An Introduction to Mergers & Acquisitions (M&A)
Mergers & Acquisitions (M&A) is a corporate development which often require large financial and time commitments contributed by both the acquiring company and target company.
Accountants, lawyers and investment bankers are usually hired to underwrite and advise on the deal. A company which initiates the M&A venture is called a bidder or acquirer whilst the company getting acquired is usually referred to as the target. Many companies use M&A activities to achieve growth or to diversify their business operations which can take on a friendly stance or hostile form.
What is a Merger?
A merger basically occurs when two or more companies combine to form a new corporate entity. A good reference can be taken from an article written, Does The CIMB, RHB and MBSB Merger Make Sense? awhile back.
Company A + Company B = Company C
What is an Acquisition?
An acquisition is a concentrated investment, albeit a part of a target company or conglomerate. The acquiring firm either has the option of directly purchasing the assets or buying the shares of the target company. As mentioned earlier, although an acquisition may help diversify the business of the acquiring company, such diversification benefits may be much less as compared to the diversification benefits from buying a broad-based basket of shares. An acquisition usually entails high risks and can often be an inferior choice for the acquiring firm with capital to invest organically or return its cash to shareholders instead.
What are the Motivations for M&A?
There are several reasons why companies carry out M&A activites. Here are some of them:
- To create synergies between companies where their business value could be worth more than if they were operating separately.
- To accelerate growth
- To increase market share
- Gaining access to proprietary technology or resources
- Unlocking hidden value
What Should Investors Look Out For?
Acquisitions tend to be bought at a huge premiums where purchases have historically averaged 30% above the pre-announcement price. Sometimes, it may run even high depending on the stock market outlook. As such, it is important for investors to understand the motivation behind managers’ decision on such expensive activities which many of them might not make economic sense. Managers might be financially driven to increase their compensation through increasing firm size rather than shareholder value. A larger company also might imply greater financial power and prestige among managers which could feed managerial ego.
Value in Action
M&A activities are always exciting events to watch on the sideline where the ultimate winners tend to be investment bankers who broker the deals themselves. Investors should be aware of managers’ motivation on carrying out such activities and whether these transactions make any economic sense.
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All views and opinions articulated in the article were expressed in Willie’s personal capacity and do not in any way represent those of his employer and other related entities. Willie does not own any shares in the companies mentioned above.
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