In corporate finance, acquisitions and mergers are transactions where the total ownership of various business enterprises, other related entities, or their components are merged or acquired. In a merger or acquisition, one business entity purchases another entity in order to acquire additional market share or to implement some strategic restructuring. In this process, there are a lot of financial risk as well as potential losses to the acquiring company, therefore it requires vigorous due diligence and VDR (virtual distribution delivery) strategies.
In United States, mergers have become a popular method of restructuring businesses since the 1980s due to the rapid expansion of the banking sector. In addition, the banking sector in the United States offers attractive liquidity, tax advantages, and growth opportunities. As a result, there has been an increasing trend of mergers and acquisitions in the banking sector over the past two decades. Mergers and acquisitions in banking sector are based on three principal elements: cash considerations, debt considerations, and the size of the acquisition. Since banks usually have substantial inventories and liquid financial resources, they are considered to be good candidates for acquisition. Additionally, bank mergers and acquisitions can offer good financial rewards to the owners.
Before and After mergers and acquisitions, owners should conduct a complete due diligence and VDR analysis of the target company. This includes identifying the ideal acquisition target, evaluating competitors, analyzing customer and business characteristics, and analyzing business plan and financing options. The due diligence and VDR analysis should be completed before making any investment in the target company. This analysis should also include the steps that will be taken during the acquisition process. The list is long, but here are the main aspects to consider in the due diligence and VDR process.
Horizontal Merger and Acquisition. A horizontal merger is when two companies that compete for the same acquisition purpose are willing to enter into an agreement where the acquiring company will provide its acquired business under its existing ownership. Horizontal mergers occur when the merging companies are smaller than the target company or they are both much larger than the target company. A horizontal merger is more complicated because of the involvement of third-party suppliers.
Vertical Merger and Acquisition. A vertical merger is a vertical merger when one company creates a new publicly held company by buying another company within a larger industry. An example of vertical acquisitions is when a chemical company combines with a pharmaceutical company or oil refiner. Vertical mergers require extensive research and analysis to determine if the combination would enhance the corporation’s competitive position in the market.
Acquisitions and Facet acquisitions. Facet acquisitions refer to acquisitions made in the context of the core business. These acquisitions make sense only if the core business will actually create positive financial results. A major problem with core mergers is the high risk of control and loss of control due to the inherently long-term nature of mergers and acquisitions. When a major corporation makes an acquisition, there is immediate and unlimited access to capital. However, it can also be difficult for a struggling company to obtain capital on the market.
The two terms above are broad and do not exhaust the entire spectrum of transaction types. In order to understand which type of acquisition is most appropriate for your own company, you will need to speak with a professional corporate acquisition lawyer or other business development experts. There are a number of free online resources where you can gain an in-depth understanding of the acquisition process. You can also contact a reputable professional business law firm for a consultation.
There are a number of advantages associated with mergers and acquisitions. For one, they provide a significant increase in cash available for use. Additionally, companies that are able to acquire other companies through mergers and acquisitions have a leg up on their competitors as they are able to negotiate the purchase price of the other companies with less strain on their cash resources. Lastly, mergers and acquisitions allow a company to significantly smooth out the tax implications of making a number of acquisitions at the same time. All of these reasons make mergers and acquisitions an attractive business strategy for many different companies.