There are two ways to grow: organically and inorganically.
M&A is one of the latter, and consists of buying other companies to increase your market share, both in your local market and abroad.
It has been configured as one of the key strategies for the highly competitive globalized environment in which we live.
What is M&A (Mergers and Acquisitions)?
Es the operation of buying and merging companies; a strategic transaction that usually occurs to expand and grow the acquiring company.
That is, a company seeks to buy or be absorbed by another company with the aim of accessing new markets, expanding its customer base or acquiring new resources.
It is usually the response to certain business circumstances that require substantial changes in the corporate paradigm.
Its complexity makes it necessary to have professionals that they know the business reality and carefully analyze the different elements that will intervene, because if not it can be disastrous.
The materialization of a merger or acquisition It requires not only compliance with legal procedures, but also a deep understanding of financial and strategic realities. by the companies involved.
Reasons to carry out an M&A process
Some reasons to acquire and merge a company are as follows:
- Improving business performancel: Companies seek to increase their value and maximize their profits while reducing their costs, expanding their reach.
- Acquisition of experience, resources, technology and products: Instead of investing in research and development, as well as in personnel training, a company chooses to acquire another that already has the desired experience and technology.
- Taking advantage of economies of scale: By increasing its size and market share through mergers or acquisitions, a company seeks to reduce its operating costs and, therefore, increase its profits.
- Investment in companies with potential: An established company in its sector acquires a younger one with the potential for success, providing resources and experience to turn that promise into a reality.
- Acceleration of expansion: Instead of opting for organic growth, some companies choose to merge or acquire others to expand their customer base and market globally.
M&A risks
Many of these operations do not end well.
Therefore, in order to try to minimize the intrinsic risks of this type of transaction, several relevant aspects must be addressed, which are summarized in the following key points:
- Legal aspects: Facing a merger or acquisition involves significant legal challenges. Regulations can vary considerably from country to country, and companies must ensure compliance with all relevant laws to avoid potential penalties.
- exhaustive investigation: Before proceeding with an acquisition, it is crucial for the acquiring company to conduct thorough research on the target entity. This process, known as Due Diligence, is essential to evaluate the possible benefits and associated risks.
- financial considerations: The financial aspect of a merger or acquisition is particularly complex. Determining the true value of the target company, securing adequate financing and managing potential debt requires expert analysis and careful intervention.
- Integration of corporate cultures: Mergers can generate tensions if the corporate cultures of the companies involved are not aligned. It is essential to work on the alignment of objectives, values and practices to guarantee the success of the operation.
Types of M&A
Vertical Mergers and Acquisitions
Within the same sector, a company merges or acquires another that is at a different stage of the production process, as is often the case between manufacturers and suppliers.
The main purpose of this type of operations is improve the efficiency and quality of the services and products offered by the purchasing company, in order to increase their profits.
Horizontal mergers and acquisitions
At the same sector or business niche and with similar productive activities, One company acquires another, usually a competitor.
The objective of this type of M&A is to eliminate competition to obtain a greater market share.
Concentric mergers
These mergers occur between Two companies that operate in the same market niche and have the same customer base, but offer different types of products or services..
The purpose of this merger is to combine the technology and experience of both companies to better satisfy their clientele with improved products and services.
Conglomerate mergers
These are mergers between companies that do not have a direct relationship with each other.
The main objective of this merger is to find additional business opportunities or mitigate existing business risks.
How the M&A process works
Through mergers and acquisitions, an established company is acquired, with its own know-how and client portfolio.
Therefore, the M&A process must start with the valuation of the company in which we are interested.
The most commonly used methods are: discounted cash flow (DCF) valuation and valuation by multiples.
Once it is clear how much the company is worth, the negociación, due diligence, and contracts -among others-, until their completion.
Conclusions on M&A as a business growth strategy
M&A is another business strategy, increasingly used in countries like Spain and suitable for both large companies and SMEs, our broad business fabric.
Although it is often thought that it is only for multinationals, nothing could be further from the truth.
The SMEs (between 1 and 50 million in annual turnover) have become an attractive option for investors and even their competitors.
Generating the opportunity to consolidate highly fragmented sectors, where companies lack optimized processes, a robust commercial team or efficient management systems, among other aspects, and they can do so by taking advantage of their management experience.
RRYP Global, lawyers experts in Commercial Law
