From Deal Making to Value Creation: The Dynamics of M&A

Published : 2 weeks ago, on 03/09/2024

M&A: What is it? Most people only notice the purchase price and ownership transfer when they learn that a corporation has bought a particular brand or entity.The majority of people are ignorant about the acquisition’s strategy, the complexity of the agreement, and the amount of information involved. 

In this post, we’ll go into greater detail about what are mergers and acquisitions and what are the reasons businesses include M&A in their growth plans. 

Mergers and acquisitions meaning

The mergers and acquisitions definition refers to the process of merging organizations through a variety of transaction forms. The most common kind is acquisition, in which one business purchases another and assigns ownership. A stock sale or an asset sale are the two types of purchases that are possible. 

When a business sells its stocks, the buyer acquires the entire company together with all of its assets and obligations. Although the buyer is the new owner of the company, the business nevertheless retains legal ownership of its assets and obligations. In contrast, an asset sale involves the buyer acquiring a specific asset of the target company, like machinery or intellectual property. Sometimes businesses even sell a whole division of their company; this is known as a corporate carve-out or divestment. 

On the other hand, mergers occur when two businesses of equal size voluntarily combine to form a single organization. Although the terms are frequently used interchangeably, acquisitions and mergers have separate legal definitions. The majority of the time, mergers result in the use of one of the company’s names or brands, which also often gives the impression of a takeover or acquisition.

To ensure the success of the deal, due diligence in mergers and acquisitions is common. It is conducted with the purpose of thoroughly assessing the target company’s financial, legal, operational, and commercial aspects.

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Examples of merger and acquisitions

To better understand the concept of M&As, let’s now overview some mergers and acquisitions examples. We’ll focus primarily on three successful mergers and acquisitions conducted in 2023.

Pioneer Natural Resources and ExxonMobil, $60 billion

One of the biggest oil and gas firms in the world, ExxonMobil, stated in October 2023 that it was acquiring rival Pioneer, a Texas-based hydrocarbon exploration company. At $253 per share, the all-stock transaction is worth about $60 billion. Since Saudi Aramco, this is ExxonMobil’s largest transaction to date. The combined business is therefore anticipated to produce the most oil and gas in the Permian Basin.

Splunk and Cisco, $28 billion

Technology corporation Cisco announced in September 2023 that it has bought cybersecurity-focused software business Splunk, located in California. The projected cost of the transaction is $28 billion, or $157 per share of Splunk in cash. By this deal, the two organizations hope to strengthen their cybersecurity defenses and increase the digital resilience of their clients.

Pfizer and Seagen, $43 billion

The global biotechnology business Seagen was acquired by Pfizer, an American multinational pharmaceutical and biotechnology organization, for a total estimated value of $43 billion, or $229 per Seagen share, in March 2023. With this agreement, the biggest in the healthcare sector since 2019, Pfizer hopes to advance cancer treatment strategies.

Types of mergers and acquisitions

There are several varieties of mergers and acquisitions, such as conglomerate, concentric, vertical, and horizontal.

1. Horizontal mergers

When a business merges with or buys out another that offers the same service or product to end users, this is known as a horizontal merger. Both businesses are in the same sector, serve the same clientele, and are producing goods in the same phase.

2. Vertical mergers

Similarities exist in a vertical merger, albeit the companies’ stages of production differ.

A vertical merger would occur, for instance, if an automaker bought out a supplier of seat belts for the vehicles. Despite being in different phases of production, both companies are in the same industry.

3. Concentric mergers

A concentric merger is another kind of M&A. This occurs when two companies in the same industry serve the same clients, but their offerings of goods and services differ.

The products or services in a merger must be complementary to one another in order for it to be deemed concentric. A concentric merger would be the union of a cell phone manufacturer with a manufacturer of phone cases.

4. Conglomerate mergers

A merger is referred to as a conglomerate merger if it involves two entirely different companies. Usually, the goal of this kind of M&A is to diversify into new markets.

Wrapping up

In conclusion, mergers and acquisitions (M&A) are complex transactions that involve much more than just the transfer of ownership. Understanding the intricacies and strategies behind M&A is essential for businesses aiming to grow and remain competitive in today’s market. Through due diligence, companies can thoroughly assess potential targets and mitigate risks associated with the transaction. 

The examples provided highlight the magnitude and impact of recent M&A deals, emphasizing the significance of these transactions in shaping industries and driving innovation. By staying informed about M&A trends and developments, businesses can position themselves strategically and capitalize on opportunities for growth and expansion.