Business Acquisitions and Mergers
In recent years, business acquisitions and mergers have become a source of inorganic growth for many businesses around the world. Business Mergers and Acquisitions (M&A) refers to events in which the ownership of companies and or operating units is transferred or consolidated with other entities to create a new bigger entity with an objective of realising synergies, efficiency, improving the financial performance / reducing risk and taxation among others. The outcome of business mergers and acquisitions are based on long term value creation where the post-merger business should be as a whole be always worth more than the sum of its parts before the merger. Mergers and acquisition in recent memory have taken place across borders owing the benefits bought by globalisation and deregulation in many countries.
An acquisition is a business event or a transaction in which a bigger company (financially and technically) takes over all the operational management decision making ability of the acquired firm through buying of the majority of its shares. The acquired firm does not change its legal name or structure but it has the effect of placing the acquired business under indirect control of parent and subsidiary for instance the acquisition of TM supermarkets by Pick n Pay South Africa.
A merger occurs when two separate entities combine forces to create a new joint organisation with new ownership and management. Mergers require no movement of cash to complete but dilute each company’s individual power. A merger gives each company’s shareholders partial ownership of the combined company. For example the merger of Lancet Laboratories Zimbabwe (PVT) Limited and Cerba Healthcare Africa.
Reasons for Mergers and Acquisitions
- Creating Synergies – this is the additional benefit derived from combining the resources of the acquiring and the acquired firm. A synergy happens when the combined entity is more productive than the sum of the individual firms pre-merger. It can be described as the 1+1=3 effect. This can be attributed from improved managerial capabilities, inventiveness and knowledge transfers.
- Growth is imperative for any firm to succeed. Mergers and Acquisitions are considered a quicker and better means of achieving growth as compared to internal growth.
- Diversification can be defined as a process of operating into different industries and to spread in such a way which helps to influence the value of the firm and enhance shareholders value. This can be in the form geographic and product diversification which in turn reduces risk. Mergers and Acquisitions driven diversification enables a company the potential to add management that already has the expertise in the sector or industry being pursued.
- Market Power is the ability of a firm in a market to profitably charge prices above the competitive level for a sustained period of time. This can be bought about by successful mergers and acquisition of competitors and thus eliminating the threat of completion and achieving market dominance.
- Tax Benefits are brought about through acquisitions of a company in a strategic industry or a country with a favourable tax regime. These include the transfer of assets within the group without giving rise to stamp duty, capital assets can be transferred on a no profit no loss basis, interest could be paid within the group companies so as to use it as a tax shield and some nations also give tax reliefs to corporations that acquire struggling businesses.
Types of Mergers
Horizontal mergers occur when corporations in similar or relevant product lines, aimed at eliminating competition leading to an increase in market share of the acquirer and degree of concentration of the industry. The result of horizontal mergers is an improvement in efficiency and economies of scale. For instance the acquisition of Portland Holding Ltd by Pretoria Portland Cement.
Vertical mergers are an amalgamation of companies with a supplier-customer relationship. The main aim being to ensure sources of supply. Vertical mergers can be subdivided into Downstream and Upstream vertical mergers.
- Downstream vertical mergers occurs when a company involved in activities like the distribution or further refinement of the product are acquired by the manufacturing company. There are sometimes referred to as forward vertical integrations.
- Upstream vertical mergers occur when prior activities such as the extraction of raw materials or production of components are acquired, this is can be referred to as backward vertical integration for example Innscor Group acquiring Irvine’s Zimbabwe (Private) Limited.
Conglomerate merger occurs when merging companies are involved in different types of businesses, this implies that the merging firms would be unrelated by value chain. The rationale behind this type of mergers is diversification resulting in increased market share, synergy and productivity for instance the merger of Kingdom Financial Holdings and Meikles Africa Ltd.
Due to the difficulties companies encounter in achieving organic growth, many companies are using business mergers and acquisitions as a strategy of achieving growth through eliminating competition (if you cannot beat them buy them), controlling the supply and distribution routes and dominating the market. Business mergers and acquisitions has been made easy through globalisation and deregulation in many countries as such cross border acquisitions and mergers has been made possible. Mergers and acquisitions has made it easier for companies to acquire unique skills and knowledge through management transfers brought about.