Let’s look at some common words used frequently in Mergers & Acquisitions

A “merger” refers to a situation where 2 firms of similar size combine (or merge ) willingly, while an “acquisition” or take-over implies that there is a dominant, bigger (predator) company taking over a smaller (target) company. Take-overs can either be agreed (friendly take-over) or contested (hostile take-over) by the target company.

We can further classify mergers into different types:

• Vertical mergers where two firms are in different stages of production of a product, e.g. a crude oil producer and an oil refining company
• Horizontal mergers where two firms are in the same line of business
• Conglomerate mergers where the firms are in unrelated line of business
• Concentric mergers where the firms are involved in different but related line of business
• Reverse take-over where the bigger firm acquires a smaller firm through share swaps and the smaller firm ends up controlling (taking over) the bigger company.

Why do we have a M&As? Possible rationales include:

• Economies of scale as fixed costs are shared over a larger output and common costs may be reduced;
• Economics of vertical integration-through vertical mergers, large manufacturing companies can gain control over the production process by expanding back towards the output of the raw materialsand forward to the ultimate customer. One way to achieve this is to merge with a supplier or a customer. Vertical integration makes co-ordination and administration easier,
• Strength in size where complementary resources may be pooled together for more effective competition;
• Liquidity, where a company with surplus cash may make acquisitions to produce growth and synergy, or a company may acquire another company which is cash-rich through share swaps to gain control and use the surplus cash; or
• Growth which is substantially higher than organic growth.
• Unused Tax shelter
• Diversification program to broaden their earning base and reduce risk.

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