Mergers and acquisitions are one of the characteristics of the globalization of economic systems and play a significant role in the company’s development. Therefore, it is expedient to investigate different types and motives of companies before carrying out such a transaction.
The essence of the M&A deal as a form of reorganization
Today, companies, to either stay afloat in an unstable economy or expand their influence in the market, resort to implementing such processes as mergers or acquisitions (M&As). In modern business practice, a merger is traditionally understood as the termination of the activity of two or more enterprises as legal entities and the transfer of their property rights and obligations to the legal successor created as a result of the merger. As a result, the balance sheets of such enterprises are consolidated. The acquisition means the termination of the activity of one enterprise as a legal entity and the transfer of its property rights and obligations to another enterprise (successor).
Thus, the main difference between a merger and acquisition is that in the case of a merger of enterprises, all the property rights and obligations of several legal entities are concentrated on the balance sheet of one newly created enterprise, and in the case of a merger – on the balance sheet of the existing one at the time of the decision on the merger enterprises.
The main reasons for such reorganization of an existing enterprise are:
- significant expansion of the enterprise’s activities and its size;
- winding down of the enterprise;
- the need for financial rehabilitation;
- the need to change the full liability of the owners for the company’s obligations;
- diversification of financial investments;
- creation of concerns and other integrated corporate structures;
- profiting from the acquisition of undervalued enterprises.
The common types of the M&A deals
In today’s world, there are various types of M&As of companies. Depending on the nature of the integration of companies, there are the following types of M&A deals:
- Horizontal
It is a combination of companies in the same industry that produce the same products or have common stages of production are often competitors. An example is the merger of Mobil and Exxon in 1999. Among the main reasons for horizontal mergers of companies is the desire for economies of scale, which is achieved by consolidating operations and eliminating duplicate resources, as well as increasing market power, as the number of industry competitors decreases and increases the size of the acquiring company;
- Vertical
It is the union of companies of various industries, which are related to the technological process of the production of the finished product, that is, the expansion of the company-buyer of its activities either to the previous production stages to the sources of raw materials, or the following ones – to the final consumer. Thus, the initiator of the merger/acquisition can be, for example, a supplier or distributor for another company. If the initiator of the takeover (buyer company) buys a company that is in front of it in the value chain, then such a transaction is called backward integration;
- Conglomerate
It is a combination of companies from different industries without production commonality, i.e., a merger of this type is a merger of a firm of one sector with a firm of another industry that is neither a supplier, nor a consumer, nor a competitor. That is, it has nothing to do with the business of the company initiating the merger/acquisition. An example of a conglomerate is General Electric. Within the conglomerate, the companies have neither technological nor objective unity with the main field of activity of the integrator firm.