A advice investment banks are called boutique investment banks.
Research and statistics for acquired organizations[edit]
An analysis of 1,600 companies across industries revealed the rewards for M&A activity were greater for consumer products companies than the average company. For the period 2000–2010, consumer products companies turned in an average annual TSR of 7.4%, while the average for all companies was 4.8%.
Given that the cost of replacing an executive can run over 100% of his or her annual salary, any investment of time and energy in re-recruitment will likely pay for itself many times over if it helps a business retain just a handful of key players that would have otherwise left.
Organizations should move rapidly to re-recruit key managers. It's much easier to succeed with a team of quality players that one selects deliberately rather than try to win a game with those who randomly show up to play.
Cross-border[edit]
Introduction[edit]
In a study conducted in 2000 by Lehman Brothers, it was found that, on average, large M&A deals cause the domestic currency of the target corporation to appreciate by 1% relative to the acquirer's local currency. Until 2018, around 280,472 cross-border deals have been conducted, which cumulates to a total value of almost US$24,069 billion.[49]
The rise of globalization has exponentially increased the necessity for agencies such as the Mergers and Acquisitions International Clearing (MAIC), trust accounts and securities clearing services for Like-Kind Exchanges for cross-border M&A. On a global basis, the value of cross-border mergers and acquisitions rose seven-fold during the 1990s.[50] In 1997 alone, there were over 2,333 cross-border transactions, worth a total of approximately $298 billion.
The vast literature on empirical studies over value creation in cross-border M&A is not conclusive, but points to higher returns in cross-border M&As compared to domestic ones when the acquirer firm has the capability to exploit resources and knowledge of the target's firm and of handling challenges. In China, for example, securing regulatory approval can be complex due to an extensive group of various stakeholders at each level of government. In the United Kingdom, acquirers may face pension regulators with significant powers, in addition to an overall M&A environment that is generally more seller-friendly than the U.S. Nonetheless, the current surge in global cross-border M&A has been called the "New Era of Global Economic Discovery".[51]
In little more than a decade, M&A deals in China increased by a factor of 20, from 69 in 2000 to more than 1,300 in 2013.
In 2014, Europe registered its highest levels of M&A deal activity since the financial crisis. Driven by U.S. and Asian acquirers, inbound M&A, at $320.6 billion, reached record highs by both deal value and deal count since 2001.
Approximately 23 percent of the 416 M&A deals announced in the U.S. M&A market in 2014 involved non-U.S. acquirers.
For 2016, market uncertainties, including Brexit and the potential reform from a U.S. presidential election, contributed to cross-border M&A activity lagging roughly 20% behind 2015 activity.
In 2017, the controverse trend which started in 2015, decreasing total value but rising total number of cross border deals, kept going. Compared on a year on year basis (2016–2017), the total number of cross border deals decreased by −4.2%, while cumulated value increased by 0.6%.[52]
Even mergers of companies with headquarters in the same country can often be considered international in scale and require MAIC custodial services. For example, when Boeing acquired McDonnell Douglas, the two American companies had to integrate operations in dozens of countries around the world (1997). This is just as true for other apparently "single-country" mergers, such as the $29-billion merger of Swiss drug makers Sandoz and Ciba-Geigy (now Novartis).
In emerging countries[edit]
M&A practice in emerging countries differs from more mature economies, although transaction management and valuation tools (e.g. DCF, comparables) share a common basic methodology. In China, India or Brazil for example, differences affect the formation of asset price and on the structuring of deals. Profitability expectations (e.g. shorter time horizon, no terminal value due to low visibility) and risk represented by a discount rate must both be properly adjusted.[53] In a M&A perspective, differences between emerging and more mature economies include: i) a less developed system of property rights, ii) less reliable financial information, iii) cultural differences in negotiations, and iv) a higher degree of competition for the best targets.
If not properly dealt with, these factors will likely have adverse consequences on return-on-investment (ROI) and create difficulties in day-to-day business operations. It is advisable that M&A tools designed for mature economies are not directly used in emerging markets without some adjustment. M&A teams need time to adapt and understand the key operating differences between their home environment and their new market.
Despite the goal of performance improvement, results from mergers and acquisitions (M&A) are often disappointing compared with results predicted or expected. Numerous empirical studies show high failure rates of M&A deals. Studies are mostly focused on individual determinants. A book by Thomas Straub (2007) "Reasons for frequent failure in Mergers and Acquisitions"[57] develops a comprehensive research framework that bridges different perspectives and promotes an understanding of factors underlying M&A performance in business research and scholarship. The study should help managers in the decision-making process. The first important step towards this objective is the development of a common frame of reference that spans conflicting theoretical assumptions from different perspectives. On this basis, a comprehensive framework is proposed with which to understand the origins of M&A performance better and address the problem of fragmentation by integrating the most important competing perspectives in respect of studies on M&A. Furthermore, according to the existing literature, relevant determinants of firm performance are derived from each dimension of the model. For the dimension strategic management, the six strategic variables: market similarity, market complementarities, production operation similarity, production operation complementarities, market power, and purchasing power were identified as having an important effect on M&A performance. For the dimension organizational behavior, the variables acquisition experience, relative size, and cultural differences were found to be important. Finally, relevant determinants of M&A performance from the financial field were acquisition premium, bidding process, and due diligence. Three different ways in order to best measure post M&A performance are recognized: synergy realization, absolute performance, and finally relative performance.
Employee turnover contributes to M&A failures. The turnover in target companies is double the turnover experienced in non-merged firms for the ten years after the merger.
M&As involving small businesses are particularly problematic and have been found to take longer and cost more than expected with organisation cultural and effective communication with employees being key determinants of success and failure [58]
Many M&A fail due to lack of planning or execution of the plan. An empirical research study conducted between 1988 and 2002 found that "Successful acquisitions, as defined by return on investment and time to market, are more likely to involve complex products but minimal uncertainty about whether the product is functional and whether there is an appetite in the market."[59][60] But failed mergers and acquisitions are caused by "hasty purchases where information platforms between companies were incompatible and the product was not yet tested for release."[59] A recommendation to resolve these failed mergers is to wait for the product to become established in the market and research has been completed.
Deloitte[61] determines most companies do not do their due diligence in determining whether a M&A is the correct move due to these four reasons:
Transactions that undergo a due diligence process are more likely to be successful.[62]
A considerable body of research suggests that many mergers fail due to human factors such as issues with trust between employees of the two organizations or trust between employees and their leaders.[63]
Any M&A transaction, no matter the size or structure, can have a significant impact on the acquiring company. Developing and implementing a robust due diligence process can lead to a much better assessment of the risks and potential benefits of a transaction, enable the renegotiation of pricing and other key terms, and smooth the way towards a more effective integration.[61]
M&A can hinder innovation by mismanagement or cultural differences between companies. They can also create bottlenecks when they disrupt the flow of innovation with too many company policies and procedures. Market dominant companies can also be their own demise when presented with an M&A opportunity. Complacency and lack of due diligence may cause the market dominant company to miss the value of an innovative product or service.