Mergers and Acquisitions

hutchvodafone.jpgWherever you go, the network follows! Hutch’s famous punch line which was adapted appropriately in its much loved advertisement turned out to be quite a pun as the ‘Merger&Acquisition’ bug followed and finally caught up with Hutch! Following an entire battle of give and take, Vodafone acquired Hutch for a whopping 10 billion USD! Most of us would be wondering, that why at all a company should acquire a rival? What are the gains and risks involved in the entire transaction and how are mergers different from acquisitions?

A Merger, as the name suggests occurs when two companies go ahead and merge into a bigger company, mostly under a different name. This is often a result of stock swap, which takes place when two companies agree to share the risks involved in the deal. A merger might resemble an acquisition, it is indeed quite similar, but it is named so in most cases due to political and marketing reasons to avoid media frenzy. Well, obviously a company acquires the other or two companies merge together to accelerate their growth without having to create a separate business entity. An acquisition, as opposed to a merger, can be friendly or hostile. If a company buys the shares of the other company without prior knowledge, it is a hostile takeover. However if both companies cooperate and reach at a final stand, an acquisition can be friendly.

Coming back to the Hutch and Vodafone instance, which was a friendly acquisition, it is seen that a lot of expenditure is involved in such deals. When a company decides to take over the other, several factors need to be kept in mind. Considering that such actions are taken to increase the popularity, growth and market reach of a brand, one has to be aware of the consequences of the deal. How much technological know-how and expertise exists with the company to actually go ahead and ensure such a process. Mergers and acquisitions are an important part of brand building. It could also show how powerful you are as compared to your rival.

There are thus several motives behind merger and acquisitions, some of them being, economies of scale which refer to the fact that two companies merge together, they actually reduce the costs incurred to the same revenue stream thus increasing their overall profits. Companies also increase their brand value and market share by taking over a rival. A profitable company can buy a loss maker to use the target’s loss as their advantage by reducing their tax liability. In the United States and many other countries, rules are in place to limit the ability of profitable companies to “shop” for loss making companies, limiting the tax motive of an acquiring company.

Another important factor that comes into play is the geographical diversification: This is designed to smooth the earnings results of a company, which over the long term smoothens the stock price of a company, giving conservative investors more confidence in investing in the company. However, this does not always deliver value to shareholders.

Accurate business valuation is one of the most important aspects of M&A as valuations like these will have a major impact on the price that a business will be sold for. No marketplace currently exists for the mergers and acquisitions of privately owned small to mid-sized companies. Market participants often wish to maintain a level of secrecy about their efforts to buy or sell such companies. Their concern for secrecy usually arises from the possible negative reactions a company’s employees, bankers, suppliers, customers and others might have if the effort or interest to seek a transaction were to become known. Thus need for secrecy has thwarted the emergence of a public forum or marketplace to serve as a clearinghouse for this large volume of business.

Thus, in this method of give and take, it always remains to be seen how well planned the move was but in the end it is the market that the decider.

Surbhi Bhatia