Mergers and Acquisitions (M&A) Definition

REVIEWED BY WILL KENTON

Updated Apr 18, 2019

What Is Mergers and Acquisitions?

Mergers and acquisitions (M&A) is a general term that refers to the consolidation of companies or
assets through various types of financial transactions. M&A can include a number of different
transactions, such as mergers, acquisitions, consolidations, tender offers, purchase of assets and
management acquisitions. In all cases, two companies are involved. The term M&A also refers to
the department at financial institutions that deals with mergers and acquisitions. The following will
review some of the different kinds of financial transactions that occur when companies engage in
mergers and acquisitions activity.
What's an Acquisition?
Mergers & Acquisitions Overview
Merger: In a merger, the boards of directors for two companies approve the combination and seek
shareholders' approval. After the merger, the acquired company ceases to exist and becomes part of
the acquiring company. For example, in 2007 a merger deal occurred between Digital Computers
and Compaq whereby Compaq absorbed Digital Computers.
Acquisition: In a simple acquisition, the acquiring company obtains the
majority stake in the acquired firm, which does not change its name or
legal structure. An example of this transaction is Manulife Financial
Corporation's 2004 acquisition of John Hancock Financial Services, where
both companies preserved their names and organizational structures.

Consolidation: A consolidation creates a new company. Stockholders of

both companies must approve the consolidation, and, subsequent to the
approval, they receive common equity shares in the new firm. For
example, in 1998, Citicorp and Traveler's Insurance Group announced a
consolidation, which resulted in Citigroup.

Tender Offer: In a tender offer, one company offers to purchase the

outstanding stock of the other firm at a specific price. The acquiring
company communicates the offer directly to the other company's
shareholders, bypassing the management and board of directors.
Example: Johnson & Johnson made a tender offer in 2008 to acquire
Omrix Biopharmaceuticals for $438 million. While the acquiring company
may continue to exist — especially if there are certain dissenting
shareholders — most tender offers result in mergers.

Acquisition of Assets: In an acquisition of assets, one company acquires

the assets of another company. The company whose assets are being
acquired must obtain approval from its shareholders. The purchase of
assets is typical during bankruptcy proceedings, where other companies
bid for various assets of the bankrupt company, which is liquidated upon
the final transfer of assets to the acquiring firm(s).

Management Acquisition: In a management acquisition, also known as

a management-led buyout (MBO), the executives of a company purchase
a controlling stake in another company, making it private. Often, these
former executives partner with a financier or former corporate officers in
order to help fund a transaction. Such an M&A transaction is typically
financed disproportionately with debt, and the majority of shareholders
must approve it. For example, in 2013, Dell Corporation announced that
it was acquired by its chief executive manager, Michael Dell.

What Is the Difference Between a Merger and an Acquisition?

Although they are often uttered in the same breath and used as though they were synonymous, the
terms merger and acquisition have slightly different definitions.

A merger occurs when two separate entities - usually of comparable size

- combine forces to create a new, joint organization in which –
theoretically – both are equal partners. For example, both Daimler-Benz
and Chrysler ceased to exist when the two firms merged, and a new
company, DaimlerChrysler, was created.

An acquisition refers to the purchase of one entity by another entity,

usually a smaller firm by a larger firm. A new company does not emerge
from an acquisition; rather, the acquired company, or target firm, is often
consumed and ceases to exist, and its assets become part of the
acquiring company. Acquisitions – sometimes called takeovers – generally
carry a more negative connotation than mergers, especially if the target
firm shows resistance to being bought. For this reason, many acquiring
companies refer to an acquisition as a merger even when technically it is
not.

Legally speaking, a merger requires two companies to consolidate into a

new entity with a new ownership and management structure, ostensibly
with members of each firm. An acquisition takes place when one
company takes over all of the operational management decisions of
another. The more common interpretive distinction rests on whether the
transaction is friendly (merger) or hostile (acquisition).

In practice, friendly mergers of equals do not take place very frequently.

It's uncommon that two companies would benefit from combining forces
and two different CEOs would agree to give up some authority to realize
those benefits. When this does happen, the stocks of both companies are
surrendered, and new stocks are issued under the name of the new
business identity.

Since mergers are so uncommon and takeovers are viewed in a

derogatory light, the two terms have become increasingly conflated and
used in conjunction with one another. Contemporary corporate
restructurings are usually referred to as merger and acquisition (M&A)
transactions, rather than simply a merger or acquisition. The practical
differences between the two terms are slowly being eroded by the new
definition of M&A deals. In other words, the real difference lies in how the
purchase is communicated to and received by the target company's
board of directors, employees and shareholders. The public relations
backlash for hostile takeovers can be damaging to the acquiring
company. The victims of hostile acquisitions are often forced to announce
a merger to preserve the reputation of the acquiring entity.

Why Merge?
Regardless of their category or structure, all mergers and acquisitions
have one common goal: they are all meant to create synergies that make
the value of the combined companies greater than the sum of the two
parts. The success of a merger or acquisition depends on whether this
synergy is achieved.

Synergy takes the form of revenue enhancement and cost savings. By

merging, the companies hope to benefit from the following:

 Becoming bigger: Many companies use M&A to grow in size and

leapfrog their rivals. While it can take years or decades to double
the size of a company through organic growth, this can be achieved
much more rapidly through mergers or acquisitions.
 Preempted competition: This is a very powerful motivation for
mergers and acquisitions and is the primary reason why M&A
activity occurs in distinct cycles. The urge to snap up a company
with an attractive portfolio of assets before a rival does so generally
results in a feeding frenzy in hot markets. Some examples of
frenetic M&A activity in specific sectors include dot-coms and
telecoms in the late 1990s, commodity and energy producers in
2006-07, and biotechnology companies in 2012-14.
 Domination: Companies also engage in M&A to dominate their
sector. However, since a combination of two behemoths would
result in a potential monopoly, such a transaction would have to run
 the gauntlet of intense scrutiny from anti-competition watchdogs
and regulatory authorities.

 Tax benefits: Companies also use M&A for tax purposes, although
this may be an implicit rather than an explicit motive. For instance,
since the U.S. has the highest corporate tax rate in the world, some
of the best-known American companies have resorted to corporate
“inversions.” This technique involves a U.S. company buying a
smaller foreign competitor and moving the merged entity’s tax
home overseas to a lower-tax jurisdiction, in order to substantially
reduce its tax bill.
 Staff reductions: As every employee knows, mergers tend to mean
job losses. Consider all the money saved from reducing the number
of staff members from accounting, marketing, and other
departments. Job cuts will also probably include the former CEO,
who typically leaves with a compensation package.
 Economies of scale: Yes, size matters. Whether it's purchasing
stationery or a new corporate IT system, a bigger company placing
the orders can save more on costs. Mergers also translate into
improved purchasing power to buy equipment or office supplies—
when placing larger orders, companies have a greater ability to
negotiate prices with their suppliers.

 Acquiring new technology: To stay competitive, companies need to

stay on top of technological developments and their business
applications. By buying a smaller company with unique
technologies, a large company can maintain or develop a
competitive edge.
 Improved market reach and industry visibility: Companies buy
companies to reach new markets and grow revenues and earnings.
A merger may expand two companies' marketing and distribution,
giving them new sales opportunities. A merger can also improve a
company's standing in the investment community as bigger firms
often have an easier time raising capital than smaller ones.

Sadly, synergy opportunities may exist only in the minds of the corporate
leaders and the deal makers. Where there is no value to be created, the
CEO and investment bankers – who have much to gain from a successful
M&A deal – will try to create an image of enhanced value. The market,
however, eventually sees through this and penalizes the company by
assigning it a discounted share price.