The phrase mergers and acquisitions (M&A) refers to the aspect of business strategy and management dealing with the merging and/or acquiring of different companies.
Usually these occur in a friendly setting where officers in each company involved come together to go through a due diligence process to ensure a successful marriage between all the parties involved. Historically however, this process has failed, with the majority of mergers and acquisitions failing to add shareholder value.
On other occasions, acquisitions can happen through hostile takeover via absorbing the majority of outstanding shares in the open stock market. In the United States, business laws vary from state to state; some companies have limited protection against hostile takeover.
See Delaware corporations.
Financing M&A
Technically, what differentiates a merger from an acquisition is how it is financed. Various methods of financing an M&A deal exist:
- Merger:- A stock swap involves issuing stock to exchange for the shares of the other company.
- Acquisition:- A cash deal involves buying a target company with cash.
- In some cases, a company may acquire another company by issuing junk bonds to raise funds. In a 1985 merger between Pantry Pride and Revlon, Pantry Pride had to issue 2.1 billion dollars of Junk bonds to buy Revlon. The target Revlon was worth 5 times the acquirer.
Motives behind M&A
These motives are thought to be good for shareholders:
- Economy of scale: This refers to the fact that the combined company can often reduce duplicative departments or operations, lowering the costs of the company relative to theoretically the same revenue stream, thus increasing profit.
- Increased revenue (due to lack of competition): This motive assumes that the company will be getting rid of a major competitor and increasing its power to set prices.
- Increased revenue (due to "revenue synergies" aka "cross-selling"): For example, a bank buying a stock broker could then sell its banking products to the stock broker's customers, while the broker can sign up the bank's customers for brokerage accounts
- Synergy (better use of complementary resources)
- Taxes (a profitable company can buy a loss maker to exploit the target's tax shield
- Geographical or other diversification: This is designed to smooth the earnings results of a company, which over the long term smooths the stock price of a company, giving conservative investors more confidence in investing in the company
Bad for shareholders
- Diversification (tend to be unprofitable due to conflict of interest)
- Overextension (tend to make the organization fuzzy and unmanageable)
- Manager's hubris: Oftentimes the executives of a company will just buy others because doing so is newsworthy, and increases the profile of the company.
- Manager's Compensation: In the past, certain executive management teams had their payout based on the total amount of profit of the company, instead of the profit per share, which would give the team a perverse incentive to buy companies to increase the total profit while decreasing the profit per share (which hurts the owners of the company, the shareholders)
- Bootstrapping (example: how ITT executed its M&A)
M&A and Investment Banking
Historically, Investment Banks (intermediaries which assist companies in selling ownership of themselves as stock or borrowing money directly from investors in the form of bonds) have been closely associated with Merger and Aquisition activity. This is because usually a merger or aquisition is a sales opportunity for the Investment Bank. If the company wants to merge with another, it must print shares to swap, which would involve an invesment bank. If it wants to buy the other company with borrowed money, it would most likely borrow directly from investors in the form of bonds, also printed by the investment bank. Thus, Investment Banks position themselves to act as advisors on mergers and aqusitions, and usually charge a separate fee for doing so (this fee is usually the most profitable of their operations).
This system however, gives and incentive to Investment Banks to try and stimulate as much mergers and aquistions activity as possible, even though the result might not be good for the shareholders of the acquiring company. The amount of influence this has is unclear, since this activity is usually secret and since the majority of merger proposals do not go through.
M&A marketplace difficulties
No effective marketplace currently exists for the mergers and acquisitions of privately-owned small to mid-sized companies. Market participants often wish to maintain a level of secrecy about their efforts to buy or sell such companies. Their concern for secrecy usually arises from the possible negative reactions a company's employees, bankers, suppliers, customers and others might have if the effort or interest to seek a transaction were to become known. This need for secrecy has thus far thwarted the emergence of a public forum or marketplace to serve as a clearinghouse for this large volume of business.
At present, the process by which a company is bought or sold can prove difficult, slow, and expensive. A transaction typically requires six to nine months and involves many steps. Locating parties with whom to conduct a transaction forms one step in the overall process and perhaps the most difficult one. Qualified and interested buyers of multimillion dollar corporations are hard to find. Even more difficulties attend bringing a number of potential buyers forward simultaneously during negotiations. Potential acquirers in industry simply cannot effectively "monitor" the economy at large for acquisition opportunities even though some may fit well within their company's operations or plans.
An industry of professional "middlemen" (known variously as intermediaries, business brokers, and investment bankers) exists to facilitate M&A transactions. These professionals do not provide their services cheaply and generally resort to previously-established personal contacts, direct-calling campaigns, and placing advertisements in various media. In servicing their clients they attempt to create a one-time market for a one-time transaction. Many but not all transactions use intermediaries on one or both sides. Despite best intentions, intermediaries can operate inefficiently because of the slow and limiting nature of having to rely heavily on telephone communications. Many phone calls fail to contact with the intended party. Busy executives tend to be impatient when dealing with sales calls concerning opportunities in which they have no interest. These marketing problems typify any private negotiated markets.
The market inefficiencies can prove detrimental for this important sector of the economy. Beyond the intermediaries' high fees, the current process for mergers and acquisitions has the effect of causing private companies to sell at a significant discount relative to what the same company might sell for were it publicly owned and traded on a functioning exchange. An important and large sector of the entire economy is held back by the difficulty in conducting corporate M&A (and also in raising equity or debt capital). Furthermore, it is likely that since privately-held companies are so difficult to sell they are not sold as often as they might or should be.
Previous attempts to streamline the M&A process through computers have failed to succeed on a large scale because they have provided mere "bulletin boards" - static information that advertises one firm's opportunities. Users must still seek other sources for opportunities just as if the bulletin board were not electronic. A "multiple listings service" concept has not been applicable to M&A due to the need for confidentiality. Consequently, there is a need for a method and apparatus for efficiently executing M&A transactions without compromising the confidentiality of parties involved and without the unauthorized release of information. One part of the M&A process which can be improved significantly using networked computers is the improved access to "data rooms" during the due diligence process.
Levels and flows
Worldwide Completed Mergers & Acquisitions reported by Thomson Financial ([1]) ($ trillion)
- 2004: 1.516 (Q4 2004 report)
- 2003: 1.149 (Q4 2003 report)
- 2002: 1.337 (Q4 2003 report) 1.316 (Q4 2002 report)
- 2001: 2.186 (Q4 2002 report)
Worldwide Announced Mergers & Acquisitions
- 2004: 1.949 (Q4 2004 report)
- 2003: 1.333 (Q4 2003 report)
- 2002: 1.207 (Q4 2003 report) 1.230 (Q4 2002 report)
- 2001: 1.701 (Q4 2002 report)
See also
Accounting
Data
External links
Magazines
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