Mergers and acquisitions (M&A) are common events in the business world, where companies come together to combine resources and grow their businesses.
In these transactions, there are many terms that may be used to describe different aspects of the deal on business model types.
What is the purpose of mergers and acquisitions?
Companies employ strategic tactics to develop quickly and enter new markets or product lines. These moves allow companies to diversify their business, reduce risks by spreading interests across different markets, and access new tech and talent.
By combining forces, companies aim to create synergies where the new entity is more efficient and valuable than the sum of its parts. M&A can also help firms consolidate their position in an industry, reducing competition and potentially increasing profitability.
Additionally, these strategies can optimize financial performance by leveraging tax benefits or reallocating capital more effectively. Ultimately, the goal of M&A is to enhance shareholder value by creating a more competitive and financially robust company.
Mergers and Acquisitions Common Terms In Business
Here are 20 common terms you should know when it comes to mergers and acquisitions.
1. Acquisition
The process by which one company takes over controlling interest in another company.
2. Merger
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The combination of two or more companies into a single entity, usually with the goal of achieving market expansion or diversification.
3. Due Diligence
Aninvestigation or audit of a possible investment or product to make sure of all the facts, such as looking over financial records and any other information that is important.
4. Synergy
The idea that two companies working together will be worth more and do better than the two companies working alone.
5. Hostile Takeover
An acquisition effort that the target company’s management and board vigorously oppose.
6. Friendly Takeover
An acquisition in which the target company’s management and board of directors agree to the takeover by another company.
7. Leveraged Buyout (LBO)
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The acquisition of another company using a significant amount of borrowed money (bonds or loans) to meet the cost of acquisition.
8. Asset Sale
The sale of a company by selling its assets rather than its stock.
9. Stock Sale
The sale of a company through the sale of shares of the company’s stock.
10. Earnout
A part of the buying price that depends on meeting certain performance or profit goals in the future.
11. Letter of Intent (LOI)
A document outlining legal issue terms for preliminary agreements between two or more parties before the legal agreements are finalized.
12. Bidder
The entity making a takeover offer in an acquisition.
13. Target
The company being pursued in a merger or acquisition.
14. Defensive Tactics
Strategies employed by a target company to prevent a hostile takeover.
15. Golden Parachute
Substantial benefits guaranteed to a company’s executives in the event that the company is acquired and the executives are terminated as a result of the merger or acquisition.
16. Tender Offer
A price offer to buy a corporation’s shareholders’ shares over market price.
17. Reverse Merger
An agreement for a private company to join with a public company so that the private company can become public without going through the usual IPO process.
18. Carve-out
When a company sells a portion of its business or assets to another company, creating a new company or entity.
19. Integration Plan
A detailed plan outlining how two merging companies will consolidate operations, cultures, and strategies.
20. Poison Pill
A defensive strategy used by a target company to thwart hostile takeovers by making itself less attractive to the acquirer.
What are the types of merger and acquisitions in terms of form of integration?
Mergers and acquisitions (M&A) can be categorized into different types based on the form of integration between the acquiring and acquired companies.
These types reflect the strategic objectives and the nature of the relationship between the entities involved. Here are the main types:
1. Horizontal Merger: This occurs between companies operating in the same industry and are direct competitors.
The main goals are economies of scale, product expansion, competition reduction, and market share.
2. Vertical Merger: This involves companies at different stages of the production process within the same industry, such as a manufacturer merging with a supplier or distributor.
The objective is to secure supply chains, reduce production costs, and increase efficiency.
3. Conglomerate Merger: A conglomerate merger happens between companies in unrelated business activities. There are two types:
- Pure Conglomerate: Involves companies with nothing in common.
- Mixed Conglomerate: Involves companies looking to expand product lines or markets. The aim is often diversification and capitalization on brand reputation.
4.Market-extension Merger: This kind comprises corporations selling identical items in various markets.
The goal is to gain access to a larger market and ensure a wider geographical presence.
- Product-extension Merger
This occurs between companies that sell different but related products in the same business market. The aim is to combine product lines to offer a more comprehensive product to the current customer base.
- Concentric Merger
Involves companies with related products or markets but do not directly compete against each other.
The focus is on leveraging synergies in marketing, technology, or research and development to enhance competitive positioning
Takeaways
Mergers and acquisitions can bring a lot of value and growth opportunities for companies, but they can also be complex and risky transactions.
It is important to understand these common terms and their implications before entering into any M&A deal.
Additionally, it is crucial for both parties to have proper legal counsel to ensure the smooth execution of the transaction.
With this knowledge, you will be better equipped to navigate the world of mergers and acquisitions in the business world.
