Mergers & Acquisitions

1. Horizontal

A horizontal merger happens between two companies that operate in similar industries that may or may not be direct competitors.

2. Vertical

A vertical merger takes place between a company and its supplier or a customer along its supply chain. The company aims to move up or down along its supply chain, thus consolidating its position in the industry.

3. Conglomerate

This type of transaction is usually done for diversification reasons and is between companies in unrelated industries.

1. Statutory

Statutory mergers usually occur when the acquirer is much larger than the target and acquires the target’s assets and liabilities. After the deal, the target company ceases to exist as a separate entity.

2. Subsidiary

In a subsidiary merger, the target becomes a subsidiary of the acquirer but continues to maintain its business.

3. Consolidation

In a consolidation, both companies in the transaction cease to exist after the deal, and a completely new entity is formed.

Mergers and acquisitions (M&A) can take place for various reasons, such as:

1. Unlocking synergies

The common rationale for mergers and acquisitions (M&A) is to create synergies in which the combined company is worth more than the two companies individually. Synergies can be due to cost reduction or higher revenues.

Cost synergies are created due to economies of scale, while revenue synergies are typically created by cross-selling, increasing market share, or higher prices. Of the two, cost synergies can be easily quantified and calculated.

2. Higher growth

Inorganic growth through mergers and acquisitions (M&A) is usually a faster way for a company to achieve higher revenues as compared to growing organically. A company can gain by acquiring or merging with a company with the latest capabilities without having to take the risk of developing the same internally.

3. Stronger market power

In a horizontal merger, the resulting entity will attain a higher market share and will gain the power to influence prices. Vertical mergers also lead to higher market power, as the company will be more in control of its supply chain, thus avoiding external shocks in supply.

4. Diversification

Companies that operate in cyclical industries feel the need to diversify their cash flows to avoid significant losses during a slowdown in their industry. Acquiring a target in a non-cyclical industry enables a company to diversify and reduce its market risk.

5. Tax benefits

Tax benefits are looked into where one company realizes significant taxable income while another incurs tax loss carry forwards. Acquiring the company with the tax losses enables the acquirer to use the tax losses to lower its tax liability. However, mergers are not usually done just to avoid taxes.

There are two basic forms of mergers and acquisitions (M&A):

1. Stock purchase

In a stock purchase, the acquirer pays the target firm’s shareholders cash and/or shares in exchange for shares of the target company. Here, the target’s shareholders receive compensation and not the target. There are certain aspects to be considered in a stock purchase:

• The acquirer absorbs all the assets and liabilities of the target – even those that are not on the balance sheet.
• To receive the compensation from the acquirer, the target’s shareholders must approve the transaction through a majority vote, which can be a long process.
• Shareholders bear the tax liability as they receive the compensation directly.

2. Asset purchase

In an asset purchase, the acquirer purchases the target’s assets and pays the target directly. There are certain aspects to be considered in an asset purchase, such as:

• Since the acquirer purchases only the assets, it will avoid assuming any of the target’s liabilities.
• As the payment is made directly to the target, generally, no shareholder approval is required unless the assets are significant (e.g., greater than 50% of the company).
• The compensation received is taxed at the corporate level as capital gains by the target.

3. Method of payment

There are two methods of payment – stock and cash. However, in many instances, M&A transactions use a combination of the two, which is called a mixed offering.

4. Stock

In a stock offering, the acquirer issues new shares that are paid to the target’s shareholders. The number of shares received is based on an exchange ratio, which is finalized in advance due to stock price fluctuations.

5. Cash

In a cash offer, the acquirer simply pays cash in return for the target’s shares.

In an M&A transaction, the valuation process is conducted by the acquirer, as well as the target. The acquirer will want to purchase the target at the lowest price, while the target will want the highest price.

Thus, valuation is an important part of mergers and acquisitions (M&A), as it guides the buyer and seller to reach the final transaction price. Below are three major valuation methods that are used to value the target:

• Discounted cash flow (DCF) method: The target’s value is calculated based on its future cash flows.
• Comparable company analysis: Relative valuation metrics for public companies are used to determine the value of the target.
• Comparable transaction analysis: Valuation metrics for past comparable transactions in the industry are used to determine the value of the target.

At WIM we conduct comprehensive due diligence investigations to assess the financial, operational, legal, and regulatory aspects of target companies. They review financial records, contracts, regulatory filings, intellectual property rights, and other relevant information to identify potential risks, liabilities, and opportunities associated with the transaction. Due diligence specialists play a crucial role in informing decision-making and mitigating risks during the M&A process.

These specialists often work collaboratively in multidisciplinary teams to provide comprehensive support and expertise throughout all stages of the M&A transaction, from initial strategy development to deal execution and integration. Their specialized knowledge and experience help companies navigate the complexities of M&A transactions and maximize value for stakeholders.

We also assist in financial modelling, valuation analysis, and preparation of financial documents (such as financial statements, forecasts, and investment memos) for M&A transactions. We help clients understand the financial implications of proposed deals, assess the value of target companies, and evaluate the potential return on investment. We can also assist you in supporting structuring financing arrangements for M&A transactions.