Understand what mergers and acquisitions are, how they work and why they play such an important role in the finance industry.
A jargon-free introduction to the world of mergers and acquisitions in finance
Mergers and acquisitions are both forms of transactions, relating to the ownership of a company or organisation. They allow businesses to scale up and down, or shift their positioning.
A merger involves the consolidation of two businesses into one legal entity, thus creating a new business venture. Whereas acquisitions involve one company taking ownership of another.
Both are common forms of consolidation, enabling one or both businesses to grow and increase their market share. As such, the two are often grouped together under the term mergers & acquisitions (M&As).
How do M&As work?
Mergers & acquisitions don’t happen overnight. Some can take months and many take years. When the company initiating the process decides an M&A strategy could be beneficial, they usually begin by drawing up a list of potential buyers or sellers, depending on the strategy they wish to take.
They must then approach targeted companies, determining whether they would be interested in a merger or acquisition. As this is a lengthy process that involves a lot of change for the organisations, not all companies are interested in consolidating.
When companies express an interest, talks begin with an executive summary, alongside a confidentiality agreement that outlines the proposed strategy to kickstart negotiations.
Once the buyer has all the necessary information about the seller’s company, finances and customers, they are in a position to make an indication of interest (IOI) which details an offer based on the valuation.
The following meetings to negotiate lead to a letter of intent (LOI). Providing due diligence doesn’t flag up any problems, this will result in a purchase agreement and the closure of the deal. As you can see, it’s a complex process but can be lucrative for both parties if the deal comes off without a hitch.
Why are they so important?
It’s important to understand how mergers & acquisitions work because they play such a momentous role in the finance world. In the first quarter of 2016 alone, the total value of M&As in the UK was an impressive £665 million according to the Office of National Statistics.
As this is a specialist area of corporate finance, many institutions have a dedicated M&A department. It’s a popular niche for bankers, analysts, accountants and other finance professionals who want to deal with high value transactions that shape the competitive landscape of industries in the UK – and globally.
Five key facts about M&As for aspiring financiers
Thinking of going into the finance world? Here are five facts you should know about mergers & acquisitions:
- Mergers & acquisitions aren’t for life – companies can find a route out after the retention or vesting period, which is usually two to three years
- Leading global bank Citigroup was formed through a merger of Citicorp and Travelers, which created a firm worth $140 billion
- According to the Harvard Business Review, as many as 90% of mergers & acquisitions fail which makes careful execution essential…
- The largest acquisition in history was that of Mannesmann by Vodafone AirTouch Plc, creating the Vodafone Group we know today
- According to KPMG, the UK was the number one target for cross-border M&As in 2015
Swatting up on mergers & acquisitions
Whatever route you’re hoping to take in finance, it’s a good idea to do your research before applying for roles in this industry. It’s the only way to gain an understanding of this complex but significant sector.
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