The reasons for a company to decide on external development (mergers, acquisitions, alliances ...) compared to the internal one has its origin in different causes that we will comment on in this definition.
Reasons for mergers and acquisitions
We will highlight the economic and market power reasons.
1. Economic reasons
Cost reduction : Through economies of scale and / or economies of scope through the integration of two companies whose productive and commercial systems are complementary to each other, generating synergies.
Get new resources and capabilities by joining or acquiring another company.
Replacement of the management team : It usually happens that, when management is replaced, there is a greater increase in value.
Obtaining tax incentives that can increase the benefits of acquisitions and mergers, due to the existence of exemptions or bonuses.
2. Motives for market power
It may be the only way to enter an industry and / or a country , as it has strong entry barriers.
When mergers and acquisitions are horizontally integrated , an increase in the market power of the resulting company is sought and, consequently, a reduction in the level of competition in the industry
.
When mergers and acquisitions are vertically integrated, companies that operate at different stages of the production cycle are integrated , the objective is to immediately achieve the advantages of vertical integration , both backwards and forwards.
Types of external development
The types of external development are:
The merger of companies : Integration of two or more companies so that at least one of the originals disappears.
The acquisition of companies : Operation of purchase and sale of packages of shares between two companies, keeping the legal personality each of them.
Cooperation or alliances between companies : Intermediate formula, links and relationships are established between companies, without loss of legal personality of any of the participants, who maintain their legal and operational independence.
Depending on the type of relationship established between the companies, they can be classified into:
Horizontal: The companies are competitors among themselves and belong to the same industry.
Vertical: Companies are located in different phases of the complete cycle of exploitation of a product.
Conglomerates: Companies have very different activities from each other.
Types of mergers
They are unions between two or more companies, with the loss of legal personality of at least one participant.
1. Pure fusion
Two or more companies of an equivalent size, agree to join, creating a new company to which they contribute all their resources; dissolving the primitive companies. (A + B = C)
2. Merger by absorption
One of the companies involved (absorbed) disappears, integrating its assets into the absorbing company. The absorbing company (A) continues to exist, but accumulates to its equity the corresponding to the absorbed company (B).
3. Merger with Partial Contribution of Assets
A company (A) contributes only a part of its assets (a) together with the other company with which it merges (B), either to a new company (C) that is created in the merger agreement itself, or to another pre-existing society (B), which is thus increasing its size (B '); it is necessary that the company contributing assets (A) does not dissolve.
Business Acquisitions Financing
The participation or acquisition of companies takes place when a company buys part of the capital stock of another company, with the intention of totally or partially dominating it.
Acquisition or participation in companies will give rise to different levels or degrees of control depending on the percentage of share capital of the acquired company in its possession and according to the way in which the rest of the securities are distributed among the other shareholders: large packages of shares in the hands of very few individuals or a large number of shareholders with little individual participation.
The purchase of a company can be done through a conventional purchase-sale contract, but in recent decades, two financial formulas have been developed:
Purchase using financial leverage or Leveraged Buy-Out (LBO) .
Public offer for the acquisition of shares (OPA).
1. Buying through financial leverage (LBO)
Buying through financial leverage (LBO) consists of financing a significant part of the acquisition price of a company through the use of debt.
This debt is secured, not only by the buyer's equity or creditworthiness, but also by the assets of the acquired company and its future cash flows. So after the acquisition, the debt ratio tends to reach very high values.
It may be the case that the purchase is made by the same managers of the company to be acquired. In this case we are facing a purchase by management or Management Buy-Out (MBO). The reason why they decide to launch an offer on the company they work for is to put the company in the right direction.
2. The public offer for the acquisition of shares (OPA)
The public offer for the acquisition of OPA shares occurs when a company makes an offer to purchase all or part of the capital stock to the shareholders of another listed company under certain conditions.
see also finance and business knowledge
