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What are mergers and acquisitions and why are they done?

Home » blog » What are mergers and acquisitions and why are they done?

Mergers and acquisitions transactions are not simply negotiations for the purchase or combination of assets. They allow companies to expand their capabilities, enter new markets and increase their market share in existing markets. M&A (mergers and acquisitions) includes both mergers and acquisitions. Each of these forms of interaction has its own purpose and strategy.

Mergers and acquisitions enable companies to grow rapidly, adapt to changes in the market and increase their competitiveness. This is often one of the most effective ways to stay ahead of the competition and gain access to new technologies or talent.

What is M&A (mergers and acquisitions)?

Mergers and acquisitions are a series of processes related to the consolidation and acquisition of companies:

  1. A merger is a voluntary combination of two or more parties who pool their assets and resources to achieve greater success together.
  2. A takeover is the purchase of a company by another company, in which the acquired company completely loses its legal independence. The former are usually carried out between institutions of the same size, while the latter are usually initiated by a larger holding company.

An example of a promising global M&A transaction: the merger between Disney and Pixar. This allowed Disney to strengthen its position in the entertainment industry and gain access to animation technologies. Another example is the acquisition of LinkedIn by Microsoft, which allowed Microsoft to integrate its ecosystem into the largest professional network in the world.

The main difference between both transactions lies in the nature of the combination: a merger is more a typical example of a corporate transaction, while an acquisition often has a hostile connotation because the acquired party may not agree to the terms of the transaction.

Types of M&A

What is M&A (mergers and acquisitions)?Each form pursues its own goals and objectives. There are several main types of M&A:

  1. Horizontal: The collaboration between representatives of an industry to increase market share. Example: the merger of Fiat and Chrysler, which created a more competitive automobile group.
  2. Vertical: The association of institutions located at different levels of the same production chain. Example: Amazon buys a logistics company to optimize product delivery.
  3. Conglomerate: Merger of organizations operating in different sectors, with the aim of diversifying business activities. For example, when Berkshire Hathaway acquired Duracell, the company expanded its product range and minimized risks.
  4. A hostile takeover occurs when an organization takes over another organization against its will. This is done by buying shares directly on the stock exchange. A well-known example is Microsoft’s attempt to acquire Yahoo.

All these factors ensure that companies can flexibly choose a growth strategy based on their objectives and the current market situation.

Merger and acquisition transactions in Russia

The Russian market has its own characteristics that differ from global trends. Sanctions and economic instability have had a significant impact on merger and acquisition activities. Despite these restrictions, Russian entities continue to use mergers and acquisitions to expand their capabilities and strengthen their position in this area. Another feature is the active involvement of the government, which often determines the direction of transactions and influences the final outcome.

In recent years, transaction activity in the oil and gas sector has increased as major players seek to consolidate their assets and strengthen their control over resources. An example of this is the partnership between Rosneft and Bashneft, which allowed Rosneft to strengthen its position as one of the largest oil producers in the world.

In addition, transactions in the IT and telecommunications sectors play an important role in the Russian M&A market. Yandex is actively acquiring startups to strengthen its position in the technology and logistics sectors.

Strategies for companies

Mergers and acquisitions play an important role in developing growth and development strategies. By using different approaches, companies can optimally respond to changes and increase their competitiveness. Main methods:

  1. Horizontal measures help to reduce the number of competitors and increase market share. For example, large supermarket chains often merge to jointly save costs and strengthen their position.
  2. Vertical systems allow a company to control more stages of the production cycle, thus minimizing costs and improving logistics. An example of this type of transaction is buying from suppliers or distributors.
  3. Diversification through conglomerate transactions helps to minimize risks. For example, manufacturing companies can acquire financial assets for diversification purposes.
  4. Acquisition of innovative start-ups. Many large companies undertake small-scale projects to gain access to new technologies and innovations. This approach allows for rapid adaptation to technological changes, as Facebook did with the acquisition of Instagram and WhatsApp.

Why mergers and acquisitions remain crucial in business

M&A-Transaktionen in RusslandMergers and acquisitions offer companies the opportunity to quickly adapt to changing market conditions, increase their competitiveness and enter new markets. They help to pool resources, technologies and knowledge, which ultimately strengthens the position of organizations and contributes to their long-term success. M&A still plays an important role in the economy. They stimulate innovation, growth and global expansion.

Companies that use strategies intelligently can not only improve their market position, but also become market leaders. M&A is therefore still one of the most attractive instruments for those who want to reach the top of the economy.

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Financing M&A transactions: stages, sources

Mergers and acquisitions (M&A) are among the most complex and multifaceted aspects of corporate financing. The success of such transactions depends not only on strategic and operational decisions, but also on a carefully constructed financing system. Incorrect source selection or underestimation of risks can jeopardize even carefully drafted contracts.

Merger and acquisition financing is a complex and multifaceted process that can include both traditional bank loans and alternative capital lines. It is not just about raising funds, but about a whole system of strategic decisions where every decision can affect the stability and development of the company in the long term.

M&A financing stages: how to ensure success from start to finish

It is important not only to choose the right sources of capital, but also to consider many factors at each stage: from assessing the value of the company to choosing the optimal financing model.

1. Drafting an agreement: important aspects for a successful start

One of the most important tasks in the preparation phase is to analyze the risks that may arise during the transaction, including possible tax consequences, legal requirements and external economic factors.

It is necessary to determine how much capital is needed to fulfill the agreement. In this step, data on financial needs are collected and analyzed, for example, to determine the value of the company or the assets to be acquired. In this context, financing mergers and acquisitions can depend on both external factors and the internal needs of the organization.

The preparation of the advisory team that will accompany the transaction plays an important role. Lawyers, financial analysts, corporate account managers and other specialists will help you select the right financing instruments. In addition, advisors conduct a detailed analysis of current market conditions and future expectations, which influences the selection of the safest and most profitable sources of investment.

2. Company valuation: how to correctly determine the value of a transaction

An important stage that affects subsequent decisions. After all, the value of a company is not just a number on paper; it is a reflection of the country’s competitiveness, liquidity and growth prospects. The process of business valuation involves several methods, each with its own characteristics and applicability, depending on the type of agreement and market conditions:

  1. The Discounted Cash Flow (DCF) method estimates the value of a company based on the future cash flows that the company can generate. The method is useful for long-term capital-intensive transactions, as it allows a more accurate prediction of the company’s future financial position.
  2. Comparative analysis, where the value of a company is determined by comparing it with other similar companies in the market. This technique is particularly suitable when sufficient data is available to carry out such studies.
  3. The asset-based valuation method mainly looks at the value of all the assets of a company, including real estate, equipment and intellectual property. This approach is generally used for simpler contracts, such as mergers of companies active in manufacturing.

    Merger and Acquisition Financing Sources: Which One to Choose to Close a Successful Deal?

    Once the business valuation is complete, it is time to select a financing source. Not only the cost of the contract is important, but also its design and the risks associated with its execution. Merger and acquisition financing sources can range from traditional bank loans to private investments:

    1. Bank loans. They can be short-term or long-term and are usually used in cases where a deal needs to be closed quickly. Banks apply different conditions, such as interest rates, terms and required collateral.
    2. Private investors and venture capital: suitable for start-ups or companies with high growth potential. Private investors can also be strategic partners and offer significant added value through their knowledge and networks.
    3. Bond issuance is a suitable method for large companies that want to raise large amounts of capital, but do not want to take on debt in the form of bank loans. Bond issuance enables long-term financing without too much dependence on traditional lenders.
    4. Loans from institutional investors: In recent years, pension funds and insurers have become increasingly interested, as they can offer financing on more favourable terms than traditional credit institutions.

    Political and economic challenges

    Financing mergers and acquisitions in Russia is challenging due to political and economic instability. Changes in legislation and uncertainty and instability in financial markets can have a major impact on the choice of capital sources and the design of contracts. Sanctions and restrictions are forcing many companies to adopt new approaches and adapt their financing strategies.

    Changes in tax policy can therefore affect the attractiveness of the agreements and reduce their profitability. In addition, global economic changes, such as inflation and exchange rate fluctuations, can affect interest rates and borrowing costs. In an unstable economic environment, it is difficult to predict how financing standards will change, increasing the risks for transaction participants.

    Conclusion

    Financing mergers and acquisitions is a complex, multi-stage process that requires careful approach and comprehensive preparation. For successful contract execution, it is important to consider all potential sources of capital and their interaction with the transaction objectives. Each decision must be justified not only from a financial point of view, but also taking into account risks, legal requirements and the general market situation.

    In order to successfully conclude contracts, it is important to pay attention to each stage: from preparing and assessing the agreement to finding sources of financing and signing the contracts. Only such an integrated approach guarantees favorable conditions for all parties involved.

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    Popular Mergers and Acquisitions Examples

    Mergers and acquisitions are an integral part of modern business. These processes serve as a tool for expanding businesses, entering unfamiliar markets, and overcoming crises. Concrete examples of mergers and acquisitions illustrate how business leaders change the structure of their companies and shape global market conditions.

    Why do companies merge and acquire companies?

    Mergers and acquisitions are not just a fad for wealthy companies. Behind every decision of this nature lies cold calculation and careful analysis.

    Examples of the world’s largest mergers and acquisitions:

    1. Merger of Exxon and Mobil. In 1999, the largest merger between two energy giants took place. The $81 billion deal led to the creation of a new company: ExxonMobil.
    2. This combined two strong brands, allowing us to optimize costs and strengthen our position in the global oil market. The resulting synergies reduced the cost of oil production and refining, making ExxonMobil a market leader.
    3. Facebook acquires WhatsApp. In 2014, Facebook acquired WhatsApp for $19 billion to attract new users and become a major player in the messaging market. At the time of the deal, WhatsApp had approximately 500 million users; today, it has more than 2 billion.
    4. Time Warner is acquired by AT&T. In 2018, AT&T completed its acquisition of Time Warner for $85 billion. This allowed AT&T to reach a new level in the media and content marketing sector by integrating both content distribution and production into its services. As a result, WarnerMedia became part of AT&T and could compete with Netflix and Disney.

    These examples of mergers and acquisitions (M&A) show how companies are looking to strengthen their market position, improve their profitability, and increase their competitiveness.

    Main Types of M&A: From Horizontal to Conglomerates

    There are different types of M&A, each with its own purpose and consequences.

    Horizontal Mergers

    A merger of two companies operating in the same industry, with the goal of eliminating competitors and increasing market share. An example is the $130 billion merger of Dow Chemical and DuPont in 2017. The merger allowed the companies to create three separate business units focused on agriculture, materials, and specialty chemicals. This resulted in increased competition and greater overall efficiency.

    Vertical Mergers

    When companies operating in different segments of the same supply chain merge. An example is the aforementioned acquisition of Time Warner by AT&T. The merger gave AT&T complete control over the entire process, from creating content to delivering it to users.

    Conglomerates

    A merger of organizations that operate in completely different sectors, in order to diversify operations and reduce risk. An example is the acquisition of Precision Castparts by Berkshire Hathaway in 2016 for $37.2 billion. Precision Castparts produces components for the aerospace and energy sectors, which allowed Berkshire Hathaway to diversify its portfolio.

    What role do mergers and acquisitions (M&A) play in the Russian economy?

    There are also examples of large mergers and acquisitions on the Russian market. This is an important part of the economic strategy, which is aimed at improving competition and attracting foreign investment. An example is the merger of Yandex.Taxi with Uber in 2018, worth $3.8 billion. This allowed both parties to reduce costs and join forces in one of the most competitive markets. In doing so, they strengthened their share in the taxi and delivery market.

    The consequences of mergers and acquisitions: what happens to companies after the transaction?

    Every M&A transaction has consequences that can be both positive and negative. Benefits:

    1. Increases competitiveness. For example, the merger of Bayer and Monsanto in 2018, worth $63 billion, created a market leader in the agricultural sector and made it more competitive globally.
    2. Optimization and cost reduction. In most cases, companies combine resources and optimize costs. This can have consequences for production, marketing, and logistics.
    3. Layoffs and cultural conflicts. Often, a merger leads to the elimination of duplicate functions, resulting in layoffs.

    List of examples of successful mergers and acquisitions:

    1. Facebook and Instagram (2012). The $1 billion deal allowed Facebook to significantly expand its reach among younger audiences and strengthen its position in the mobile app segment.
    2. Amazon and Whole Foods (2017). The $13.7 billion acquisition of the supermarket chain allowed Amazon to expand its presence in grocery retail and integrate its technology into traditional retail, improving inventory management and logistics.
    3. Google and YouTube (2006). By acquiring YouTube for $1.65 billion, Google became the dominant player in the video content market. Today, YouTube generates billions in advertising revenue and has more than 2.5 billion monthly active users.

    Merger and acquisition risks: how to avoid failure

    1. The integration failed. Cultural and organizational differences can make it difficult to integrate two companies.
    2. Revaluation of the company. Buyers often overvalue assets, which leads to financial losses.
    3. Risk of losing customers. If a company’s strategy or management changes, there is a chance that customers will switch to competitors.

    To minimize risks, it is important to conduct a thorough analysis of the company, evaluate synergies and overcome cultural barriers among employees.

    Conclusion

    Examples of mergers and acquisitions show how deeply and significantly this phenomenon affects the global economy. For many companies, mergers and acquisitions are a way to attract capital, strengthen their position and overcome crises. Consolidation processes will remain one of the most important instruments for growth and strategic development in 2024. Mergers always involve risks, but only the willingness to transform allows companies to move forward and conquer new markets.

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