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Mergers and acquisitions

Belongs to subject Bank mergers

An acquisition/takeover is the purchase of one business or company by another company or other business entity. Consolidation/amalgamation occurs when two companies combine to form a new enterprise altogether, and neither of the previous companies remains independently. Some public companies rely on acquisitions as an important value creation strategy. Another type of acquisition is the reverse merger, a form of transaction that enables a private company to be publicly listed in a relatively short time frame. A reverse merger occurs when a privately held company (often one that has strong prospects and is eager to raise financing) buys a publicly listed shell company, usually one with no business and limited assets. Ownership control of the company in turn conveys effective control over the assets of the company, but since the company is acquired intact as a going concern, this form of transaction carries with it all of the liabilities accrued by that business over its past and all of the risks that company faces in its commercial environment. The buyer buys the assets of the target company. This type of transaction leaves the target company as an empty shell, if the buyer buys out the entire assets. One hybrid form often employed for tax purposes is a triangular merger, where the target company merges with a shell company wholly owned by the buyer, thus becoming a subsidiary of the buyer. In a "forward triangular merger", the buyer causes the target company to merge into the subsidiary; a "reverse triangular merger" is similar except that the subsidiary merges into the target company. Under the U.S. Internal Revenue Code, a forward triangular merger is taxed as if the target company sold its assets to the shell company and then liquidated, whereas a reverse triangular merger is taxed as if the target company's shareholders sold their stock in the target company to the buyer.

Such transactions are usually termed acquisitions rather than mergers because the shareholders of the target company are removed from the picture and the target comes under the (indirect) control of the bidder's shareholders.

Payment in the form of the acquiring company's stock, issued to the shareholders of the acquired company at a given ratio proportional to the valuation of the latter. They receive stock in the company that is purchasing the smaller subsidiary.

Increased revenue or market share: 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. : 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. Hiring: some companies use acquisitions as an alternative to the normal hiring process. In this case, the acquiring company simply hires ("acquhires") the staff of the target private company, thereby acquiring its talent (if that is its main asset and appeal). The target private company simply dissolves and few legal issues are involved. Manager's hubris: manager's overconfidence about expected synergies from M&A which results in overpayment for the target company. The M&A process itself is a multifaceted which depends upon the type of merging companies.

A horizontal merger is usually between two companies in the same business sector. Conglomerate M&A is the third form of M&A process which deals the merger between two irrelevant companies. A statutory merger is a merger in which the acquiring company survives and the target company dissolves. The purpose of this merger is to transfer the assets and capital of the target company into the acquiring company without having to maintain the target company as a subsidiary. A consolidated merger is a merger in which an entirely new legal company is formed through combining the acquiring and target company. The purpose of this merger is to create a new legal entity with the capital and assets of the merged acquirer and target company. Both the acquiring and target company are dissolved in the process.

A Strategic merger usually refers to long term strategic holding of target (Acquired) firm. Merger of equals is often a combination of companies of a similar size. An analysis of 1,600 companies across industries revealed the rewards for M&A activity were greater for consumer products companies than the average company. However, mergers coincide historically with the existence of companies. In 1900 the value of firms acquired in mergers was 20% of GDP. However more often than not mergers were "quick mergers". These "quick mergers" involved mergers of companies with unrelated technology and different management. First Wave

Horizontal mergers

Second Wave

Vertical mergers

Diversified conglomerate mergers

Fifth Wave

Cross-border mergers, mega-mergers


Seventh Wave

Generic/balanced, horizontal mergers of Western companies acquiring emerging market resource producers

During the third merger wave (1965–1989), corporate marriages involved more diverse companies. For example, retail companies are buying tech or e-commerce firms to acquire new markets and revenue streams. Buyers aren’t necessarily hungry for the target companies’ hard assets. The turnover in target companies is double the turnover experienced in non-merged firms for the ten years after the merger.

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