Mergers and Acquisitions (M&A) is a term used to describe the process of combining two businesses into one. The idea behind this is to create synergy where the merged company is better than the sum of its parts.
Typically, mergers involve two companies that are similar in size. These companies recognize that they can benefit from integrating their products and services, improving their sales and efficiencies.
Synergy
Synergy occurs when companies merge together to improve the overall result. This can be in the form of financial synergies, when a merged firm reduces its cost of capital through higher profitability or patents, which improves its ability to manufacture its products.
Despite their positive effects, synergies can also create negative knock-on effects. The knock-on effects can range from increasing or reducing employee motivation and innovation to altering the way unit managers think about their businesses and their roles, for better or worse.
Corporate executives often miss these downside risks because they focus so hard on the positives of cooperation. They also fall victim to four biases that distort their thinking: a synergy bias, a parenting bias, a skills bias, and an upside bias.
Valuation
Valuation is a critical process for business owners, investors and takeover targets. It helps a business calculate the value of its assets or shares, determine if it is undervalued and how much it should be sold for.
There are many different valuation methods and each of them will produce a different result. This is because every asset or company is unique and the valuation process must consider all of the relevant information to make an accurate, defensible valuation.
A common method is to comb through public filings of previous acquisition transactions to gauge the price paid for similar companies. This can be done through a public database or by paying a fee to access private databases that accumulate this data.
Another common method is to estimate the enterprise value of a target company by using market value of all shares outstanding, plus total debt minus cash on the balance sheet. However, this is a theoretical method that doesn’t account for the effect of any control premium and does not factor in the impact on the share price once the takeover bid is announced.
Taxes
In the current business climate, many companies are in the market for acquisitions and mergers. They are looking to buy up new technologies, capture market opportunities, enhance their existing offerings, and cement leadership positions in their respective industries.
However, acquiring these companies can come with a host of tax implications. Understanding the tax impact of an M&A transaction, including those that occur in light of recent legislative changes, can be vital to maximizing value and cash flow while closing deals successfully.
The primary taxable forms of M&A transactions are stock acquisitions and asset acquisitions. In stock acquisitions, the tax attributes of the target company (e.g., net operating losses, capital loss carryforwards, and gains on sales of equity) generally carry over to the buyer for potential utilization in future years.
Integration
Integration is the process of connecting and bringing together different systems to work as a single unit. This includes requesting information from a website, connecting customer data to a point of sale system, and communicating between internal employee systems.
Businesses that integrate their business systems and applications are able to share information more efficiently, enabling employees to make better decisions and customers to receive faster and more relevant customer experiences. In addition, the enterprise benefits from integration because it reduces time spent aggregating and updating data manually, and allows for data to be shared in real-time.
Companies can pursue integration in one of three ways: horizontal, vertical or balanced. With horizontal integration, a company expands its reach in its core competency, such as a grocery chain buying a rival grocer or a technology company taking on the production of raw materials.
With vertical integration, a company extends its reach in the supply chain, either upstream or downstream from its own core competency. This is usually done for the benefit of increased control, reduced costs or improved margins.
