Mergers and Acquisitions – Houston Law Firm
Effective corporate management is always keen to explore available opportunities that will position their company on top of their competition and grow their organization. Mergers and acquisitions are some of the approaches taken to eliminate competition and strengthen the market position of a company. RunRex highlights mergers and acquisitions in this post.
Mergers
A merger is an agreement between two companies that aims at uniting them to form one large company. There are different types of mergers, and they include:
Conglomerate merger
A conglomerate is a type of merger involving two or more companies engaging in unrelated business activities. They may operate in different industries and based in completely different geographical locations. A conglomerate can either be mixed or pure. A mixed conglomerate is one that involves companies that, while engaging in related business activities, have a goal of gaining market or product extension through the union. A pure conglomerate, on the other hand, involves companies that share nothing in common.
Horizontal merger
A horizontal merger involves companies that share the same industry. It mainly involves two competitors who offer similar services or products to the market coming together. Such are common in industries that have been ventured into by fewer firms.
Vertical merger
A vertical merger involves two or more companies that produce individual parts for a certain product. They are mostly done to boost the synergies achieved by reducing costs of production and operation.
Market extension merger
This is a type of merger that involves different companies offering the same product but operating in different markets coming together. The main aim of this type of merger is to increase their access to the market.
Congeneric merger
This type of merger is also referred to as a Product-extension merger, and it occurs when companies operating within the same market and that have overlapping factors like marketing, technology, research and development, and product processes join. The main aim is usually to gain a larger consumer group and expand their market.
Acquisitions
An acquisition is a scenario that involves one company purchasing a part or all of the ownership stakes of another company and assumes control of it. It normally occurs when a company purchases more than 50% of another company’s ownership stakes. Some of the main reasons why companies perform acquisition include gaining a greater market share, achieving economies of scale, reducing company costs, increased synergy or exploring the offerings of a new niche.
Important steps in the mergers and acquisitions processes
Mergers and acquisitions are meant to help a company improve its operations and revenue by reaching a wider marker and improving its operations. As such, managers ought to be careful to identify the right candidate to either merge with or to acquire. The process involved when a company is either merging or acquiring another is almost the same. The general steps to follow for either mergers or acquisitions include:
- Evaluating growth opportunities
The first step is to evaluate the opportunities for growth that exist in the market. This involves careful analysis of market demographics, clients origins, competitor and consumer preferences. Settle on an opportunity that gives a promise of growth.
- Identifying the best candidates
With the growth opportunity as the guide, identify companies that are potential candidates for the merger or acquisition who can meet the growth objectives envisioned. Candidates can be identified through research, management experience or the use of consultants.
- Strategic assessment of financial position and fit
After picking the target, a strategic and thorough evaluation of their financial and their credit position and that of the combined entities is performed based on financial forecasts and solid utilization. The factors considered include revenue generated, volume, the costs and balance sheet considerations. As such, this is where questions like what the target of the transaction is, what are the risks involved and what other targeted opportunities are available are answered.
- Decide whether to proceed or not
At this stage, the corporate leadership has to determine whether to proceed with the merger or acquisition or not. The decision is based on careful analysis of data, market and the financial projections. In making the right decision, the leaders determine whether the value-added case for both entities combined is enough for the merger or acquisition to proceed or not.
- Conduct Valuation
The first step in the process involves the assessment of the value of the targeted candidate and exploring alternative ways the merger or acquisition could be structured. The main valuation methods include comparable transaction analysis, analysis of a comparable publicly traded company and analysis of discounted cash flow. After the valuation, produce an offer for the target.
- Perform due diligence, definitive agreement negotiation and execute transaction
If the target accepts the offer, the leaders will now do diligence review of the entity to understand issues, risks, and opportunities. The process involves the review of the financial, operational and legal position of the target. After that, definitive agreements are negotiated and regulatory approvals obtained.
- Implementation of the transaction
Once everything is set, implement the transaction. There should be continued monitoring to ensure that the goals envisioned are attained with time.