Mergers and acquisitions (M&A) are transactions in which the ownership of companies, other business organizations or their operating units are transferred or combined. As an aspect of strategic management, M&A can allow enterprises to grow, shrink, and change the nature of their business or competitive position.
I. Acquisition
An acquisition or takeover is the purchase of one business or company by another company or other business entity. In an acquisition, one business buys a second and generally smaller company which may be absorbed into the parent organization or run as a subsidiary. A company under consideration by another organization for a merger or acquisition is sometimes referred to as the target.
Based on the content analysis of seven interviews authors concluded five following components for their grounded model of acquisition:
(1) Improper documentation and changing implicit knowledge makes it difficult to share information during acquisition.
(2) For acquired firm symbolic and cultural independence which is the base of technology and capabilities are more important than administrative independence.
(3) Detailed knowledge exchange and integrations are difficult when the acquired firm is large and high performing.
(4) Management of executives from acquired firm is critical in terms of promotions and pay incentives to utilize their talent and value their expertise.
(5) Transfer of technologies and capabilities are most difficult task to manage because of complications of acquisition implementation. The risk of losing implicit knowledge is always associated with the fast pace acquisition.
II. Merger
Mergers are generally differentiated from acquisitions partly by the way in which they are financed and partly by the relative size of the companies. Various methods of financing an M&A deal exist:
(1) Cash. Payment by cash. Such transactions are usually termed acquisitions rather than mergers because the shareholders of the target company are removed from the picture and the target comes under the (indirect) control of the bidder's shareholders.
(2) Stock. Payment in the form of the acquiring company's stock, issued to the shareholders of the acquired company at a given ratio proportional to the valuation of the latter. They receive stock in the company that is purchasing the smaller subsidiary.
(3) Financing options. There are some elements to think about when choosing the form of payment. When submitting an offer, the acquiring firm should consider other potential bidders and think strategically. The form of payment might be decisive for the seller. In general, stock will create financial flexibility. Transaction costs must also be considered but tend to affect the payment decision more for larger transactions. Finally, paying cash or with shares is a way to signal value to the other party, e.g.: buyers tend to offer stock when they believe their shares are overvalued and cash when undervalued.
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