Acronyms are commonly used in the business world to represent complex and lengthy phrases. In finance, M&A is one such acronym that represents 'Mergers and Acquisitions.' This article aims to provide a clear definition of M&A while also discussing its different aspects like Due Diligence, Financial Modeling, Valuation Methods, Synergy Analysis, and Deal Structuring.
In simple terms, Mergers refer to two companies coming together to form a single entity while an Acquisition means when one company takes over another complete structure. Together they are referred to as 'Mergers and Acquisitions' (M & A).
Example: Facebook acquired Instagram in 2012 for $1 billion.
There can be various reasons behind mergers/acquisitions:
Example: The merger between Disney and Fox Studios was mainly driven by increasing their production value by combining forces.
Before finalizing any acquisition deal following activities have been considered as due diligence:
Evaluation of all financial documents
Reviewing the legal contract related documents
Checking employee's contracts/ agreements
Reviewing the Intellectual Property / Patents owned
Example: Microsoft did its due diligence process before acquiring LinkedIn for $26.4 billion dollar
Financial modeling helps analysts evaluate future scenarios using historical performance data information provided through accounting principles.The model gives insights into forecasts based on various factors that affect profitability under certain conditions during the acquisition.
Some examples include; Revenue synergies being achieved after merger/acquisition activity or Cost-cutting initiatives taken from restructuring unused systems.
Example: Google leveraged past historical data & financial models before acquiring Motorola Mobility for $12.5 Billion.
Various methods are used to evaluate a company's worth in the M&A process. The primary five methods include;
Asset-Based valuation approach
Market-based valuation approach
Income Based Valuation Approach
Industry specific approaches.
Companies and their partner basically choose them as per investor needs, industry nature and several other factors.
Example: Verizon Communications uses discounted cash flow models as part of its value proposition when brainstorming new potential Mergers & Acquisitions possibilities.
## Synergy Analysis
Synergy is identified in M&As when two companies come together, and collaboration results in an increase that may not have been possible independently. Such gains can be from Cost savings or revenue growth opportunities due to joint venture efforts drafted by both teams with common goals/objectives after reviewing combined strength/weaknesses during due diligence phase
Example: After Time Warner merged with Turner Broadcasting System (TBS), synergy was realized through cost optimization programs resulting in profitability gained within 1 year since the merge completion.
This activity links each deal structure created between acquirer and target companies based on various factors such as securing consent/approval clauses from shareholders/Auditors/Legal departments or Fund managers to minimize legal risk exposure so they don't jeopardize funding arrangements already established at either party business levels beforehand via investment vehicles like LLC’s.
Example: In Pfizer-AstraZeneca acquisition attempts dating back to 2014, many aspects of deal structuring were carefully reviewed upfront before finalizing any terms between parties officially.
