This content explains the fundamental differences between mergers and acquisitions (M&A), categorizes different types of M&A, outlines the strategic reasons for pursuing them, and compares M&A with organic growth, while also highlighting common challenges and methods of acquisition.
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Let's start another section of the
syllabus and this time around we're
talking about measures and acquisition.
Yeah, this is such an interesting part
of the syllabus pretty easy as well and
um probably something you can really
relate with quite um easily and where
I'm going to start from is [snorts] the
difference between merger
versus acquisition because you know it's a
a
word where you've seen so many things
happening between companies coming
together one acquiring other so I know
this concept is not new to you 100%. I
can tell that whoever is writing this
paper must have heard about this major
and acquisition. Maybe when you doing
your FR paper or even your maybe your
SPR must have done something on
consolidation measures and business
acquisition and all of that. But what
I've seen so far is the fact that major
has been overly abused and everything.
People call it major, major, major,
major. But sometimes it is not a major,
it's an acquisition. And how do you know
the difference? Please, one thing you
need to know quickly is that when you
have a major, you actually have two
companies coming together. Yeah. They
merge together, they combine together
and they form a new company. So usually
these two companies are almost of a
equal comparable size. Like if you if
you think about it like that, they are
almost equal. Yeah. None has control
over the other. They just agree to come
together for a better company and that
is mostly C. But in a place where you
have a company A trying to take over
company B.
Yeah. Which means A is actually taking
control of company B. Then that is an
acquisition. So it's very important to
be clear on how these two words are
different because they've been overly
abused. Right? So remember A takes over
control of B then that's an acquisition.
But if they combine together to form a
new company that is major now let's
quickly speak about this. So types of merger
merger
or even acquisition. So let me just say
type of M&A.
So it can be in different forms right
but usually this is grouped into three.
It can be horizontal
Yeah. So when is horizontal what is
going on is you have companies two
companies in the same industry with
similar operations
like two banks coming together. Yeah.
Then that's horizontal. Yeah. You have
one bank combining with another bank.
That's horizontal because they do the
operations is similar. They have same
customers. They have same vendors. They
are regulators almost similar
stakeholders. Yeah. And the operations
as well is the same that's horizontal.
However, if they in the same value chain
but different operations. So, same value chain.
Same value chain
but different operations
operations
then that's vertical. So here you
probably have heard of vertical
integration. When you have a company on
one side of a value chain taking over
another company on the same value chain
but on the other side. Yeah. Let me give
you a typical example is when you have a
manufacturing industry. So in
manufacturing industry say you are
producing cars. Yeah. Your raw materials
will be steel. You don't have to be the
one producing that steel. But the value
chain of manufacturing a car will
involve production of steel because you
need steel to be able to manufacture
those cars or aluminium or whatever it
is. But when a company decides maybe the
guy that produces the car decides to acquire
acquire
its supplier that been giving him still
over years maybe because he wants to
expedite uh his process of efficiency or
maybe he wants to go into JIT and needs
to be more reliable with supply want to
be able to guarantee that he's going to
be able to get his raw materials when he
needs them. He might decide to acquire
the supplier and in that case he has
acquired a company with different
operation but in the same value chain
that is called a vertical uh acquisition
or measure. But conglomerate is just
talking about two companies that are
totally unrelated.
So when you have a conglomerate
integration then that is between two
companies with unrelated totally
unrelated business.
Yeah. This looks like they're trying to
Yeah. Okay. But why do you think people
I know generally speaking. Yeah. So in
general, which we're going to go into
deeper later. So generally it's just
because of synergy
which means you want better performance
that what you would have gotten if both
of you are working separately. So you're
saying 1 + 1 if you produce one you
produce one. Normally if we have
produced this separately it should be
two. But if we come together to produce
we should be getting three or we should
be getting five or we should be getting
seven. No, that is arithmetically not
possible and that is what synergy is all
about. Yeah, but how do you even get
that synergy? Remember, we're going to
go into this synergy discussion later
like I said, but there are several
reasons why people do M&A in in order to
achieve this synergy. There are a lot of
things that happen under it that will
produce that synergy. The first one is
that when you do it, you're likely to
market power.
And I'm sure you can relate with market
power because imagine if there are just
three four companies. Yeah. Let's say
you have equal market share that's 25%
each of you are four. But by time one
combines with another one then you are
left with three in the market. Then if
you have increased your market share by
that it means that the other two still
have 2525. But what you have is now 50.
So your market share has gone up. And if
you have higher market share definitely
your market power has gone up. And how
do you benefit from that? You're able to
charge the higher price. You're
controlling the market right. So that is
quite interesting.
Likewise you can actually use to reduce
risk as you can see from conglomerate diversification.
diversification.
So that is risk management which you
have learned before. If you your
business is operating in different
industries then definitely you can
actually reduce your risk by that. Yeah.
Yeah. If you have two companies
combining together both of them have
different finance division you can
actually reduce staff from one and just
use one division to still achieve the
same objective. Right? And
likewise, economies of scale is another benefit
benefit
which you can easily relate with. If two
companies combine together and they need
the same amount of raw materials, what
comes to mind? Bulk purchase discount.
They can negotiate for better price
because now they are buying so much and
with that
they can achieve some economies of
scale. Right? So there are all sort of
reasons. Some will even combine because
of tax relief cuz it's it's possible or
acquire because the company has a lot of
huge losses and it doesn't know how to
achieve benefit get because if you have
so much losses you're even not able to
get some tax benefit on that because
you're not yes you're not paying tax but
you don't have profit to claim those
losses. A company can come and offer you
to say let me acquire you and that
company is acquiring you because he
could see that he has a lot of profit
and acquiring you will help him to
actually use that your tax losses to get
some credit for himself. Yeah. So I mean
that's what you see a lot of reasons
like I said. Yeah. And can be because
you want to just dispose the asset
because maybe a company has valued the
target and realize that selling those
asset is even much watch is worth much
more than just keeping the company and
in that case you might might try to
acquire and just strip up the company
and sell the asset and make money from
it. Yeah. So those are the reasons just
to quickly mention them. Yeah.
Now I'm going to talk about something
quite interesting. Remember
when you are trying to achieve this
objective you don't have to actually go
and do M&A
yeah to achieve this objective as well
some of them especially maybe increasing
your market power I mean maybe
efficiency economies of scale yeah
sometimes organic growth can actually
give you some of those benefit
organic growth and I'm sure you
understand what organic growth is all
Organic growth is when you grow the
business without acquisition, without
external acquisition. This is without
But
is it always the best? Maybe not. But is
it always the worst? Also maybe not. And
that's why you actually need to understand
understand
how this compares with M&A. So I'm going
to do a quick comparison now of organic
growth benefit versus
M&A. And remember those benefit that I
list here will be the disadvantages of
this one. So if I leave list any
advantages for M&A that would be
automatically disadvantages for organic
growth. So let's look at organic growth.
What are those benefit?
The first thing you need to know when
you are doing organic growth is the fact
Integration
is easy.
Yeah. Because remember that would be a
disadvantage for M&A is a disadvantage
easily because when you bringing a new
company to another company it's like a
marriage two people from different
backgrounds coming together there will
be some misunderstanding chaos and all
of that. How they succeed would depend
on how they able to understand each
other and you know live together. And
that's same thing that you see for
companies. Different companies coming
together, different staff, different
cultures, different ambitions,
different systems, different processes,
they might struggle. But if you are
growing your own business to big, then
it's your business. There's no external
influence coming. So integration is
super easy. And that is what you get
when you use organic growth. And
likewise, it's cheaper. You don't need
to buy a company. You just need to be
expanding with assets. So this is
cheaper. You don't need to buy don't
need to pay a premium. You want to
acquire any business definitely you have
to pay a premium so that the
shareholders are happy to let go of
their own investment.
But if it's organic growth, it's your
business. You're just growing slow and
steady. Yeah. Likewise, this will put
less pressure on the management
because they are just growing the
business. But if it was an acquisition,
trust me, both managements have
pressure. The targets will be under
pressure of they might be fired. And
even the guy that is buying the mment
will also be under pressure that they
must succeed. The shers must see the
reason why they have done the
acquisition. So, but organic growth
doesn't put that pressure.
Right. And because of all of that is
quite easier to retain the strategic focus
because we're not bringing external party.
party.
It's just us. We understand where we are
going. We understand what we want and
because of that we can focus. All of
this makes expansion or growth more successful.
successful.
So growth will be
with other organic growth actually. So
what we are saying is that the failure
because this is company you know very
well and you actually growing it from
beginning to where you want to.
That doesn't mean that organic growth is
the best or is better than acquisition
or M&A. Like I always say, they both
have their good and bad. Yeah, M&A also
have its own good. It has its own
advantages over the organic growth. And
the first one is fact that this will
increase your market power
like I've mentioned earlier. Yeah.
Because by the time you acquire a market
player, you also acquire their market
share. So market power will go up. And
because of those benefits you are
getting from your target. Either you
have better competence from better
management or you have people that have
more experience in a particular area or
even it's just to get their technology
that gives you that cutting edge
advantage. You know that all that will
give you advantage. Yeah. And likewise
this is quicker
expansion is quicker. to quicker growth
because to grow organically it's going
to take you a long time. Very long time.
Yeah. Like I I always joke about this.
You might be fully grown before your
company even grows. So but with
acquisition or merger overnight you
become bigger immediately.
And those are the key advantages. Very
good to note this
cuz you are required even by your
syllabus to be able to make those comparison.
comparison.
Yeah. So let's look at the methods for acquisition.
Yeah. Methods. How how is this done?
That's what we're looking at. Yeah. [snorts]
[snorts]
So now one thing you need to know is
what this is talking about is what am I acquiring?
Am I acquiring the asset of a company or
am I acquiring
That's what we are discussing here. I'm
not discussing how you are paying for
acquisition. Now please take note. I'm
discussing what are we sorry what are we acquiring
I said there are two things that we can
acquire that we are looking at the
company and we are taking over the
assets of the company
or we are actually acquiring the shares
of the company.
Those are the two things that we can
acquire. So which means if A is trying
if A is taking over B, is B transferring assets
assets
to A? Which means if that is the case, B
is dissolved.
There's no more B. Or is A just b shares
And if A is buying shares of B to the
extent that he gets control then yeah
you know that B remains in existence.
Yeah. But becomes subsidiary
of A.
And what you will see going forward is A
now saying I'm a parent and I have to
consolidate B when I prepare my
financial statement.
So that is how we can acquire either
asset or [clears throat] the shares.
Either of it you need to know what it means.
Whether it's an acquisition or merger is
a similar concept because if you look at
a major Yeah. If you have X and Y coming together,
together,
X and Y can collapse
and form a new company called
J can form anything. So if is assets
that is being acquired those asset comes
and Y is gone X is gone dead and this
becomes a new company. But if X and Y
is just being invested in by J
What it means is that J has bought
shares of Y and has bought shares of X.
X continues to exist. Y continues to
exist. J will also exist. But what it
means is that J will now be a
shareholder of X and a shareholder of Y
and eventually he can decide to do
whatever he wants to X and Y. for X and
Y will also becomes subsidiaries
that it must consolidate. So J can even
be an olding company, right?
Okay, very important to know the
difference. Yeah, like I said, I didn't
talk about the consideration cuz I'm
going to get to that later. This is
talking about what we are acquiring.
Yeah, that's what we're talking about
here. Right.
Also still on acquisition and measure
very important to know that yeah like we
said it's not always rosy not always
that you need to know
when you are doing M&A there are issues
real life issues that you need to know
what are the issues that might come into place
place
why this M&A usually unsuccess because
the data has shown that we've seen more unsuccessful
unsuccessful
M&A than successful ones. And you wonder
why do people still do it? Why do people
They will still do it because they have
they always think there will be benefit.
They will still do it because they
believe it will be successful. But why
is it not always successful? That's what
I want to talk about. And the first
Like I said, you have companies
coming from different locations, coming
from different businesses, coming from
different management, coming together to
run as one. It will be tough.
They will not always understand each
other and they might see each other in a
different ways and that might create problem.
problem. Likewise,
Likewise,
there might be just an integration issues.
Integration issues. And what am I
talking about here? You have companies
coming together. They come with
different operations, different systems,
different people, processes,
processes,
you know, all of that. to integrate all
of that together might be a challenge
and the benefit that they have
anticipated they might not be able to
get it. That might be a problem.
Also some people once they hear that
their company is about to be acquired
they resign. So and this might be really
key staff. So
by the time you finish the merger that
you're anticipating you're going to get
some expertise from your target the
staff could have gone. So lots of key
stuff can make it a problem for you to
achieve the anticipated benefit that you
think you will get. Also there might be
because two companies coming together
both of them have their board but
remember not both of them will be will
be able to retain all their board
members. So there might be hostility as
to who is going, who is staying or even
when they retain the ones that they want
to retain, there might still be power
tole among them. So there might also be
Yeah. And all of that will create
problem for the merger. Even the public
might not just accept it. So there might
especially when there's monopoly and and
this might actually lead to even the
accusition being cancelled or being
rejected by the regulators. Right. Poor
public acceptance. Yeah.
Anti competition issues.
Yeah. All that can create a problem for
that activity and might not go through
or even if it goes through you might
struggle because of restrictions and
conditions that have been put on it.
Very important to note all these issues. Yeah.
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