If you look at the great deal makers of our era – Donald Trump, Warren Buffet and Mark Cuban, to name just a few – the one thing they all have in common is their innate ability to identify opportunities and close lucrative deals. Mergers and Acquisitions are part of strategic management of any business. It involves consolidation of two businesses with an aim to increase market share, profits and influence in the industry. Indian M&A activities touched a six-year high in 2016 and deal values clocking $56.2 billion, the highest since 2010 and this escalation is expected to continue through 2017. Merger affects all the stakeholders of both the companies involved in many ways also merger is a cumbersome process which consume a lot time, then how mergers and acquisitions help companies?
Merger means when two companies come together to form a new company with a new name. Both companies’ stocks are surrendered and new companies stocks are issued in its place. Mergers help companies gain advantages over competitors. For example, if one company sells products similar to the other, the combined sales of a horizontal merger give the new company a greater share of the market.
New company formed will consist of a new name and a different capital structure in which both the companies involved have shares according to their contribution. All the assets as well as liabilities are valued and settlement is done accordingly. For example let the two companies involved in merger are company A and company B with 200 shares and 1000 shares respectively and new company formed be C. In this case the exchange ratio will be 0.2 which means for every 1 share of company B, 0.2 shares of company C will be given. Hence for 1000 shares of company B, 200 shares of company C will be given. Shareholders of company A will get 1 share of new company for every single share of company A. As a result new company formed will have total 400 shares with both companies having equal stakes in new company. However exchange ration can be altered as per the net gain or loss of the companies. Also if company A has liabilities of ₹ 3, 00,000 and assets worth ₹ 5,00,000 and company B has liabilities and assets amounting to ₹ 4,00,000 and ₹ 6,00,000 respectively, then the new company will have liabilities and assets worth ₹ 7,00,000 and ₹ 11,00,000 respectively.
The synergy may lead to improved market reach and industry visibility. M&A will combine the resources of companies involved and will help them to develop an edge over the others. Companies buy companies to reach new markets and grow revenues and earnings. A merge may expand two companies’ marketing and distribution, giving them new sales opportunities. To stay competitive, companies need to stay on top of technological developments and their business applications. By buying or merging with a company with unique technologies, a company can maintain or develop a competitive edge over others.
Regardless of their category or structure, all mergers and acquisitions have one common goal: they are all meant to create synergy that makes the value of the combined companies greater than the sum of the two parts. It is well said that “never care about what something costs, care what it’s worth.”