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Which Regulatory Agency Will Review the Merger and Determine if the Two Companies Can Combine?
Mergers and Acquisitions are part of strategic management of whatever concern. It involves consolidation of two businesses with an aim to increase market share, profits and influence in the industry. Mergers and Acquisitions are complex processes which require preparing, analysis and deliberation. There are a lot of parties who might be affected by a merger or an acquisition, like government agencies, workers and managers. Before a bargain is finalized all party needs to exist taken into consideration, and their concerns should be addressed, and then that any possible hurdles tin can be avoided.
In this article, we look at 1) an introduction to M&A, 2) motives for G&A, 3) transaction characteristics, and 4) regulations and other hurdles.
INTRODUCTION TO MERGERS & ACQUISITIONS
'Mergers and Acquisitions' is a technical term used to define the consolidation of companies. When ii companies are combined to form a single unit of measurement, it is known as merger, while an acquisition refers to the purchase of company by another one, which means that no new visitor is formed, merely one company has been absorbed into another. Mergers and Acquisitions are important component of strategic direction, which comes under corporate finance. The subject deals with buying, selling, dividing and combining diverse companies. It is a blazon of restructuring, with the aim to grow apace, increase profitability and capture a greater proportion of a market place share.
Parties in an acquisition:
The Target Company is the visitor that is being acquired.
The Acquirer visitor is the company that is acquiring the target.
Mergers can be divided into three types:
Horizontal merger: Information technology happens when both companies are in the same line of business, which means they are normally competitors. Case: Disney bought LucasFilm. Both companies were involved in production of picture show, TV shows.
Vertical merger: This happens when two companies are in the same line of product, but stage of production is dissimilar. Example: Microsoft bought Nokia to support its software and provide hardware necessary for the smartphone.
Conglomerate merger: This happens when the two companies are in totally different line of business. Case, Berkshire Hathaway caused Lubrizol. This kind of merger mostly takes identify in lodge to diversify and spread the risks, in case the current concern stops yielding acceptable profits.
Introduction to Thou&A
The main difference between a merger and an conquering is that a merger is a form of legal consolidation of two companies, which are formed into a unmarried entity, while an conquering happens when one company is absorbed past another company, which ways that the company that is purchasing the other company continues to exist. In the recent years, the stardom between the ii has go more and more blurred, as companies take started doing articulation ventures. Sometimes acquirer wants to go on the name of the acquired company, as it has goodwill value fastened to it.
Mergers and acquisitions are complex area of a company long-term strategy. The process takes a long time, at times, even years. It involves number of parties and stakeholders:
The 2 companies which are being merged or coordinating to venture are the main stakeholders, since any changes in the structure of the company is likely affect both companies.
Employees will as well be affected, since they are an integral function of the companies. At times, during a merger or acquisition employees accept to be laid off.
The government agencies play a decisive function in whatsoever merger or acquisition, as they want to make certain that the 1000&A does non create a monopoly or impinge on the rights of general public. Whatever merger of acquisition must not be a hurdle to competitive surround in the industry.
Force per unit area Groups would be interested in the affect the merger or conquering would have on the environment, worker welfare, consumer welfare and overall social impact the bunco. Some companies manufacture product/services that are controversial, hence detested past some people. Firms must find a way to bargain with possible hostility from these people.
Competitors would be interested in a possible merger or acquisition betwixt 2 companies in the industry, since a collusion could threaten to take away their market place share equally the combined company would be more than powerful, financially and strategically.
Financial institutions as well take a pale in possible merger or conquering, since the companies involved might have outstanding debt. Alternatively, a company involved in a mail service-merger or an acquisition might want to borrow more coin, so that the financial institutions would take to evaluate the company's financial standing and power to repay it later.
The Mergers and Acquisitions Process
MOTIVES FOR MERGERS AND ACQUISITIONS
Synergy
From the strategic point of view the main motive behind a merger or conquering is to improve the company's functioning for its shareholders through synergy, which is a concept that states that the value and performance of 2 companies combined will be greater than the sum of the separate private parts. Two businesses tin combine to class one company which tin generate more revenues that could be done if they worked independently. This is why potential synergy from merger and acquisition is evaluated before the determination is fabricated.
Growth
Mergers or acquisitions can exponentially increment the growth of the visitor, as it has more resources at its disposal. When two companies combine their expertise, assets and market place share are also combined, which leads to more than opportunity in the market for growth. The market place share which was previously shared past ii companies will now exclusively belong to one visitor. The increased market power is likely to generate more opportunities for sales, revenue, and profitability.
Acquiring Unique Capabilities
Sometimes, mergers and acquisitions take place in club to larn unique capabilities or resource, which could prove prototype-shifting for the visitor. This would include patents and licenses, which the acquiring visitor will gain access to once the merger is completed. A patent, license or certain technology could make a lot divergence for the visitor, which could aid it substantially increase sales and profits, since information technology might create a natural monopoly situation for the new company. When two unlike companies combine, it could as well issue in unlocking hidden value, which becomes credible as resources and experiences combined bring innovation and efficiency.
Exploiting the Market
Market systems in nigh economies are non perfect, which ways there is room for companies to exploit these imperfections to their own advantage. Taking over another company or merger could facilitate a monopoly-like state of affairs, which would give the company an border over its competitors. Alternately, a merger could be done with a motive to control the supply of certain raw materials which will requite the company an undue reward over other companies.
As an Answer to Government Policies
Mergers and acquisitions also have place in order to cope with adverse government policies, which may require a sure size of a firm to be. Some governments offering tax breaks and other incentives to large corporations, which encourage mergers as more than profit can be made as taxation liability is lower. In social club to bargain with government pressure level to survival within an industry, companies mergers and acquisitions have greater leverage to influence government policies.
Transfer of Technology
Another popular reason for mergers and acquisitions is transfer of engineering science, especially for highly specialized companies with unique technologies. Companies buy other companies in an attempt to acquire a certain technology which is patented or unique. Subsequently, these technologies are used to brand meliorate products/services, hence greater market share and profits.
To Handle Large Clients
Mergers and acquisitions, especially in the service industry, also have identify in order to follow large clients. There are a lot of examples of such M&A activity happening for police force firms, since sometimes the clients are so big, it forces firms to merge in social club to serve them improve. The merged firms have more resources and expertise to handle powerful clients. Information technology also gives companies a mode to bootstrap earning, hence better operation at the stock exchange for listed companies.
Diversification
Mergers and acquisitions permit companies to diversify into other areas of business concern, hence it spreads risks and nowadays opportunity for more than sales, profits and recognition in the market. For instance, if clothing store merges with a fabric company, it would assist both companies, since they would be able to go along a greater margin of profit. Diversification can too accept place in a totally different industry birthday. For case, if a restaurant chain store acquires a clothing shop, it would accept reduced its risks, since even if people stop eating out, hypothetically speaking, they could still brand coin from the habiliment store, and other way.
Personal Incentives
In some rare cases, a merger or an acquisition is initialised due to managers personal incentives in form of college salary, benefits etc., and has nothing to do with strategic planning.
TRANSACTION CHARACTERISTICS
There are several methods of payment for an M&A activeness described below.
Stock Purchase: This transaction requires acquirer to provide cash, stock, or combination of cash and stock in substitution for the shares of the company being acquired. This requires shareholders' approval, since shares tin can't exist bought without their consent. Whatsoever gain fabricated past the shareholders on their uppercase is taxed by the government.
Nugget Purchase: This requires acquirer to buy all the target firm's avails. The payment in made straight to the firm. This kind of transaction may not require shareholders' approving/permission. Acquirer, in most cases, won't assume the responsibility for firm'south liabilities, which would hateful that the firm existence acquired would have to settle the debt on its own.
Cash Offering: This kind of transaction simply requires payment in greenbacks.
Security Offering: In this example, shareholders are given shares of mutual stock, preferred stock, or in some cases debt of the acquirer. The exchange ratio is calculated bases on number of securities in substitution for a share of target stock.
Factors influencing method of payment
There are various factors that need to exist considered before method of payment is decided. The hazard is usually shared among acquirer and target shareholders in a certain ratio. The ratio is decided based on fiscal standing of each visitor. Moreover, signaling by the acquiring business firm is also important; they are in a much stronger position to dictate terms. Balance sail and other financial documents are an immense assistance in ascertaining the uppercase construction of the acquiring firm, which becomes an important consideration when it comes to method of payment.
Another important consideration includes the financial leverage the acquirer enjoys. If the company is highly leveraged, more debt wouldn't be recommended, and liability if the target company will not be assumed.
Attitude of Management
From the perspective of the lath of directors of the target companies, the merger can be classified into two broad categories:
A friendly merger: This happens when the 'board of directors' agree, negotiate and finally take an offer.
A hostile merger: This happens when the 'board of directors' attempt to foreclose the merger.
In instance of a hostile takeover, takeover defenses are used, with the intention to either forbid the transaction or increase the bid. Directors may trigger pre-offer mechanism, which makes the target company seem less attractive. This prevents the acquiring firm from making a decent offer. Alternatively, directors may attempt postal service-offer machinery, which include addressing ownership of shares, hence reducing acquirer'due south power gained from its buying.
REGULATIONS AND OTHER HURDLES
Legal Due Diligence
Information technology is an important exercise of an M&A transaction and helps both parties place any legal risks associated with the merger. Due diligence also provides an opportunity to minimize those risks. At the initial stage, all corporate documents are thoroughly reviewed which include Manufactures of Association. It also covers aspects relating to registrations of company's employees with the regulatory authorities. The second phase includes reviewing details related to visitor'due south shareholders, financial liabilities, contractual rights and obligations.
There are several regulatory considerations when performing M&A. In some cases, there is a need to obtain specific approvals from an M&A transaction from government regulatory bodies, peculiarly when the company is office of core economical activities of the country like banking, insurance, electricity or water supply. Some areas of economy require licenses and NOCs to collude. Additionally, authorities agencies exist that ensure industries stay competitive. G&A transactions commonly present a possibility of collusion between firms, in lodge to raise toll and create a monopoly situation. This situation generated boggling profits for the company, simply exploits consumers, since they don't have a pick and finish upwards purchasing the goods at a college price. Competition commissions exist on order to brand sure that markets stay competitive. Some countries have foreign capital letter investment laws, which foreclose foreign companies from investing locally or set up a sure investment limit. At that place are no ways around these hurdles, which ways that M&A transaction cannot be executed and finished.
As the house grows in size after Grand&A transaction, a different ready of taxation brackets may exist applicative. This needs to exist takes into considerations since it could adversely bear on company's profits. Such a evolution will be wearisome to shareholders and other stakeholders.
Labor Laws
Some countries have stringent labor laws, which need to be taken into account before M&A transaction take place. Big firms find themselves in spotlight when it comes to labor laws. The acquirer needs to understand how the labor laws are going to touch the visitor one time the merger is complete. Moreover, the politics of labor unions also needs to be understood and reconciled with. Sometimes, the employees are not happy with the proposed merger, which could threaten to disrupt the operations of the company.
It must also be made sure that labor is not exploited under the new administration, which tin be done by paying a off-white wage, providing safety working condition and health insurance.
