Mergers and Acquisitions

Introduction

A means of expansion, often considered by investors, is the taking over, or merging of one business with another existing business. Very often, the company initiating the take-over or merger will be a listed company, though this is not always the case.

The terms, "merger", "amalgamation", and "take over" are often used interchangeably. Whereas the first two terms imply a combining of interests with continuity of ownership and/or management, the term "take-over" suggests that the interests of one of the parties to the transactions are being acquired by the other party, with consequent loss of ownership and/or management. The word "merger" has been used as a generic term to cover both situations.

Mergers represent a highly specialised field and in practice a number of experts will usually be involved. The explanation which follows serves merely to provide some idea of what it entails.

Reasons for mergers

In practice it may be difficult to establish the motivation for a merger, but various possibilities exist from the point of view of the buyer and the seller.

From the buyer's viewpoint, at least four possible areas may be identified:

1. production advantages, such as the use of complementary facilities, achieving economies of scale. A merger may prove the best way of acquiring additional capacity, or a source of raw materials (amongst others);
2. marketing considerations, which would include the expansion of outlets, elimination of competition, or protection against the possible loss of one's existing markets;
3. management factors may make a merger attractive - for example, a business with a strong and creative management team may need to merge in order to provide its management with a challenge - though this is unlikely to be a decisive factor on its own;
4. investment possibilities may be the main motivation for a merger in the case of a company with surplus funds, or one that is seeking to reduce the risk attaching to its existing operations, by means of diversification. Any merger should normally not be undertaken unless it is a sound investment, but investment needs will not necessarily be the force initiating the merger.

Reasons for selling may be very similar to those for buying in the case of a merger, as opposed to a take-over. A seller may, however, have specific reasons for wanting to divest from a company entirely. These will often be of a personal nature, particularly in family businesses. Thus estate duty considerations, difficulty in ensuring management succession, and the like, may cause the owner(s) of a company to seek a buyer. In many cases, small businesses which have grown rapidly are unable to find the capital necessary for continued expansion, and a complete or partial take-over becomes necessary.