Mergers & Acquisitions in the turmoil: trends and perspectives through these days of crisis

How Do mergers and acquisitions work today?

To answer to this question first it is important to understand what they exactly are and what their goal is.

Mergers and acquisitions have in general the objective of maximizing the wealth of the shareholders: it means that an acquisition should create an added value that exceeds the
cost of acquisition.

So what possiblilities can you create with M & A?

Synergies for example that increase the competitiveness far beyond what the two companies are expected to accomplish independently with the value of new company created exceeding the sum of the two previous companies.
It could mean operating and financial economies; and also less or not tax (if for instance the company acquired has accumulated losses).

And looking at the terminology we can identify as Corporate restructuring, all activities involving expansion or contraction of a firm’s operations or changes in its asset or financial structure;
and a Merger as a transaction in which at least one firm ceases to exist and the assets of that firm are transferred to a surviving firm so that only one separate legal entity remains; an Acquisition is a transaction in which both firms in a transaction survive but the acquirer increases its percentage ownership in the target; for Consolidation we mean the combination of two or more firms to form a completely new corporation; and last but not least we have the Merger of equals.

We can distinguish also between a Strategic merger that is a transaction undertaken to achieve economies of scale and a financial merger that has the goal of restructuring the acquired company to improve its cash flow and disclose its hidden value.

A hostile merger is a merger not supported by the acquired (we can call also it target company) firm’s management, forcing the acquiring company to gain control of the firm by buying shares in the marketplace.

But does it exist a secret for successful mergers, mergers that create value?
From the observation experts say that often companies that acquire with frequency and make it a major core competency tend to do well and perform better than their peers, but this is not a rule. We can add that buying without studying the possible creation of value and the future performances can lead to mergers and acquisitions that are destroying value.

We can conclude that we are facing a challenging and complex issue. Judging if an M&A will be successful or not is very difficult and needs a serious and wide analysis.

Today it is probably not the time for big mergers and it is instead probably the time for mid corporate mergers; sometimes the economic crisis can create new opportunities.

Author¬ Andrea Campione