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What Is Merger & Acquisition (M&A) - A Full Guide

General

updated:
8.19.22
merger & acquisition

Mergers and acquisitions are some of the most vital and challenging aspects of owning and growing a business. Transactions vary wildly in size and scope, and there is no one-size-fits-all approach. Beyond the double brokering law, double brokered loads place carriers and shippers exposed to delays and concerns with adequate insurance coverage and other liabilities. We have made a guide to explain what is double brokering and strategies to avoid double-brokered loads.

The best method to use in any specific deal will vary based on numerous factors, including the industry sector and the size of the companies acquiring and being acquired. Companies must make commercial considerations, legal and tax considerations, and obtain requisite third party and corporate consent. Acquiring or merging companies requires a sophisticated approach, and it is important to develop a strategic plan to ensure that crucial steps are not overlooked.

Mergers & Acquisitions Explained: What is an M&A Transaction?

M&A is an umbrella term that describes transactions involving companies joining forces (merging) or purchasing other companies (acquisitions). The terms mergers and acquisition are commonly used interchangeably, but they have two distinct meanings.

Mergers And Acquisitions Definition: What Is M&A In Business?

The technical definition of a corporate merger is usually two companies of approximately the same size joining forces to become one single entity. The best example of this is a deal when both CEOs agree that combining the companies is the best move for all parties involved. In contrast, an acquisition occurs when one company takes over or purchases the other company and establishes itself as the new owner. This can occur in many different ways.

Reasons for M&A in business include value creation, diversification of assets, acquisition of assets, and strategic taxation structuring. Through the transfer or consolidation of assets and liabilities, M&A transactions can change the nature of a business and its position in the marketplace.

Mergers and Acquisitions Examples

what is an m&a

Mergers and acquisitions of companies are common events, and finance newspapers like the Wall Street Journal and business news programs like CNBC cover M&A activity in depth. However, many people outside of finance are not aware of the complex nature of M&A deals and how some deals are tremendously successful while others have abominable outcomes. Over the years, you have probably heard of many successful mergers and acquisitions - and not-so-successful acquisitions. Examples include:

Mergers Examples

  • 1997: Boeing and McDonnell Douglas merged.
  • 1998: Daimler-Benz and Chrysler merged.
  • 1998: Exxon and Mobil merged.
  • 2000: AOL and Time Warner merged.
  • 2000: Chase Manhattan and J.P. Morgan & Co. merged.
  • 2008: XM Satellite Radio and Sirius Satellite Radio.
  • 2013: American Airlines and US Airways merged.
  • 2013: Office Depot and OfficeMax merged.
  • 2015: H.J. Heinz Company and Kraft Foods Group merged.
  • 2018: Westar Energy and Great Plains Energy merged.
  • 2018: AT&T and Time Warner merged.

Acquisitions Examples

  • 2005: Starbucks acquired Ethos Water.
  • 2008: Wells Fargo Bank acquired Wachovia Bank.
  • 2010: United Airlines acquired Continental Airlines.
  • 2012: Starbucks acquired Teavana.
  • 2012: Starbucks acquired La Boulange.
  • 2014: Facebook acquired WhatsApp.
  • 2016: Alaska Airlines acquired Virgin Airlines.
  • 2016: Atlas Air acquired Southern Air.
  • 2017: Amazon acquired Whole Foods.
  • 2018: Google acquired Waze.
  • 2018: Pepsi acquired SodaStream.
  • 2019: Boeing acquired Foreflight.
  • 2021: Uber acquired Drizly.
  • 2022: Oracle acquired Cerner.

What Is The Difference Between a Merger and an Acquisition?

The primary difference between a merger and acquisition of companies is the size of the companies involved relative to each other. Mergers - the most common M&A business term -  generally involve companies of similar size, and are sometimes described as a marriage of businesses. An acquisition is more typical when a larger company acquires a smaller company, which may or may not be on friendly terms.

How Do Company Acquisitions Work? Types of Mergers and Acquisitions (M&A) Transactions

Below are some of the main types of M&A transactions:

Horizontal Mergers

A horizontal merger is a merger of competing companies that produce the same products. A well-known horizontal merger example was the 2011 merger between HP (Hewlett-Packard) and Compaq. A merger of three or more companies, often using the same supply chain, is horizontal integration.

Vertical Mergers

mergers and acquisition transactions

A vertical merger combines two companies that are not direct competitors, but that is in the same supply chain. Ebay’s 2002 acquisition of Paypal is a well-known vertical merger. Apple’s acquisition of Beats by Dr. Dre is another vertical integration. M&A vertical mergers are often followed by Post-merger integration (PMI), the process of combining or rearranging business interests to maximize efficiencies and financial benefits.

Conglomerate Mergers

A conglomerate merger joins two companies in different industries - such as tobacco giant Phillip Morris’s 1970 merger with Miller Brewing (they later sold Miller Brewing in 2002 to South African Breweries). Walt Disney Company’s 1995 merger with the American Broadcasting Company (ABC) is another example of a conglomerate merger. Conglomerate mergers position companies for diversification and may be part of monopolization.

Market Extension Mergers

A market extension merger combines two companies that offer similar services but operate in different markets. For example, an airline with routes on the west coast merging with an airline with routes on the east coast would be a market extension merger.

Product Extension Mergers

A product extension merger combines two companies that offer the same product or service. The merger can allow shared or reduced operating costs, while simultaneously expanding the customer base. This can put a larger company in a position ahead of the competition. PepsiCo’s 1977 acquisition of Pizza Hut and 1978 acquisition of Taco Bell have commonly cited examples of product extension mergers.

Congeneric (Concentric) Mergers

If companies have different products or services but sell to the same customers, a congeneric merger can make sense. For example, a gas company and electric utility company can merge to provide one integrated energy service.

Mergers and Acquisitions (M&A): Forms of Integration

The result of M&A deals can look very different from one deal to the next, depending on the way the businesses are integrated.

Statutory

A statutory integration occurs when an acquirer is much larger than the target - for example, Google or Amazon acquiring a small tech startup. After the transaction, the target company no longer exists as a separate company.

Subsidiary

m & a deals

A subsidiary acquisition occurs when a larger company acquires smaller businesses that continue to run as independent businesses. For example, Coca-Cola has acquired several subsidiary businesses in the beverage industry, including Minute Maid, Fuze Beverage, Odwalla, and Honest Tea.

Consolidation

A consolidation merger occurs when two companies merge and form a single separate entity. For example, Verizon, the largest wireless carrier in the United States, was the result of a consolidation merger when Bell Atlantic and telephone company GTE merged in 2000. The resulting company was Verizon Communications, which eventually reorganized to be simply Verizon.

Why Mergers And Acquisitions Are So Popular

Create Synergies

In the context of M & A deals, synergies are the potential financial benefits of a transaction. For example, Starbucks' acquisition of American tea company Teavana allowed them to increase revenue by offering another beverage. Synergies can also be geographical expansion, such as when utility companies in neighboring states merge.

Higher Growth

A merger or acquisition can accelerate growth far beyond what a company can do organically. For example, Google’s acquisition of Youtube is widely seen as a very successful acquisition resulting in impressive growth. Youtube remains a major contributor to Google’s parent company Alphabet’s massive annual revenue.

Stronger Market Power

A strategic acquisition can put a company in a much better position in the marketplace. However, market conditions can change rapidly. Understanding forecasts for products and market sectors is critical - and time must be spent in the due diligence phase ensuring that outside forces won’t destroy a deal. Third-party mergers and acquisition transactions involving competitor businesses can also impact your business.

Diversification

Diversification of offerings is an attractive goal for many companies. Amazon’s acquisition of Whole Foods in 2017 put the e-commerce giant in the grocery business. Netflix’s acquisition of two gaming studios, Next Games and Night School Studio LLC, positioned the streaming giant to move into gaming opportunities.

Not all diversification acquisitions are successful. Mergers and acquisition transactions that were made impulsively, without understanding how to operate in a different market, may be risky. Quaker Oats Co.'s 1993 acquisition of Snapple Beverage Corp. for $1.7 billion is often cited as one of the worst merger & acquisition flops in history. Quaker sold Snapple four years later for just $300 million, a sale that analysts at the time called “generous.”

Tax Benefits

In the aftermath of COVID-19, many companies experienced unforeseeable losses which came with tax benefits and government relief, while some corporations saw their biggest revenue growth ever. M&A transaction analysts were quick to observe opportunities where savvy buyers could make strategic acquisitions to receive economic benefits where the losses of one business could level the balance sheet for a profitable company. However, such “win-win” deals on paper may not be permissible under tax law. U.S. Code § 269 states that the benefits of an acquisition may be disallowed if the principal purpose of an acquisition is to evade or avoid tax.

Some types of mergers can be tax-free if they are structured as reorganizations. However, stock deals and asset deals are taxable. The tax implications of an M&A deal should be thoroughly considered before execution.

What Are Acquisitions and Mergers Pros and Cons?

merger and acquisition of companies

There are several benefits and reasons that companies may decide to enter into a merger or acquisition.

The Pros

Some of the benefits of a merger or acquisition include:

  • An increased market share and greater momentum in comparison to the competition;
  • A reduction in competition in the market-leading to a reduction in operating costs;
  • An opportunity to expand the company’s target market geographically;
  • Prevent the closing of a failing and/or unprofitable business.

The Cons

Along with potential rewards, disadvantages must not be overlooked:

  • High expenses of acquisition, especially if there is resistance to a hostile takeover;
  • High legal costs, whether or not the deal goes through;
  • The missed opportunity of other deals that may be available;
  • Negative reactions from customers, competition, or the public, may drive a business’s value down.

Although most executives are aware of the potential downsides of an M&A deal, sometimes potential issues - and risks - are overlooked. Deal assessment, risk avoidance, and thoughtful integration post-deal are essential.

Valuation M&A: How Are Businesses Valued in Mergers and Acquisitions Transactions?

In order to properly integrate two companies and allocate the shares proportionally post-merger, the two companies need to ascertain the value of each. Valuation methods vary, but it is best in these situations to hire an outside, third-party valuation expert to determine the value of each company. The valuation expert is experienced in all acceptable accounting valuation methods and can give a fair and accurate price for each company. This allows for the companies to properly price the shares of the new company in accordance with the company’s values.

Merger and Acquisition Professionals Can Help You Merge Two Brands

Mergers and acquisitions are highly technical business transactions subject to regulatory oversight. How a deal is handled and negotiated can drastically affect the outcome, which is why business owners must tread carefully. The best outcomes can be achieved by working with experienced attorneys who understand mergers and acquisitions law.

At Sequoia Legal, our Colorado attorneys have handled numerous mergers and acquisitions of varying sizes. We have the expertise and connections to ensure that mistakes and pitfalls are avoided and that the merger or acquisition is a success.

Along with our robust team of professionals, we can connect you to whatever expert assistance is required to help manage the deal. This may include an intermediary who serves as a representative throughout the process and helps structure and negotiates the final merger or acquisition agreement. Contact us today for a free consultation with our team.

FAQ: Mergers and Acquisition Transactions

What is a hostile takeover?

A hostile takeover is an unwanted acquisition when an acquiring company takes over (or attempts to take over) a company against the wishes of the target company. Kraft Foods’ acquisition of Cadbury in 2009 (when it was not for sale) is a frequently cited example of a hostile takeover.

How are acquisitions financed?

Acquisition transactions can be financed in numerous ways (or combinations of ways): with stock; with cash on hand; through acquisition financing (traditional loan or a line of credit); through seller financing; with the assumption of debt.

How does M&A activity affect shareholders?

Shareholders can benefit from M&A deals, especially when the transaction is an all-cash acquisition and shareholders can cash out at a premium. In some cases, an M&A transaction may be executed specifically for the benefit of shareholders. Depending on the governing law where the transaction occurs, shareholders may need to vote to approve a deal. Shareholders may take an aggressive stance against deals, depending on their perception of the deal price or the market for other deals.

How long does the M&A process take?

The M&A process can vary widely depending on how complex the deal is, how much due diligence is required, and whether shareholder approval is required (governed by state law). Because M&A deals are one-of-a-kind transactions with many unique variables, it is challenging to project timeframes. The process can be slowed for months or years when regulatory approval is required.
Hunter Boone

Hunter has been a part of the Sequoia Legal team since 2017.  Hunter specializes in general corporate matters, healthcare compliance, international trade laws, and anti-kickback regulations.

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