The concept of merger and acquisition

Corporate restructuring occurs when a company carries out a fundamental change in the structure of its operations or its financial position.. Its investments in the assets of the company and the way and manner those investments are financed. This may arise from either a change in the economic environment in which it operates or in the objectives it earlier set for itself. It should be noted that any form of restructuring that is carried out should seek to add value thereby maximising shareholders wealth.

Mergers and acquisitions (M&A) are a way of expanding and growing a business by purchasing another company in its entirety . Although used interchangeably there is a slight difference between the two. A merger occurs when two or more seperated companies come together to form a single one. The companies so mentioned go into liquidation and an entirely new one is formed to acquire their shares. And acquisition or take over occurs when one company buys shares in another company substantial enough to acquire enough to acquire controlling interest. The former is called the bidding company while the latter is  the target company.

Take over could either be friendly take over or hostile take over.  Friendly take over is when the target company is willing to be taken over and its management is in agreement with the management of the bidding company. While hostile take over is when the target company is resisting the bidding company from taking over the company. It is characterized by rancor and in some cases serious litigation.

The major objective of M&A is to maximize shareholders wealth through creation of what is known as "synergy ". This refers to the effect of combining resources instead of using them independently so as to give maximum benefits. Any merger should create synergy in order to add value. The concept usually expressed mathematically as 1+1=3 states that combination of inputs produces a greater output than the sum of the seperated individual inputs.

Types of mergers

Typically there are three main types of merger and they are as follow

Horizontal Merger
This involves combination of two companies engaged in similar line of activities. This type of merger usually results in removal of duplicate facilities and filling of the supply gap to meet increased demand for the companies products.

Vertical Merger
This occurs where bidding company decides to integrate forward to take advantage of the sales outlet of the target company or integrate backward to have access to the source of raw materials of the target company.

Conglomerate Merger
This is a combination of two companies that are totally different in activities. This type of merger is normally undertaken for diversification purposes.

Motives For Merger

The following factors have been advanced as reasons for mergers.

a). Access to the market

Merger may create greater access to the market for the bidding company thereby, continually increasing   sales.

b). Access to source of supply

The target company may be the supplier of a critical raw materials for the bidding company. The latter may  want to protect or control this source to ensure continued supply.

c). Reduction of competition

Where two companies compete in the same market for their output, a merger may bring a larger market share which may enable the enlarged company to raise prices without a cut in sales volume.

d). Economies of scale

These are advantages to be gained from operating on a large scale. They come in form of lower prices being paid for raw materials, lower set up costs from large production runs.

e). Better management

The assets of the target company may either be underutilized or untapped because of poor management. This will create an opportunity for the bidding company to inject better and skilled managers to enable the target company's potentials to be tapped and fully utilized.

f). Diversification

Here, the bidding company merges with another company in a totally different activity in order to make up for a fall in its traditional core business or to reduce the risk arising from cyclical savings in returns.

g) Show of serious intent

A merger announcement may be a positive signal that the company's future potential is big. Information about impending merger may jerk up the market price of its share.

h). Stronger asset base

A company in a high risk industry with high level of earnings in relation to its net assets, may want to mitigate its risk by acquiring another company with a lot of assets.

i). Enhance quality earning

Similarly, a company may improve its risk complexion by acquiring another company with a more stable earnings.

j). Improved liquidity

The acquiring company's liquidity might improve if the target company has substantial free cashflow, that is, cash lying idle and not intended to be used as dividends because of lack of profitable investments.

k). Lower cost

This occurs, if management believes that it is cheaper to achieve growth via merge.

l). Tax

This is a deliberate strategy to acquire tax losses that may be used as tax relief, with a view to paying lower tax.