M&A: what is it?
The concept of M&A is certainly one of the best known in the business world.
The acronym stands for Mergers & Acquisitions and indicates strategic activities that may involve two or more organizations.
The outcome of these processes is a change in the structure of the companies involved, which can be either private or public.
Although the terms are often used interchangeably, there are important differences between acquisition and merger activities.
Acquisition involves the transfer of ownership of one company to another, through the purchase of a majority stake in the capital of the acquired entity.
The acquirer may sometimes retain the right to use the previous brand, without therefore replacing it with its own brand.
An example is the acquisition of Instagram by Mark Zuckerberg’s Facebook in April 2012.
In contrast, a merger between two or more entities results in the creation of a new corporate entity. In this case, the parties involved combine their assets to pursue common goals, strengthening their position in the market.
More precisely, the merger may give rise to a new entity – the so-called newco – with the disappearance of the pre-existing entities, or it may result in the absorption of one company into another, in which case the merged company loses its legal identity.
An example of a newco is the merger between the PSA and Fiat Chrysler Automobiles groups with the birth of Stellantis at the beginning of 2021, a record year for M&A transactions worth $5.9 trillion globally.
But what are the main types of M&A? Let’s look at them with some examples.
Types and examples of M&A in the B2B world
Conventionally, a distinction is made between four types of M&A transactions.
- Horizontal M&A
- Vertical M&A
- Concentric M&A
- Conglomerate M&A
Let us understand their features, using examples from the B2B world.
Horizontal M&A
In a horizontal M&A, the companies involved operate in the same sector, developing similar products or services.
A case in point is that of a company specialising in pneumatic components for the automotive industry that decides to acquire a competitor abroad, to strengthen its production structure and preside over a new market.
Vertical M&A
In a vertical merger or acquisition, companies operate within the same supply chain, but with different roles. The same company as in the previous example could acquire a wholesaler of car components, to integrate a distribution channel into its structure.
Concentric M&A
It occurs when the companies involved develop and market different products or services, but target the same customer segments.
An example is when a company specialising in machinery production decides to merge with a company operating in the field of surface treatments for metals, developing a complete range of services for the metalworking world.
Conglomerate M&A
So-called conglomerate M&A take place between organizations from different sectors. The aim is often to expand in order to reduce risks, increase profitability, review their cost structure and integrate new competencies.
A case of conglomerate M&A is when a company specializing in industrial machinery decides to acquire a majority stake in a corporation producing electronic systems.
The phases of an M&A strategy
Regardless of the type, every M&A transaction has fundamental steps.
The first one is the strategic evaluation of the project.
For example, an acquisition may be dictated by the will to grow in a high-potential market without setting up a foreign subsidiary. This makes it possible to take advantage of already existing production, distribution and financial structures without incurring the costs to develop them.
For a company aiming to penetrate new foreign markets, the purchase of an already established competitor can therefore be an effective choice.
This phase is followed by the analysis and selection of companies in line with the strategy.
The screening of potential candidates is a crucial but complex operation: companies reflecting specific criteria, defined a priori, must be identified.
These criteria can be both qualitative and quantitative.
Returning to the example of the car parts manufacturer, factors to be taken into account could be the EBITDA of the competitor to be acquired (quantitative criteria) and the type of products offered along with the certifications possessed (qualitative criteria).
The verification of all these aspects results in research that extends the timeframe of mergers and acquisitions. However, this market analysis is essential to proceed with the next steps.
One is due diligence. This is the process by which the suitability of a deal is assessed, based on the information available to the parties, in order to lay the groundwork for the subsequent deal negotiation.
During this phase, the parties agree on the details of the merger or acquisition transaction, defining instruments and modalities for guarantees, indemnification and compensation. Only afterwards will it be possible to actually conclude the agreement.
As can be guessed, all these activities are complex, but today technology can make some of them simpler. In particular, we are talking about finding the right target companies.
Effective screening: databases and Artificial Intelligence
Digital databases, online searches and consultancies are the tools usually used to identify organizations in line with one’s M&A strategy.
These solutions have two main limitations: high cost – especially for consultancies – and long lead times.
A business that has decided to embark on an M&A operation can turn to a specialised company to search for firms willing to be acquired, or it can rely on its own staff to carry out the activity.
In any case, it is necessary to compare different sources (e.g. websites and online databases), checking the companies identified one by one.
Are the company’s production processes compatible with our M&A strategy? Does the target possess the certifications we are interested in? Is the company financially sound? What is its size in terms of employees?
These are just some of the questions we need to answer to find the right targets.
At Matchplat we combine a database of 400 million companies worldwide with AI algorithms to study their online content in real time. This enables effective screening of companies, without manually comparing multiple sources of information.
Let us return once again to the example of the car parts manufacturer.
The company might only be interested in buying medium-sized Polish manufacturers of car oil sumps.
Matchplat’s Explore platform allows a quick and precise mapping of companies with these features, in the selected country, in order to immediately focus on the most suitable targets.
Conclusions
We have seen what is meant by M&A and the differences between mergers and acquisitions.
We then reviewed the main types, identifying four categories and illustrating their characteristics with examples from the B2B world.
M&As can involve companies in the same sector with similar productions (horizontal M&A), companies operating in different areas of the same supply chain (vertical M&A) and companies with different products and services but targeting the same customers (concentric M&A). Lastly, we outlined the characteristics of industrial conglomerates, the result of M&A between very heterogeneous realities.
We then looked at the stages of each M&A: from the definition of the strategic goals to the negotiation between the parties, focusing on the analysis of the companies that best meet the search criteria. This activity can now be automated thanks to the combination of global databases and Artificial Intelligence algorithms, speeding up a crucial step.
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