Mergers and Acquisitons (M&A)
Mergers and Acquisitions (M&A) are part of a dynamic process to allow firms to restructure their operating and financial activities and engage in corporate renewal. M&A's are commonly incorporated into public corporation business strategies to deliver value to shareholders because it provides a mode by which firms can quickly respond to rapid changes in their business environment. Where best-practices and risk-return profiles today are acceptable, they may not be in tomorrow's marketplace. M&A therefore, provides an avenue to respond to these changes in a timely and effective manner.
Both mergers and acquisitions describe business combinations resulting from a transaction that involves an acquirer and a target. Although mergers and acquisitions once referred to different forms of restructuring, characterised by relative size differences between the buyer and seller as well as the different accounting policies for the two, today they are perceived to be one and the same thing. They can therefore (and usually are) used interchangeably both in research and industry. Under the Corporations Law (Chapter 6, Australia) there is no definition in reference to either of the terms.
Whilst M&A's were once simple combinations that allowed firms to build greater market power and extract corresponding synergies, today, through developments in capital markets, the legal framework, the market for technology, as well as social and cultural developments, M&A's are now part of a much larger artillery of tools at the disposal of firms. Firms looking to grow have a wide array of structural options, including, strategic partnerships and alliances, joint ventures, leveraged-buyouts (LBO), management buy-outs (MBO), reverse mergers and the list can go on for pages. In addition to simply following an acquisition form of growth (otherwise referred to as inorganic growth), firms these days are required to examine other options such as demergers, equity carve-outs, spin-offs, divestitures, and split-ups. These forms of corporate restructuring can potentially be value enhancing to shareholders.
Firms generally need to participate in M&As, because despite evidence that shows that on average they earn no better than the cost of capital for the acquirer, they provide opportunities for growth and restructuring not attainable through other means. Like valuation analysis, the design of good M&A's is an art form rather than an exact science. For this reason, to ensure firms are able to benefit from this practice, a framework that allows us to examine the structure of the opportunity, understand the role of participants and their conduct in the process, as well as a clearly defined set of outcomes is necessary.
To take each aspect of this paradigm apart, the structure of the opportunity compels firms to focus on mergers where opportunities, or potential risks exist. Opportunities and risks arise due to a myriad of factors from changes in technology and regulations, to changes in market valuations, or even industry appeal. The structure is at its root a basic valuation proposition. If the benefit of the acquisition outweighs the cost to the firm then it should at least be considered. A focus on structure however, needs to be augmented with a view on conduct. M&A is as much about the way that people interact and find best solutions to problems as it is an exercise in finding value in numbers. For this reason conduct in M&A can have a large influence on outcomes.
Conduct involves steps taken from the search process (information networks, consultation of investment banks), to the due diligence required to reveal where the risk lay, to the negotiation and bidding process. Conduct also requires firms to understand the limitations imposed by regulation (for example anti-competitive practices) as well as delicately plan the post-merger integration plan so to realise projected synergies. Provided such a due process is followed, where the conduct corresponds to the structure of the opportunity, merger outcomes, whilst they can never really be guaranteed, the possibility of a disastrous acquisition can be avoided or at least mitigated.
To take each aspect of this paradigm apart, the structure of the opportunity compels firms to focus on mergers where opportunities, or potential risks exist. Opportunities and risks arise due to a myriad of factors from changes in technology and regulations, to changes in market valuations, or even industry appeal. The structure is at its root a basic valuation proposition. If the benefit of the acquisition outweighs the cost to the firm then it should at least be considered. A focus on structure however, needs to be augmented with a view on conduct. M&A is as much about the way that people interact and find best solutions to problems as it is an exercise in finding value in numbers. For this reason conduct in M&A can have a large influence on outcomes.
Conduct involves steps taken from the search process (information networks, consultation of investment banks), to the due diligence required to reveal where the risk lay, to the negotiation and bidding process. Conduct also requires firms to understand the limitations imposed by regulation (for example anti-competitive practices) as well as delicately plan the post-merger integration plan so to realise projected synergies. Provided such a due process is followed, where the conduct corresponds to the structure of the opportunity, merger outcomes, whilst they can never really be guaranteed, the possibility of a disastrous acquisition can be avoided or at least mitigated.
Following a number of requests to keep this blog going, I will endeavour to do my best with what little time I have over the next few months!!!
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