A merger or acquisition (M&A) deal is the consolidation of companies or assets through various types of financial transactions. (www.investopedia.com)
A merger is when two companies come together to create a newly formed organization. Contrary to a merger, when an acquisition occurs, a newly formed company doesn’t emerge. The company being acquired commonly ceases to exist.
For an M&A deal to be successful, both companies need to be on the same page. Since these deals have high values, the merger or acquisition deal process is often a complex affair. The potential value of the deal must be clear to all involved parties such as executives, employees, and investors.
The term M&A doesn’t just refer to the actual deal. The term M&A also refers to the name of the departments that manage and execute deals.
Once a merger is complete, the acquired company is often "erased from existence" and functions as a part of the acquiring company. During an acquisition, the acquiring company claims a majority stake in the firm to be acquired. The latter does not need to change its name or its legal structure in order to abide by the laws of the deal.
M&A is one of the most important areas of corporate finance because it helps in the future expansion of companies, and it is a way for companies to get the necessary support when they need it. For instance,
For example, Alphabet, Google’s parent company, has acquired over 200 smaller companies to date, including the likes of Picasa and Android Inc.
The time required to complete an M&A deal usually varies based on the degree of involvement from both companies. When the buyer is serious and wants to finish the business as soon as possible, the firm can determine the principal terms and deal structure in just a few weeks. After that, teams must conduct due diligence, document exchange, closing and more. It can take anywhere from one month to over a year for an M&A deal to close.
An M&A deal structure refers to the binding agreement that ties two parties together when a deal is being discussed. It states the rights and obligations of the two parties so that there is no scope for confusion later. It elaborates on what the parties are entitled to and what they are obligated to do under the agreement.
An M&A deal structure is a symbol of mutual agreement between the two parties. Firms draw up the deal structure, and this process is called deal structuring. They prioritize the goals and objectives of the deal, keeping in mind the risk-bearing capacity of both companies.
The parties need to be clear about the following before the deal structure can be created:
Devising an M&A deal structure can be an ordeal due to a large number of critical factors such as the financing means, market conditions, antitrust laws, corporate control, and accounting policies of both parties.
In recent times, deal structuring has become much more flexible, and companies are willing to experiment with more creative deal structuring methods. Traditionally, there are three general options for structuring an M&A deal
1. Asset Acquisition
2. Stock Purchase
The M&A deal structuring process also requires two important documents, including the Term Sheet and the Letter of Intent (LOI).
The United States has always been a hotbed for M&A. The late 1990s popularized the idea of large M&A transactions, and since then they have also become more common. Here are some of the biggest M&A deals in the U.S history:
Verizon Communications and Vodafone jointly came up with Verizon Wireless. However, Verizon later acquired Vodafone's 45 percent stake in a transaction that amounted to $130 billion. Now, Verizon Wireless is completely owned by Verizon Communications.
These two companies from the pharmaceutical field came together in 2000 when Pfizer Inc acquired Warner-Lambert. The deal was worth $90 billion and took three months.
ExxonMobil Corporation (XOM) came into being in 1998 when Exxon Corporation and Mobil Corporation merged after an $80 billion deal. Exxon and Mobil, at the time of the deal, were the biggest oil producers in the U.S. and today they are in a class of their own.
In 2008, the Altria Group Inc. gave their approval to the spin-off of Philip Morris International. All Altria shareholders received a share of Philip Morris International.
One of the biggest telecommunication giants in the world, AT&T acquired BellSouth (BLS) in a deal that grossed $67 billion. AT&T, as a result, got a local customer base of 70 million people which helped them strengthen their hold over the industry.
The banking giant, Citicorp, created a historic merger when they decided to come together with Travelers Group in 1998. The $70 billion deal had a tremendous influence on the financial services industry in the country, and the merger gave birth to Citigroup Inc.
America Online and Time Warner
The year 2000 saw one of the biggest mergers in history occur when America Online (AOL) joined hands with Time Warner Inc. AOL, an internet provider, merged with Time Warner, the entertainment conglomerate, to create AOL Time Warner. The deal was worth $165 billion and is considered to be a landmark in the M&A world. However, the merger fell through soon after.