Mergers and acquisitions

Mergers and acquisitions (M&A) is a general term describing the consolidation of companies or their assets through various types of financial transactions, including mergers, acquisitions, consolidations, tender offers, purchases of assets and management buyouts. The phrase also refers to the desks at financial institutions that arrange such deals.

In any transaction there is an acquirer (the buyer) and a target (the company or assets being bought). The transaction may be friendly, agreed by both boards, or hostile, pursued against the wishes of the target's board (see hostile takeover).

Mergers versus acquisitions

Although used together, the two words describe different things. A merger is the combination of two companies into a single new legal entity, typically presented as a union of equals. An acquisition is the purchase of one company (or its assets) by another, where the buyer is clearly in control and the target may cease to exist as an independent firm. In practice most "mergers of equals" are structured as acquisitions for legal and tax purposes.

Strategic rationale

Companies pursue M&A for a range of reasons:

• Growth — buying revenue, customers or capacity faster than building it organically.
• Synergies — cost savings or revenue gains that the combined firm can achieve but the two separately could not.
• Market power and consolidation — increasing scale or share within an industry.
• Diversification — entering new products or geographies.
• Vertical integration — securing suppliers or distribution (see types of mergers).
• Acquiring capabilities — technology, intellectual property or talent ("acqui-hiring").
• Financial motives — deploying excess cash, tax considerations, or in a leveraged buyout, generating returns from financial engineering.

Buyers: strategic versus financial

Acquirers are commonly grouped into two types. Strategic buyers are operating companies, often in the same or an adjacent industry, that expect to realise synergies by combining with the target. Financial buyers — chiefly private-equity firms — acquire companies as investments, frequently using a leveraged buyout structure, and aim to sell them at a profit within a number of years.

How deals are paid for

Consideration can be cash, stock (shares of the acquirer), or a combination. Cash gives target shareholders certainty; stock lets them share in future upside and can be more tax-efficient, but exposes them to the acquirer's share-price risk. The mix chosen affects the buyer's balance sheet and its earnings per share.

The deal process

A typical transaction moves through several stages:

1. Strategy and sourcing — identifying targets or buyers, often with an investment bank.
2. Initial contact and a letter of intent outlining headline terms.
3. Due diligence — detailed investigation of the target.
4. Valuation and negotiation of price and terms.
5. Signing the definitive agreement.
6. Regulatory approval and other closing conditions.
7. Closing and post-merger integration.

Do deals create value?

A large body of empirical research — including long-running studies by McKinsey, KPMG and academic finance scholars — finds that a substantial share of acquisitions fail to create value for the acquirer's shareholders, even though target shareholders usually gain through the takeover premium. Common causes include overestimating synergies, overpaying (the "winner's curse"), and weak integration. This makes disciplined valuation, due diligence and integration planning central to the practice of M&A.

Merger waves

M&A activity is famously cyclical, clustering in "waves" driven by economic expansion, cheap financing, technological change and deregulation. Historians typically count several major waves since the late 19th century, each with a characteristic deal type — from the horizontal monopolies of the 1890s–1900s to the conglomerates of the 1960s, the leveraged buyouts of the 1980s, and the cross-border and technology-driven booms of more recent decades.