The Merger motivation and its alchemy equation is 1+1 = 3. The main idea behind launching a merger or acquisition is to create shareholder value over and above the sum of the two companies. Its main reasoning is that two companies together are worth more than two separate companies.
Fuelling this motivation are the following factors;
- It creates a more competitive, cost efficient company
- Narrows the competition
- Greater market share
- Increased buying power / Economies of scale (Synergy)
- New sales opportunities
- Lowers costs and staffing requirements
Mergers & Acquisitions, although often uttered in the same breath have slightly different meanings. Acquisition is when one company ‘swallows’ the target company and clearly establishes itself as the new owner. See Acquisition.
In a merger, two firms (often of equal size) agree to go forward as a single new company and become one. Both company’s stocks are surrendered and new stock (of the new company) is issued in its place. Mergers will need restructure and refinancing.
There are several types of mergers, each is fuelled by a differing motivation, although each sharing the same goal to become more efficient;
- Horizontal Merger – Where two companies in direct competition with each other agree to merge.
- Vertical Merger – Where two companies merge such as a customer and supplier for mutual benefit.
- Market Extension Merger – Where two companies merge that sell the same products in different markets.
- Product Extension Merger – Where two companies merge that sell different products in the same markets.
- Conglomeration Merger – Where two companies merge that have no common business areas.
To launch any merger, it is important to have the correct structure and objectives. It is essential to understand the process and to have the correct financing in-place. It may call for intricate financial structures to be implemented to ensure that control is not compromised in the new company.
To begin a merger launch or take the first steps towards proposing a merger with your target company, speak to us first. With our financial expertise and our associated legal teams, we are able to effectively reach your objectives, swiftly.