Mergers And Acquisitions (M&A) : Definition, Type And Tips
Understanding Mergers and Acquisitions
Mergers: are merging two companies into one, in which merging firms take/buy all the merged assets and liabilities of a company so that the merging company has at least 50% of the shares and the merged company ceased operations and its shareholders received some cash or shares in the new company (Brealey, Myers, & Marcus, 1999, p.598). Another definition of mergers is the absorption of a company by another company. In this case, the purchasing company will continue its name and identity. The buyer company will also take both the assets and liabilities of the purchased company. After the merger, the purchased company will lose/stop operating (Harianto and Sudomo, 2001, p.640).
The Acquisition: is the takeover of a company by purchasing the shares or assets of the company, the purchased company remains. (Brealey, Myers, & Marcus, 1999, p.598).
Types of Mergers and Acquisitions
According to Damodaran 2001, a company can be acquired other companies in several ways, namely:
a. Merger
At the merger, the directors of both parties agree to join the shareholders' approval. In general, this merger is approved by at least 50% shareholder of the firm target and bidding firm. Eventually, the target firm will disappear (with or without the liquidation process) and become part of the bidding firm.
b. Consolidation
After the merger process is complete, a new company is created and shareholders of both parties receive new shares in this company.
c. Tender offer
Occurs when a company buys another company's outstanding stock without the firm's target management agreement and is called a tender offer as it is a hostile takeover. The firm's target will remain for as long as there remains a rejection of the offer. Many tender offer which later turned into a merger because the bidding firm managed to take control of the target firm.
d. Acquisition of assets
A company buys another company's assets through the firm's target shareholders' approval. (p.835).
The division of the acquisition differs according to Ross, Westerfield, and Jaffe 2002. According to them, there are only three ways to make an acquisition:
- Merger or consolidation
The merger is a joined company with other companies. The bidding firm stays with its identity and name and obtains all assets and liabilities belonging to the firm's target. After the firm's target merger stops to become part of the bidding firm. Consolidation is the same as a merger unless a new company is formed. Both companies both eliminate the company's existence legally and become part of the new company, and between merged companies or mergers are not distinguished.
- Acquisition of stock
Acquisitions can also be made by buying a company stock voting, by buying cash, stocks, or other securities. Acquisition of stock can be done by bidding from a company against another company, and in some cases, the offer is given directly to the owner of the selling company. This can be adjusted by conducting a tender offer. The tender offer is an offer to the public to buy stock target firms, filed from a company directly to the owners of other companies.
- Acquisition of assets
The company can acquire other companies by purchasing all its assets. In this type, the firm's target shareholder votes are required so that there are no hindrances from minority shareholders, as in the acquisition of stock (p.817-818).
While based on the type of company that merged, merger or acquisition can be distinguished:
a. A horizontal merger occurs when two or more companies engaged in the same industry join.
b. The vertical merger occurs when a company acquires a supplier or customer company.
c. Congeneric mergers occur when companies are in the same industry but not in the same business line as their suppliers or customers. The advantage is that companies can use the same sales and distribution.
d. Conglomerate mergers occur when unrelated companies merge. The advantage is that it can reduce the risk. (Gitman, 2003, p.717).
Reasons for Merging and Acquisition
There are several reasons why companies merge either through mergers or acquisitions, namely:
a. Growth or diversification
Companies that want rapid growth, both size, the stock market, and business diversification can do mergers and acquisitions. The company has no risk of new products. In addition, if expanding with mergers and acquisitions, then the company can reduce competitor companies or reduce competition.
b. Synergy
Synergy can be achieved when a merger produces an economy of scale. The scale rate of the economy occurs because the combination of overhead costs increases income greater than a number of corporate earnings when not merged. Synergy is evident when companies that do mergers are in the same business because excessive function and labor can be eliminated.
c. Increase funds
Many companies are unable to raise funds for internal expansion but can raise funds for external expansion. The company combines with a company that has high liquidity that leads to an increase in corporate lending and financial liabilities. This allows increased funds at low cost.
d. Adding management or technology skills
Some companies cannot develop properly because of the lack of efficiency in their management or lack of technology. Companies that can not streamline their management and cannot pay to develop the technology, can combine with companies that have expert management or technology.
e. Tax considerations
The Company may carry tax losses of up to 20 years or until tax losses may be covered. Companies that have a tax loss can make acquisitions with a profit-generating company to capitalize on tax losses. In this case, the acquiring company will increase the combination of after-tax revenue by subtracting the income before tax from the acquired company. However, the merger is not only due to tax advantages but based on the objective of maximizing the welfare of the owner.
f. Increase owner liquidity
The inter-company merger allows the company to have greater liquidity. If the company is bigger, then the stock market will be wider and the stock more easily obtained so it is more liquid than the smaller company.
g. Protect yourself from takeover
This happens when a company becomes the target of a hostile takeover. The firm's target acquires another company, and finances its takeover with debt, because of this debt burden, the company's liability becomes too high to be borne by an interested bidding firm (Gitman, 2003, p.714-716).
Advantages and Disadvantages of Mergers and Acquisitions
Excess Merger
Acquisition through mergers is simpler and less costly than other takeovers (Harianto and Sudomo, 2001, p.641)
Disadvantages of Merger
Compared to the acquisition of the merger has several shortcomings, that is, there must be approval from the shareholders of each company, while to get the approval takes a long time. (Harianto and Sudomo, 2001, p.642)
Advantages and Disadvantages of Acquisitions
Excess Acquisitions
The benefits of the stock acquisition and asset acquisition are as follows:
a. Stock Acquisitions do not require shareholder meetings and shareholder votes so that if shareholders dislike the Bidding firm offer, they can hold their shares and not sell to the Bidding firm.
b. In the Acquisition of Shares, the purchasing company may deal directly with the shareholders of the company purchased by conducting a tender offer so no approval of the company's management is required.
c. Because it does not require management approval and company commissioner, stock acquisition can be used for a hostile takeover.
d. Acquisition of Assets requires a shareholder vote but does not require a majority shareholder vote as in the acquisition of shares so that there is no impediment to minority shareholders if they do not approve the acquisition (Harianto and Sudomo, 2001, p.643-644).
Shortage of Acquisition
The following losses on the stock acquisition and asset acquisition are as follows:
a. If enough minority shareholders do not approve the acquisition, then the acquisition will be void. In general, the company's articles of association determine at least two-thirds (about 67%) of the votes agree on acquisitions to make the acquisition happen.
b. If the company takes over all the shares purchased then there is a merger.
c. Basically, the purchase of any asset in the acquisition of an asset should be legally reversed so as to incur high legal costs. (Harianto and Sudomo, 2001, p.643)
Read:
Residual Income: Definition And How Its Work
Mutual Fund: Definition And Type
Mergers: are merging two companies into one, in which merging firms take/buy all the merged assets and liabilities of a company so that the merging company has at least 50% of the shares and the merged company ceased operations and its shareholders received some cash or shares in the new company (Brealey, Myers, & Marcus, 1999, p.598). Another definition of mergers is the absorption of a company by another company. In this case, the purchasing company will continue its name and identity. The buyer company will also take both the assets and liabilities of the purchased company. After the merger, the purchased company will lose/stop operating (Harianto and Sudomo, 2001, p.640).
The Acquisition: is the takeover of a company by purchasing the shares or assets of the company, the purchased company remains. (Brealey, Myers, & Marcus, 1999, p.598).
Types of Mergers and Acquisitions
According to Damodaran 2001, a company can be acquired other companies in several ways, namely:
a. Merger
At the merger, the directors of both parties agree to join the shareholders' approval. In general, this merger is approved by at least 50% shareholder of the firm target and bidding firm. Eventually, the target firm will disappear (with or without the liquidation process) and become part of the bidding firm.
b. Consolidation
After the merger process is complete, a new company is created and shareholders of both parties receive new shares in this company.
c. Tender offer
Occurs when a company buys another company's outstanding stock without the firm's target management agreement and is called a tender offer as it is a hostile takeover. The firm's target will remain for as long as there remains a rejection of the offer. Many tender offer which later turned into a merger because the bidding firm managed to take control of the target firm.
d. Acquisition of assets
A company buys another company's assets through the firm's target shareholders' approval. (p.835).
The division of the acquisition differs according to Ross, Westerfield, and Jaffe 2002. According to them, there are only three ways to make an acquisition:
- Merger or consolidation
The merger is a joined company with other companies. The bidding firm stays with its identity and name and obtains all assets and liabilities belonging to the firm's target. After the firm's target merger stops to become part of the bidding firm. Consolidation is the same as a merger unless a new company is formed. Both companies both eliminate the company's existence legally and become part of the new company, and between merged companies or mergers are not distinguished.
- Acquisition of stock
Acquisitions can also be made by buying a company stock voting, by buying cash, stocks, or other securities. Acquisition of stock can be done by bidding from a company against another company, and in some cases, the offer is given directly to the owner of the selling company. This can be adjusted by conducting a tender offer. The tender offer is an offer to the public to buy stock target firms, filed from a company directly to the owners of other companies.
- Acquisition of assets
The company can acquire other companies by purchasing all its assets. In this type, the firm's target shareholder votes are required so that there are no hindrances from minority shareholders, as in the acquisition of stock (p.817-818).
While based on the type of company that merged, merger or acquisition can be distinguished:
a. A horizontal merger occurs when two or more companies engaged in the same industry join.
b. The vertical merger occurs when a company acquires a supplier or customer company.
c. Congeneric mergers occur when companies are in the same industry but not in the same business line as their suppliers or customers. The advantage is that companies can use the same sales and distribution.
d. Conglomerate mergers occur when unrelated companies merge. The advantage is that it can reduce the risk. (Gitman, 2003, p.717).
Reasons for Merging and Acquisition
There are several reasons why companies merge either through mergers or acquisitions, namely:
a. Growth or diversification
Companies that want rapid growth, both size, the stock market, and business diversification can do mergers and acquisitions. The company has no risk of new products. In addition, if expanding with mergers and acquisitions, then the company can reduce competitor companies or reduce competition.
b. Synergy
Synergy can be achieved when a merger produces an economy of scale. The scale rate of the economy occurs because the combination of overhead costs increases income greater than a number of corporate earnings when not merged. Synergy is evident when companies that do mergers are in the same business because excessive function and labor can be eliminated.
c. Increase funds
Many companies are unable to raise funds for internal expansion but can raise funds for external expansion. The company combines with a company that has high liquidity that leads to an increase in corporate lending and financial liabilities. This allows increased funds at low cost.
d. Adding management or technology skills
Some companies cannot develop properly because of the lack of efficiency in their management or lack of technology. Companies that can not streamline their management and cannot pay to develop the technology, can combine with companies that have expert management or technology.
e. Tax considerations
The Company may carry tax losses of up to 20 years or until tax losses may be covered. Companies that have a tax loss can make acquisitions with a profit-generating company to capitalize on tax losses. In this case, the acquiring company will increase the combination of after-tax revenue by subtracting the income before tax from the acquired company. However, the merger is not only due to tax advantages but based on the objective of maximizing the welfare of the owner.
f. Increase owner liquidity
The inter-company merger allows the company to have greater liquidity. If the company is bigger, then the stock market will be wider and the stock more easily obtained so it is more liquid than the smaller company.
g. Protect yourself from takeover
This happens when a company becomes the target of a hostile takeover. The firm's target acquires another company, and finances its takeover with debt, because of this debt burden, the company's liability becomes too high to be borne by an interested bidding firm (Gitman, 2003, p.714-716).
Advantages and Disadvantages of Mergers and Acquisitions
Excess Merger
Acquisition through mergers is simpler and less costly than other takeovers (Harianto and Sudomo, 2001, p.641)
Disadvantages of Merger
Compared to the acquisition of the merger has several shortcomings, that is, there must be approval from the shareholders of each company, while to get the approval takes a long time. (Harianto and Sudomo, 2001, p.642)
Advantages and Disadvantages of Acquisitions
Excess Acquisitions
The benefits of the stock acquisition and asset acquisition are as follows:
a. Stock Acquisitions do not require shareholder meetings and shareholder votes so that if shareholders dislike the Bidding firm offer, they can hold their shares and not sell to the Bidding firm.
b. In the Acquisition of Shares, the purchasing company may deal directly with the shareholders of the company purchased by conducting a tender offer so no approval of the company's management is required.
c. Because it does not require management approval and company commissioner, stock acquisition can be used for a hostile takeover.
d. Acquisition of Assets requires a shareholder vote but does not require a majority shareholder vote as in the acquisition of shares so that there is no impediment to minority shareholders if they do not approve the acquisition (Harianto and Sudomo, 2001, p.643-644).
Shortage of Acquisition
The following losses on the stock acquisition and asset acquisition are as follows:
a. If enough minority shareholders do not approve the acquisition, then the acquisition will be void. In general, the company's articles of association determine at least two-thirds (about 67%) of the votes agree on acquisitions to make the acquisition happen.
b. If the company takes over all the shares purchased then there is a merger.
c. Basically, the purchase of any asset in the acquisition of an asset should be legally reversed so as to incur high legal costs. (Harianto and Sudomo, 2001, p.643)
Read:
Residual Income: Definition And How Its Work
Mutual Fund: Definition And Type
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