Mergers and acquisitions (M&A) broadly refers to a consolidation of companies, assets, or capabilities via transactions between firms. M&A includes businesses absorbing other companies, merging and forming a new one, acquiring assets, or even purchasing talent.
For instance, Apple acquired Beats by Dre in 2014 for $3B. In 2022, WarnerMedia and Discovery merged to form Warner Bros. Discovery. Amazon alone has made ~100 acquisitions, including WholeFoods, IMDb, Audible, and more.
M&A can help companies grow faster, reach new customers, and mitigate competition. Successful entrepreneurs will likely encounter M&A at some point in their professional lives, either as the one making the offer or receiving one.
What Is the Difference between Mergers and Acquisitions?
Though different, mergers and acquisitions get thrown into one definition because of their similarities.
A merger occurs when two companies combine to form a new corporate entity under one name and banner. For example, in 2019, aerospace and defense firms United Technologies and Raytheon merged through a $121B deal, creating the aptly named Raytheon Technologies.
An acquisition differs because it features one company, usually larger than the other, completely absorbing another while retaining the larger firm’s identity. As an example, Microsoft acquired LinkedIn for $26.2B in 2016.
Although the professional networking platform retained its culture and brand identity, it legally belongs to Microsoft.
In theory, mergers differ from acquisitions. “Everything is an acquisition,” says Kiston Patel, CEO of educational platform M&A Science. “[But] at the end of the day, there tends to be one team that ends up controlling.”
Businesses typically use the term “merger” for marketing purposes, per Patel, as it signals an amicable partnership between two organizations instead of a takeover.
Strategic Mergers and Acquisitions
On the surface, acquiring another company sounds like a solid way to expand your business. But companies engage in M&A for many reasons, such as:
- Diversification of products or offerings
- Economies of scale
- Increased market share
- Cost reductions
- Acquiring new technologies
The goals of a company seeking a merger or acquisition also change the type of M&A they pursue, including the following:
Merger of Equals: When two companies, often of similar size, combine because it is mutually beneficial.
United Technologies and Raytheon combining to form Raytheon Technologies is a merger of equals. Two companies might conduct a merger-of-equals transaction to reduce competition, as they no longer have to compete with each other.
Hostile Takeovers: When a company purchases another against the wishes of the acquired company’s management and board of directors. Instead, the acquiring firm arranges the deal directly with the acquired company’s shareholders.
In 2010, Cadbury strongly resisted a hostile takeover by Kraft. Its chairman at the time, Roger Carr, even argued Kraft held “contempt” for Cadbury. Eventually, the deal went through — but notwithstanding an intense back-and-forth between the two companies.
“It makes sense to get a little aggressive” if the acquiring company has better operators and managers, says Patel.
Tender Offers: When one company makes an offer to acquire another’s outstanding shares based on a specific price instead of a market price. Often, the acquiring company will offer above market price, incentivizing shareholders to sell so the larger company can gain a majority vote on the board of directors.
In 2011, Parker Tennessee Corporation, a wholly-owned subsidiary of Pfizer, completed a tender offer of all of King Pharmaceuticals stocks. This resulted in Pfizer taking majority control on King’s board and the NYSE removing King’s common stocks from trading.
Asset Acquisitions: M&A can sometimes involve simply purchasing business assets from another, typically from companies experiencing bankruptcy. Rather than absorb an entire firm’s assets and liabilities, the purchasing company chooses parts beneficial to them.
Management Acquisitions: Management-led acquisitions occur when a company’s executives purchase a controlling or total stake of a company. Also known as a management-led buyout, this acquisition often happens when leaders feel they could manage an organization better than its current owners. Other times, owners might want to pass down the company to longtime execs they trust. Management interested in acquiring their company typically partner with financiers.
For example, the founders of oil and gas services company Atchafalaya Measurement Inc. planned to retire, so they asked two managers if they had interest in purchasing the firm. The managers held key roles in the company, which made them solid candidates. The managers opted to work with a private equity firm, who helped facilitate the management-led acquisition in exchange for 80% equity.
M&A transactions can take on several structures, including:
Vertical: When one company acquires or merges with either a supplier or a customer. For example, a soda maker could acquire its manufacturer of metal cans.
Horizontal: When one company acquires or merges with a competitor in the same market. Two tutoring companies in the same region, for example, merge into one, thus reducing competition.
Examples of Mergers and Acquisitions
M&A can help a business achieve any strategic goals — such as Toyota and Lyft’s talent-based acquisition in 2021.
In April 2021, Toyota purchased one of Lyft’s self-driving vehicle divisions for $550m in cash. For Lyft, it received an injection of liquidity while reducing yearly costs. Of course, Lyft still exists as a separate company — Toyota just acquired some of their assets.
“There’s a huge shortage of AI engineers,” explains Patel, “so, [Toyota was] doing acquisitions” to combat the labor shortage.
After the pandemic shifted the working world, global CRM platform Salesforce acquired instant messaging app Slack in July 2021. Salesforce hopes to use Slack to create a more integrated platform for businesses to use. By acquiring a messaging company, Salesforce demonstrates how businesses can grow and expand their product offerings via M&A.
Mergers and Acquisitions Process
Because of the flexibility around M&A, the process can vary greatly. Depending on a company’s goals, the process could result in additional hurdles. For example, a hostile takeover would likely take much longer than a merger of equals.
1) Develop an acquisition and financial strategy
Patel recommends companies looking to engage in M&A start with a strategy. What do you hope to gain from this transaction? How would an M&A help your business reach its goals? Where do you see the company in five or 10 years?
Write down why an acquisition or merger makes sense for your company. Additionally, figure out which criteria matters most to you. For example, you could look for companies with:
- Effective management
- Advanced technological capabilities
- Geographic specialties
- Diverse product offerings
- High profits
2) Research and conduct outreach
Once you know the kind of business you hope to acquire, conduct research and create a list of potential companies to contact. You can look up companies on LinkedIn or Google, filtering for factors such as company size, industry, and growth. Also try asking your professional network for any recommendations.
How you research depends on the kind of data you want to collect. For example, LinkedIn shows the growth of companies via head counts, and this can help you see the organization’s priorities and trajectory.
After research, send messages to companies to get the ball rolling and gauge their interest. You can contact business owners directly via LinkedIn or send a note to the company’s email.
3) Evaluate the company and make an offer
If a company agrees to pursue an M&A transaction, you will need to request substantial information from them. For example, you could ask for current financial statements, HR data, agreements with suppliers, and other documents.
This will depend on the end goal of your acquisition — if you hope to acquire a division of workers, for example, knowing the team’s retention rate could help you evaluate the deal more accurately.
Several models can help you get started, though you will need financial and Excel skills to create them:
- Three-Statement Model: Links a company’s income statement, balance sheet, and cash flow sheet into a financial model, which serves as the basis for more complex models
- Discounted Cash Flow (CDF) Model: Evaluates a company based on their free cash flow discounted to its present value
- Merger Model: Projects financials and value for a company following a merger or acquisition
If everything looks solid, you will then create an offer based on your valuation, which the acquiree will likely try to negotiate. This process could vary in length depending on what the acquisition target wants.
Alternatively, Patel recommends trying out a partnership with an intended target first. Though not officially a merger, a partnership involves two companies agreeing to operate a new business and share profits.
This could help the two companies understand if a merger or acquisition makes sense for them.
4) Conduct due diligence
After the company accepts the offer, conduct due diligence to ensure the accuracy of your evaluation. Though similar to valuations, you will have to sift through all documents available to you from the acquired company.
Patel advises acquiring companies to take a more people-focused approach to due diligence. Instead of only considering financial metrics, look at a company’s LinkedIn and Glassdoor profiles. What kind of content do they produce? Are employees generally satisfied working there?
You could also network with people at the company, or employees who have left, to get a more personal understanding of how the firm works.
5) Sign the contract and start integration
Once ready, each company’s management team will come together to finalize the deal. The contract will take little time to create.
Integrating after the deal, however, will take significant time and experimentation. You will have to consider questions such as:
- What parts of our culture will we retain?
- Will any leaders from the acquired company remain?
- What resources can we commit to the integration process?
- How can we communicate the integration to our employees?
- How will we measure the success of the integration?
And, ultimately, this depends on who ends up with the most power at the end of the deal. As Patel noted earlier, one company will likely come out on top. It’s up to that company to determine what parts of the acquired company to keep.