Mergers & Acquisitions (M&A)

The term Mergers & Acquisitions, or M&A for short, refers to both the merger of two companies and the takeover or acquisition of one company by another.

The term mergers stands for company mergers, i.e. the merging of two companies into one legal and economic unit (merger), while acquisitions refers to the purchase of companies or company shares and ultimately the takeover of a company.

Mergers

The term mergers means mergers. Two companies merge and become a single company. The important thing here is that at least one of the companies completely loses its legal independence.

An example of this would be the merger of a clothing label with a shoe brand.

Initially, both are independent companies. The clothing label produces and sells clothes, the shoe brand produces and sells shoes. At the end, for example, there is a completely new brand that produces and sells both clothes and shoes. However, it could also be that only the clothing brand continues to exist and the shoe brand is fully integrated into its brand, which is also referred to as a merger.

As can be seen from this example, there are two types of mergers.

1) Mergers by absorption

In a merger by absorption, one company takes over another and fully integrates the acquired company into its own. The acquiring company must also take over all the assets and liabilities of the target company (which is being acquired). It is also important to note that the target company does not transfer its assets for free, of course, but receives money or shares in the merged company in return.

Formally, it looks like this: A+B=A (company A and company B end up becoming just company A, company B has been fully incorporated into company A.

2) Mergers by formation of a new company

In this form of merger, the following occurs: A+B= C. In other words, a new company C is founded, into which both merging companies A and B are fully incorporated. The respective assets and liabilities are transferred in their entirety to the new company C.

Acquisitions

The term acquisition refers to the purchase or takeover of one company by another. However, the acquired company remains an independent company in legal terms. For example, the shoe brand is taken over by the clothing brand, but remains legally independent and only functions as a subsidiary.

With such takeovers, however, there is again a distinction between a hostile and a friendly takeover.

Hostile takeover

In a hostile takeover, an interested party (i.e. a company) attempts to take over another company without the knowledge or against the will of its management. Such a takeover is usually carried out by buying many shares of the target company on the stock exchange or with a public takeover bid that persuades many shareholders to sell, so that the buying company ultimately holds the majority of shares in the target company.

Friendly takeover

In the case of a friendly takeover, the whole process is different; here the takeover is carried out by mutual agreement. The buyer company works together with the management of the target company. The first step is to look for a suitable company for the takeover and then negotiate with the management of the selected company. Both companies sign a confidentiality and letter of intent and the price and takeover conditions are mutually reviewed. Finally, a takeover agreement is concluded by mutual consent.

In principle, however, there is still a distinction between an asset deal and a share deal.

Asset deal

In an asset deal, only the assets of a company are purchased, e.g. machinery and rights. Debts and equity are not taken over. This naturally results in a higher purchase price and increased legal and tax peculiarities.

Share deal

The more common method of takeover is a so-called share deal. In this case, both the assets and liabilities of the company to be acquired are purchased. A complete transfer of all assets and liabilities takes place here.

Process of M&A transactions

In general, an M&A transaction begins with the search for and selection of a suitable takeover target. The selection is followed by a review and analysis of the company, known as due diligence. Successful due diligence is followed by the negotiation phase with the management of the company to be acquired. Furthermore, the intentions of both companies are recorded in a so-called "letter of intent" and finally the sale is completed. The contract is usually drawn up by law firms, auditors or investment banks. Frequently, a company sale is also carried out by investment banks, which only admit certain investors (bidders) in an auction process. The banks then conduct negotiations with the respective bidders and finally select a suitable buyer. The process of an M&A transaction is therefore divided into the following phases:

1. Initial phase
2. search phase
3. Review phase
4. Valuation and detailed analysis
5. Due diligence
6. Negotiation phase
7. Implementation phase
8. Transfer phase

Mergers & acquisitions and investment banks

As already mentioned, investment banks are often involved in mergers & acquisitions transactions. Whether in the context of contractual arrangements or the support of the entire takeover process, mergers & acquisitions transactions are a major part of the services provided by these banks and make up a large part of their corporate finance division. The consultants involved usually receive a percentage of the sale of the company or a fixed fee.

Reasons for mergers & acquisitions

There are many reasons for M&A transactions, but they are often based on strategic reasons and lead to fundamental changes. Possible reasons are

Strategic motives

• Better market access

By merging or acquiring another company, your own company continues to grow and thus gains greater negotiating power and therefore better market access

• Diversification

The merger or takeover of another company also leads to the development of new products and the company's own product range is therefore diversified

The strategic motives of financial investors, i.e. banks, investment companies or private equity investors, on the other hand, are to exploit a presumed undervaluation of the target company and the possibility of using loss carryforwards.

Financial motives

• Cost reduction

Merging two companies also offers the opportunity to reduce certain costs, as some activities no longer have to be carried out twice

• Tax reasons

Personal motives

• Management interests

In addition to strategic and financial motives, there are of course also personal motives, e.g. that managers' salaries may increase after a merger.

Problems with Mergers & Acquisitions transactions

Although M&A transactions offer many advantages, complications can often arise. For example, 2/3 of transactions fail because the clash of different corporate cultures and the right way to deal with them is often underestimated. However, good change management can help here. In addition, it should not be neglected that the investment banks carrying out the transactions often earn a lot of money from this type of transaction and are therefore perhaps not always only concerned about the welfare of the contractual partners.

Legal regulations

The legal regulations on M&A transactions can be found in capital market law - in particular in the German Securities Trading Act (WpHG) - and in foreign trade law, antitrust and tax law and, since January 1, 2002, above all in the German Securities Acquisition and Takeover Act (WpÜG). In general, the provisions on company takeovers apply here.

Alternative spellings

Mergers-Acquisitions, Margers & Acquisition, Merger and Acquisition, M&A