Mergers and Acquisitions: All You Need To Know

Published on January 07, 2017


Corporations strive to increase their earnings per share over time. They approach in following ways,
  • Organic approaches which Increase sales of existing divisions while maintaining level operating margins and increase operating margins with constant sales. 
  • Mergers and Acquisitions are seeking to merge or acquire another corporation, with resulting corporation’s size and earnings enhanced by the combination.
In a MERGER, two or more corporations come together to combine and sharetheir resources to achieve common objectives. The shareholders of the combining firms often remain as joint owners of the combined entity. A new entity may be formed subsuming the merged firms. In an ACQUISITION, one firm purchases the assets or shares of another. The acquired firm’s shareholders cease to be owner of that firm and it becomes the subsidiary of the acquirer. Acquisitions usually take the form of a public tender offer.

Mergers and Acquisitions

Mergers and Acquisitions take many forms that are helpful in increasing the shares and resources of acquiring firm

Horizontal Mergers

Horizontal Merger is that Firms producing similar products in similar markets that follow Monopolistic pricing helps in gain from reducing competition. So that reduce output and increase profit and demand curve facing the firm becomes less elastic. Antitrust Division of the Justice Department & the Federal Trade Commission worry about horizontal mergers because of Monopoly pricing makes consumers worse and efficiency increasing mergers make consumers better of more output at lower prices.

Vertical Mergers

Vertical Mergers is that upstream firm buys a downstream firm or downstream firm buys upstream firm. If one firm has a monopoly the merged firm cannot increase profits by charging monopoly prices at both levels.

Conglomerate Mergers

Conglomerate Mergers is that occurs in totally different industries and there are efficiency problems in management or some centralized service, but is doubtful for present situation. The important part is that diversification has different effects on different people as follows

Diversification effects

  • Not stockholders could do it on their own account by buying the stock of the two companies, avoiding paying a premium. And their holdings wouldn’t have to be in fixed proportions and that may benefit indirectly. 
  • Employees are forced to hold undiversified portfolios of the stock of the bidder/target firm. It is hard for them to diversify on their own accounts. Employees cannot diversify their human capital. They may be willing to accept a lower salary or have a larger commitment to the company if they take less risk and it ultimately benefit shareholders.
  • Bondholders think maybe the combined firm becomes safer but bondholders do not have any decision power. The firm’s debt capacity will be increased if the firm is more diversified and lenders care about total risk, not just systematic beta risk. To the extent that there are advantages with debt financing, shareholders will benefit.
  • Executives and Managers in small firms may be undiversified for control purposes, and become too risky so both inside and outside shareholders may benefit through diversification.

LBOs and Reverse M&A

Leveraged Buy Outs (LBO) is purchases of stock of company where a significant percentage of purchase prices is paid for with proceeds of debt. Debt financing is to fund:
  • High yield bonds
  • Hostile takeovers is acquisition in which target’s board of directors does not consent to transaction.
  • Tender offer: Potential buyer or raider makes cash offer directly to shareholders, thereby bypassing board of directors.

Reverse Mergers and Acquisitions

There are four forms of reverse M&A:
  1. Simple sale of division or subsidiary: asset sale, stock sale, or merger
  2. Spin-off: corporation issues dividend of shares of subsidiary to be spun-off corporation’s shareholders. Shareholders of parent participate in spin-off on pro rata based on their ownership percentage in parent. Prior to spin-off, parent may extract cash from subsidiary.
  3. Split-off: shareholder in Parent Corporation elects to take shares in subsidiary being split-off, but ends up with fewer shares of Parent Corporation.
  4. Split-up: shareholder elects to take shares in one part of split company or other
Less common than spin-offs and split-offs because most shareholders like having parts of both parent and entity divested


The mergers and acquisitions have many advantages and those are cost savings, Revenue enhancements. Companies will hire a group of advisors to assist in evaluating and advising. Investment bank, law firm, accounting firm, valuation firm with expertise in mergers and acquisitions. These are the basic facts of mergers and acquisitions that are followed at present.
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