A CORPORATE ACQUISITION is defined as a process by which the assets of a company are transferred to a buyer or new owner, while a merger represents the combining or disposal of the resources of two or more companies following an acquisition.
This new entity can bring benefits of economies of scale, inter-partner learning, reduced costs through elimination of duplication, a broader range of products and services, and greater market power. Mergers and acquisitions (M&A) are the amalgamation of two or more firms into a single entity based on acquisition of the assets of the target firm and the main types were identifed as horizontal, involving competing firms in the same industry and at the same stage in the process; vertical, with firms at different stages of the production chain; and conglomerates, where firms in unrelated industries merge.
Other types of M&A were referred to as congeneric, involving firms in the same industry but with different customer bases; cash mergers, where two firms are combined and shareholders obtain shares in the new company; and triangular, mergers which occur when a target company merges with a subsidiary of the acquirer for tax purposes.
There is a trend towards cross border mergers and, from an international perspective, M&A have been spurred by increased foreign direct investment, and incentives provided by economic integration of nations which have raised questions about competition policy.
Historically, M&A waves are triggered when shocks occur in the business environment such as deregulation actions; the introduction of new technologies, distribution channels or substitute products; or increases in commodity prices.
A critical aspect of M&A activity is that acquisitions may be friendly, in that the parties agree to the transfer of ownership and only the details need to be worked out, or the acquisition may be hostile. In a hostile takeover, the target firm resists the acquisition and very often legal proceedings are instituted. Firms in small countries should seriously consider mergers as a growth strategy, whether based on local joint ventures or amalgamation with foreign corporations where synergy has been established.
Embarking on an acquisition process without having a sound strategic plan in place is a recipe for failure. The financing of M&A transactions can be complex, which dictates that persons engaging in M&A deals need to appreciate the sources of financing and different instruments in order to determine the most appropriate type of financing for the particular acquisition. In this era of greater accountability and transparency, due diligence typically will be more expansive and probe more deeply than ever before.
In relation to closing a deal, the due diligence process should not be left solely to the buyer because a seller also needs to ensure effective due diligence which puts the responsibility for a detailed due diligence process on the shoulders of both parties to the M&A deal.
The literature on post-merger acquisition in M&As is clear that this is the most difficult area of the process and poor integration planning and execution is responsible for the vast majority of failed mergers. The lesson is that the merger team must pay specific attention to the integration stage and not view closing as the success indicator.
Haven Allahar is managing director of All-Inclusive Project Development Services Limited, a development planning consulting firm based in Trinidad and Tobago. He also lectures at the Arthur Lok Jack Graduate School of Business, University of the West Indies, St Augustine, Trinidad.
