What are Mergers and Acquisitions?
A Merger is a corporate action wherein two companies of similar structure and size join together and form a new entity to increase their scale of operations, sales, and profits. There are mainly 5 types of mergers- Horizontal Mergers, Vertical Mergers, Conglomerates, Product Extensions and Market Extensions.
A merger results in a change in the shareholding pattern of the companies involved. In most cases, shareholders receive either stock, cash, or a combination of the two. After the merger, the share price of the newly formed company usually exceeds the value of the underlying companies.
For example, the merger between Vodafone India and Idea formed Vodafone Idea. Operations were merged at a swap ratio 1:1 implying that for every share of Idea held by an investor, would receive 1 share of the new company- Vodafone Idea.
A reverse merger is when a private company becomes publicly listed by merging with a listed company. This way, the private company can avoid the entire process of getting listed.
An Acquisition is a corporate action wherein one company acquires/ purchases another company. It usually involves a larger company buying 51% or more of a smaller company (target company). Here, shareholder treatment is similar to that of mergers; shareholders of the target company receive payment in the form of all stocks, all cash, or a combination deal.
Smaller companies are commonly acquired to increase market size, accompanies by the advantages of avoiding costs associated with setting up a new business, reducing competition, etc. During an acquisition, the target company is usually traded at a higher price as investors believe that they are being acquired at a premium. Meanwhile, the share price of the acquiring company tends to dip due to this premium being paid or possible debt incurred to finance the acquisition. After the acquisition, prices tend to stabilise.