Overview of Mergers & Acquisitions

Acquisitions: When an acquiring company buys a portion of a target company.

Merger: When an acquiring company buys all of a target company; the acquirer remains and the acquired no longer exists as an independent corporate entity.

Integration Forms

M&A transactions can be segmented by the manners in which the acquired is integrated with the acquirer.

  • Subsidiary Merger: the target becomes a subsidiary of the acquiring company.  The acquiring company may use this form of integration in order to retain the brand recognition of the acquired entity.

  • Statutory Merger: the acquired no longer exists; it becomes part of the acquirer.

  • Consolidation: neither the acquired, nor the acquirer remain, rather both combine to form a new company.

Merger Types

  • Mergers can also be described by the way the business operations of the acquirer and the target relate to one another.

  • Horizontal Mergers: the combination of two companies in the same business line.  For example, one beverage production company may decide to purchase another beverage production company.

  • Vertical Mergers: the purchase of a target company which performs an upstream or downstream function in the acquirer’s industry value chain.

  • Backward Integration: the acquirer purchases a company closer to the raw material extraction phase of the industry value chain.  For example, a natural gas commercial distributer may decide to purchase a natural gas miner.

  • Forward Integration: the acquirer purchases a company closer to the market delivery phase of the industry value chain.  For example, a gold miner may decide to purchase a chain of retail jewelry stores.

  • Conglomerate Merger: this is the case where an acquirer purchases a company in an unrelated line of business.  For example, an airplane manufacturer may decide to purchase a chain of hospitals.

Reasons for M&A

Ideally, mergers are executed with the expectation that the target will increase the equity value of the acquirer.  Below some common merger motivations are described.

  • Cost Synergies: Mergers have the potential to lower costs for the combined companies, either through the elimination of redundant functions or by eliminating profits from “middle-man” points in the value chain.
  • Revenue Synergies: Mergers may provide the combined companies an opportunity to cross sell complementary products.
  • Growth: An acquisition might provide a company with more rapid growth potential than organic growth provided by reinvesting earnings.
  • Pricing Power: A horizontal merger can reduce competition and allow the acquirer to raise its prices.  A vertical merger can allow the acquirer to better control prices downstream or upstream in the value chain. When a merger has the potential to provide an acquirer with too much market power, government regulations may prevent the merger from taking place.
  • Increased Capability: An acquiring company may pursue a target for its in-house technical expertise.
  • Unlocking Value: An acquirer may view a target as underperforming financially and feel confident that it can facilitate the realization of the target’s full potential after taking control.
  • Diversification: Companies themselves are investors who seek to reduce risk and increase returns through the successful deployment of capital.
  • International M&A Concerns: Companies may engage in M&A beyond their domestic borders for multiple financial or strategic reasons.
Learn the skills required to excel in data science and data analytics covering R, Python, machine learning, and AI.

Free Guides - Getting Started with R and Python

Enter your name and email address below and we will email you the guides for R programming and Python.

Saylient AI Logo

Take the Next Step in Your Data Career

Join our membership for lifetime unlimited access to all our data analytics and data science learning content and resources.