Introductions and Recommendations on M&a Deals

Section 1: Introductions and Recommendations on M&A Deals

Introduction

By definition, mergers refer to the action to combine two companies of similar sizes and to create a new company that integrate both companies’ finance and management. Meanwhile, acquisitions refer to the action of a larger company acquiring a smaller companies and no new company created. However most Medias have mixed the concept of mergers and acquisitions. Most cases today are acquisitions. There have been several business merger and acquisition waves since the last century. No matter how market perception changes, the ultimate benefit or loss is always born by the shareholders from the purchaser side. In this essay, I am going to discuss the key elements to be carefully considered in M&A deals, analysis on the winner in terms of the shareholders, and justify the proposition that both gain and loss exist.

Topic 1: Key elements to be considered in M&A deals

According to Bishop, M. (2013), about two-thirds of all mergers and acquisitions fail. There are different factors causing the corporate marriage to fail, and I reckon the followings are crucial in M&A deals.

Purchase Price (including APP) Versus Net Worth & Synergy

First and foremost, success of a deal largely depends on the difference between net worth with synergy and the cost incurred. In order to better demonstrate acquirer’s cost, I think it is useful to apply the concept of Acquisition Purchase Premium (APP). As described in Topic 15 learner material, “APP represents deliberate overpayment in excess of the target firm’s market value which an acquirer must pay in order to secure control.” Apart from target firm’s net worth as valued, the purchase price paid by the acquirer also includes APP. The higher the APP, the less likely that achievable synergy can cover acquirer’s cost, and consequently the smaller the chance for a successful M&A deal.

Then what is synergy? Referring to Topic 16 learner material, synergy is either post-merger savings or efficiencies resulting from the combination. For example, if an OEM automobile manufacturer acquires an auto part manufacturer, the acquirer is likely to benefit from a lower cost of raw materials and processed goods than it used to pay for an outside auto part supplier. Such a post-merger material savings can be regarded as synergy. Another example can be the case in which an OEM automobile manufacturer acquires another OEM. The acquirer may be expert in conventional car production, while the target firm may be pioneer in electric vehicle manufacture. The combination of these two may create efficiency in both market expansion, product fusion and additional revenue earned by EV, reflecting a clear synergy after the deal. However, synergy valuation is quite subjective