What is a merger and acquisition
Mergers and acquisitions (M&A) are mergers that occur either through the voluntary association of several companies into a new one (merger), or through the purchase by one company of another (acquisition), while the acquired company ceases to exist. The purpose of mergers and acquisitions is to consolidate the business, scale it up, and increase competitiveness in the market by concentrating the merging assets.
These agreements transfer corporate control, including the purchase and exchange of assets. A merger is the association of two or more entities into a single economic unit. The acquisition involves the establishment of control over a legal entity by acquiring more than 30% of its authorized capital while maintaining legal independence.
In Ukraine, the Law on Joint Stock Companies establishes certain requirements for mergers and acquisitions. In particular, the buyer or the initiator of the acquisition must publicly declare its intention to acquire the company shares in order to concentrate control over it. In addition, the buyer, if it buys a controlling stake, is obliged to buy out minority stakes in the same company from the owners.
Types of mergers and acquisitions
M&A agreements occur in three main areas:
- horizontal merger (merger of companies in the same industry);
This is the merger of two or more companies specializing in different stages of product manufacturing into one company. For example, the association of a company – manufacturer of goods with its supplier of raw materials or a consumer of products. An example of a vertical merger is the purchase of an automobile manufacturing plant by a metallurgical plant, which provides the first participant with stable sales of metal, the second one with stable supplies of this metal, as well as business diversification and the opportunity for each of these enterprises to earn on rising prices for metal or cars.
- vertical merger (merger of companies in the same industry specializing in different business areas);
Vertical (or parallel) mergers are associations of companies that manufacture related products: a computer company can merge with a company that makes processors. An example would be the merger of a camera manufacturing company with a manufacturer of three-layer sensors used in camera manufacturer technology. The advantage of such a merger is the production concentration in one company, reducing production costs and increasing the profitability of the associated company.
- formation of a conglomerate (merger of companies from different industries);
This is an association of two companies that are completely different in the direction of conducting business, which are not connected either by a common market, or by resources, or by production or sales relations. However, even such a merger can have a positive effect – there is a diversification of capital, optimization of cash flow management and investment resources. Sometimes conglomerate mergers are driven by a company desire to enter a new fast-growing market and gain a foothold in it.