Mergers are unions of two or more companies that give rise to a third company more significant than the previous ones. According to experts from mergers and acquisitions advisory firms, acquisitions, on the other hand, consist of the purchase of one or more companies by another. Generally, mergers and acquisitions are carried out to gain a greater dimension and competitiveness in the market to face opportunities or threats that have been detected. Mergers are classified into two groups:
It consists of the union of two or more companies resulting in creating a new one, distinct from the previous ones.
Merger By Absorption:
A merger by absorption consists of a company acquiring and integrating into its legal entity the businesses of other companies, maintaining the acquiring company’s initial legal identity.
Although there is no classification for corporate acquisitions, different types are also applicable to mergers, which are defined by who the buyer is and how the merger or acquisition is financed. Thus, there are the following modalities:
Leveraged Buyout (Lbo):
This consists of purchasing a company by obtaining financing whose primary collateral will be its assets. It is also known as a “leveraged buyout”. The funding for the purchase will be satisfied with the cash flows generated by the acquired company. It is common to establish “ratchet” systems (payment with shares) as remuneration for the executives. With the passage of time and fulfillment of objectives, the acquired company’s ownership will pass into their hands.
Leveraged Employee Buy-Out (Lebo):
This is the LBO modality whereby the company’s employees acquire ownership with the help of external financing.
Management Buyout (Mbo):
This is the purchase of the company by its management team, generally supported by a financial investor.
Management Buy-In (Mbi):
This consists of the purchase of the company by a management team other than the current one. This operation usually occurs when external agents, mainly financial, perceive that the current management team will be unable to make the business profitable.
Buy-In Management Buy-Out (Bimbo):
This is the combination of MBO and MBI, i.e., the company’s purchase by both internal and external managers.
Advantages and disadvantages of mergers and acquisitions
Mergers and acquisitions of companies are carried out to gain more significant size and competitiveness in the market. As necessary background, therefore, a thorough analysis of the market opportunity, the companies’ resources, legal and regulatory restrictions (primarily related to competition), and the negotiation’s agility will be necessary.
The main advantages generated by a merger or acquisition of a company are related to the synergies derived from the operation, usually in cost rationalization, elimination of duplication, or integrating a vital component of the value chain. In the medium and long term, the operation’s success depends on the size and overall scope of the resulting business, the management team’s capacity, and how the companies are integrated without causing structural problems in the strategic and operational functioning. In this sense, professional advice is key to the success of the operation, as there are many branches of law (commercial, civil, tax) and economics (financing, management, structure, operations) involved in mergers and acquisitions, so it is essential to turn to experienced mergers and acquisitions advisory firms.
On the other hand, the disadvantages of M&A transactions usually derive from deficiencies in the company’s research to be merged or acquired or from pursuing objectives unrelated to the company’s strategy. Most mergers fail because of the difficulty of integrating two or more cultures, management teams, and workforces. This results in the inability to overcome the merger’s practical challenges and generates insurmountable friction in the teams involved, which reduces their involvement and commitment to the new organization.
It is for this reason that company acquisitions are much more frequent than mergers. The result of unions is creating a new company that “blends” two or more pre-existing companies to a greater or lesser degree. The process is highly complex and must be designed with caution and with all the parties involved, which is why it usually fails. In an acquisition, on the other hand, there is a dominant company (acquirer) and a dominated company (acquiree), and there is little doubt that the acquiring company will impose its culture, mission, vision, and vision on the acquiring company.