Corporate restructuring and mergers and acquisitions (M&A) seem to be like spices to a recipe, adding zest and excitement to the corporate scene. With the recent spate of M&A exercises in the Malaysian capital market, it is important that shareholders be made aware of their roles when faced with an impending merger or acquisition of a company. In this article, the SIDC will cover the definition of mergers and acquisitions, the process and shareholders’ roles in such situations.
M&A defined
Being a smart investor does not necessarily mean just knowing when and where to invest, but knowing what it means to own a part of a company, and the decisions a company has to make.
Since merger and acquisition exercises are part and parcel of the business world, it is important for you, as an investor, to know what some of these terms mean.
Generally, a merger can be defined as the combination of two companies of roughly equal size, pooling their resources together into single business. The shareholders/owners of both pre-merger companies have a share in the ownership of the merged business and the top management positions after the merger. Normally, the decision to merge is mutual between both companies.
In contrast, an acquisition exercise can be done through the acquisition of another company’s voting shares or business operations and assets.
What motivates mergers and acquisitions of companies?
The reason for companies to undertake corporate restructuring exercises is closely linked to the concept of survival, the need to grow and goal of increasing shareholders’ value. Some of the key reasons for restructuring are:
- Globalisation of business as markets become more open and competitive- the increased of cross-border investments requires companies in this region to remain competitive (e.g. minimise production cost and increase efficiency via maximising technology transfer). They may have to venture overseas to remain in business. Alternatively, companies may merge as quicker way to grow bigger and stronger and to exploit synergies.
- Market positioning
Growth via M&A is seen in many instances to be quicker and cheaper than the organic growth of a company’s business. M&A can also be beneficial for companies that want to capture bigger market share or as a market penetration tactic. For instance, to expand the market share/geographical reach or to enter into a new market.
- Synergy
Two or more companies’ joint effort would not only develop a competitive edge, but it can also introduce additional earnings stream while reducing dependence on unreliable earnings sources.
- Broader Strategy
There are companies that will undertake the merger and acquisition exercise to access new technology or to secure a source of supply or raw materials.
- Costs savings
Sometimes a company can save costs and achieve economies of scale by taking over or merging with another company
- Opportunism
Where there is an opportunity, such as an increase in distressed or poorly managed companies in the market, it will surely prompt a strong company to take advantage of the situation to undertake a take-over or merger exercise.
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