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M&A deals: opportunities and risks
New highs in M&A deals are being recorded, and the value of deals worldwide has also risen significantly recently. But why is that and what are M&A deals anyway?
After a record year in 2021, the M&A market initially experienced a significant slowdown - but strategic mergers and acquisitions are now gaining momentum again. Although the number of transactions has recently declined, the total volume is rising again thanks to numerous megadeals.
According to PWC, the total value of M&A deals worldwide reached around 3 trillion US dollars in 2024, an increase of 10.6% compared to the previous year. However, the number of deals was at a nine-year low.
There are many reasons for M&A transactions: companies are responding to the increasing pressure to innovate, particularly through digitalization and artificial intelligence. At the same time, many players are using the sale of non-strategic business areas to focus their portfolios.
Private equity investors are also playing a key role: they continue to have high capital reserves and are driving market activity despite geopolitical uncertainties and high interest rates.
What are Mergers & Acquisitions (M&A)?
What are Mergers & Acquisitions (M&A)?
The term "mergers & acquisitions" stands for all processes that have to do with the purchase or sale of companies. The decisive factor is that rights to ownership change hands - namely assets such as buildings or machinery, but also functions of control or management.
An M&A transaction can involve the acquisition or sale of entire companies, but also the purchase or sale of parts of a company.
Merger
The partial term "merger" stands for amalgamation. In a merger, two companies or parts of companies are combined to form a legal and economic entity.
An example: Company A merges with Company B. The two companies hope to become one legal and economic entity. The companies hope to be more successful on the world market as a merged company. They therefore combine their assets and control and management functions and form a new company C. However, it is also conceivable that the two companies continue to exist as independent organizational units A and B.
Acquisition
The term "acquisition", on the other hand, describes the purchase of a company or parts of a company.
Company A, for example, takes over company B and incorporates the company into its own organization - B thus becomes part of A.
Put differently and in a slightly more complicated way: The assets of the purchased part of the company - the so-called target company ("target") - are transferred to the acquiring company ("acquirer").
Such a deal is paid for, for example, through the purchase of voting shares ("share deal"). If no financing is required, the deal can also be settled in cash ("cash offer").
Expanded definition of M&A
Expanded definition of M&A
However, the definition of "mergers & acquisitions" can be extended even further.
Other types of transactions can also be classified as M&A - for example, when financing a company acquisition. The establishment of a joint venture or the spin-off of a part of a company are also part of M&A deals.
Last but not least, the "squeeze out" in stock corporations (i.e. the forced exclusion of minority shareholders by the majority shareholder) is also an M&A transaction.
What motives lead to M&A transaction?
What motives lead to M&A transaction?
The motives for an M&A deal are as varied as the different transaction types themselves.
One company buys another company, for example, to strengthen its own position in new markets or business areas. Another company spins off a loss-making division so that the new company can operate more quickly and efficiently on its own.
A transaction as a strategic investment is also conceivable: Financial investors (e.g. private equity firms) buy a company, restructure or reorganize it and sell it again at a profit after some time - at least that is the goal.
Today, rapid growth can often only be achieved through external company purchases and takeovers (acquisitions) or mergers. In addition, the desire not to be bought leads many managers to downright buying frenzy.
What are the categories of investors?
What are the categories of investors?
In general, a distinction can be made between two types of investors - the strategic investor and the financial investor.
Strategic Investors
Behind the overarching goals of the strategic investor (such as growth, diversification, technologies and cost leadership) are motivations such as the acquisition of a new product line.
The goal may also be to buy out a competitor and consolidate the market. Access to new technologies or patents or the avoidance of customs duties can also be reasons for acquiring a company.
As a rule, the goal is to integrate the acquired company or part of the company into the existing company and thus to keep it for a long time.
The buying side hopes for great synergy effects that can be exploited. These can be realized through consolidations and mergers.
Financial Investors
A financially driven investor usually has other goals. His aim is to maximize EBITDA in order to subsequently sell the company at a profit.
The holding period of the acquired company is therefore short, which means that full integration into the existing company is not recommended.
Mergers & Acquisitions - different interests of the parties
Mergers & Acquisitions - different interests of the parties
Buyers and sellers also usually pursue different intentions.
Many company owners have painstakingly built up their company and thus have a very personal and individual view of their company and the upcoming sales process.
Understandably, the buyers of the company often have a different perspective, as they have a completely different starting situation - the example of financial investors shows this.
What conflicts of interest may exist?
What conflicts of interest may exist?
The goals of mergers and acquisitions on the buyer and seller sides could not be more different - this does not make such transactions easy.
The price conflict represents one of the greatest difficulties of a deal, the hurdle of which must be overcome: The seller side primarily intends to maximize earnings, whereas the buyer aims to reduce the purchase price.
Transition Service Agreements (TSAs) are used to define and contractually stipulate the rules for the transition phase. However, these TSAs also represent a conflict that should not be ignored.
- The seller seeks a clear definition of the TSA with little liability responsibility and a short time window. If the business owner has decided to sell, then the sale process should generally be completed quickly.
- If the company owner has decided to sell, the sales process should generally be completed quickly.
- The buyer, on the other hand, is looking forward to a smooth Day1, which is to be achieved with the help of the TSA.
Such conflicts of interest between company sellers and buyers can jeopardize the successful completion of an M&A process and cause promising transactions to fail. These conflicts occur in all phases and are commonplace in practice.
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How can failure be prevented with IT due diligence?
How can failure be prevented with IT due diligence?
The road to successfully completing an M&A transaction is often arduous and fraught with obstacles. But how do you avoid potential deal breakers and prevent failure?
In addition to defining the goals - such as EBITDA maximization or even cost leadership - a detailed risk assessment should take place in advance.
From an IT perspective, risks include various difficulties in integrating different IT system landscapes.
Different release statuses, unresolved liability issues, expired licenses or outdated hardware can jeopardize the calculated and hoped-for synergies and lead to serious problems.
Therefore, a comprehensive and carefully conducted IT due diligence is necessary. This ensures that the risks and opportunities of the M&A deal are known at an early stage and can be managed in a targeted manner.
How do consulting firms assist in an M&A deal?
How do consulting firms assist in an M&A deal?
One of the tasks of a consulting company like GAMBIT - besides performing an IT due diligence in the run-up to the deal or other consulting and implementation services - is to mediate between the two parties involved.
This often includes the translation of perspectives, problems or risks and above all the finding of a compromise.
It is precisely the finding of a compromise that can help to make the M&A deal possible, so that in the end both company buyers and company sellers achieve their goals and the transaction can take place.
Once the hurdles of finding a compromise have been overcome and the transaction has been completed, the technical carve-out can take place for the seller and the post-merger integration for the buyer.
