How do mergers and acquisitions work?
Mergers and acquisitions are key tools to help companies grow. They refer to the process of two or more firms joining together to become one bigger company. For instance, in 2013 British Car Auctions Marketplace (BCA Marketplace) acquired We Buy Any Car in a deal worth £1.2bn making it the fifth biggest UK acquisition in the past decade. But how exactly do mergers and acquisitions work?
The three types of merger
Horizontal
A horizontal merger is one of the three main types of merger. This is usually a deal cut between two companies at the same stage in the same industry. The benefit for both businesses is that they can reduce their costs by bringing logistics, HR and financial departments all under one roof. On top of this, it means that competition between companies can be reduced.
Vertical
A vertical merger is another common type. This is where two companies at vastly different stages of the industry will join together. The vertical merger can help both companies access new markets.
Conglomerate
A conglomerate merger occurs when two companies from entirely different industries come together to reduce both of their risks.
How does a merger work?
Negotiation
Negotiation is central to the mechanics of a merger. The potential buyer and the business need to be able to agree on an acquisition value to go ahead with the merger. This can be achieved by analysing a company’s projected financial growth or by comparing the valuations of similar companies. However, if a deal can’t be agreed an outright one option is an “earnout”. This is where the seller can potentially receive future additional fees if the company hits specified financial objectives after the deal is complete.
Legal help
For any successful deal to go ahead, you’ll also need to find and hire mergers and acquisition legal specialists. Mergers and acquisitions pose many complex legal issues. They’re fast-moving deals with plenty of controversy between either side. Without specific legal expertise in tax, real estate, intellectual property, cybersecurity and data privacy amongst other areas, then a deal could fall through.
Mergers and acquisitions can help reduce risks within companies, or they can help take a business to the next level. But they can be difficult to arrange too. However, by getting the appropriate legal support and by negotiating carefully, you should be set for a prosperous deal.
