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Mergers and Acquisitions

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1. Difference between horizontal merger and Vertical merger

Horizontal merger Vertical merger

A horizontal merger occurs when two or more Vertical merger occurs when two or more
companies operating in the same industry companies operating at different stages of
merge into one combined company (Feldman production merge (Feldman & Hernandez,
& Hernandez, 2022). The firms are typically 2022). For example, a manufacturer acquires
direct competitors. For example, the merger a supplier and they become a combined
between Coca-Cola and Pepsi would be company that operates in one supply chain for
horizontal as both are direct competitors in a certain item’s production. For instance, the
the soft drink industry. acquisition of Motorola by Google is an
example of a vertical merger. This case is
because Google acquired a hardware
manufacturer to gain control over smartphone
production and integrate its Android software
more effectively.
The main purpose of a horizontal merger is to The main purpose of vertical mergers is to
create value. A successful horizontal merger increase control over the supply chain and
should create value where combining two secure access to essential inputs or
companies is worth more than when each distribution channels. Other common reasons
company operates individually (Feldman & include increasing profits, increasing
Hernandez, 2022). Other reasons for the efficiency, reducing costs, gaining merger
merger include reducing competition in the synergy, ensuring greater quality control, and
market, increasing market share and market ensuring better flow and control of
power, reducing costs, achieving economies information alongside the supply chain
of scale, and enhancing diversification. (Feldman & Hernandez, 2022).
The disadvantages of horizontal mergers The main disadvantages are high integration
include the risk of regulatory scrutiny due to costs and complexity in managing merge
potential monopolistic behavior, integration entities, the risk of reduced focus on core
challenges such as merging company cultures competencies due to managing new supply
and systems, and possible loss of focus if the chain elements, and potential regulatory
merger is not well aligned strategically concerns over creating barriers to entry for
(Feldman & Hernandez, 2022). competitors.

2. Five Phases of Merger and Acquisition Process

There are several critical steps involved in the merger and acquisition process from

planning to valuation to integration.

1. Formulation of Strategy
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The success of mergers and acquisitions depends upon the strategies followed by the

company. This helps in defining what the company is going to gain through the merger. A good

acquisition strategy revolves around the acquirer having a clear idea of what they expect to gain

from making the acquisition and what the business purpose is for acquiring the target company

(Sighhania and Partners, 2021). Therefore, this phase involves setting strategic goals behind

pursuing a merger or acquisition. It involves determining the aims the company wants to achieve

including entering new markets, expanding market share, and acquiring new technologies, the

key activities in this phase include setting objectives, market analysis, and identifying synergies.

2. Target identification and Screening

This phase involves evaluating and identifying potential companies that fit the strategic

goals. Additionally, a cost-benefit analysis is done at this stage to evaluate the expenditure of the

merger process and assessment of revenue post synergy. Cots benefits analysis is essential before

making any decisions since it maximizes the probability of the merger success and prediction of

resources to be allocated (Sighhania and Partners, 2021). It involves research and shortlisting of

potential targets, initial screening of evaluating financial health, market position, compatibility of

a potential target, and confidential meetings to evaluate interest.

3. Due Diligence

The success of M&A depends on how well the company conducts the process of due

diligence. It involves an investigation of the target company, its operations, human capital, tax,

and legal structure, and its financials before the signing of the contract (Sighhania and Partners,

2021). The objective is to ensure that the information is correct based on which the offer was

made.
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4. Negotiations and deal Structuring

The terms of the deal are negotiated and the structure of the transaction is determined at

this phase. The concentration should be creating a win-win agreement for both parties. It

involves the determination of the fair value of the target company using the discounted cash

flows method, discussing the purchase price, payment method, and key terms, deciding on the

structure of the transaction such as a stock purchase, merger, or acquisition, and seeking

approvals for relevant authority (Sighhania and Partners, 2021).

5. Integration and post-merger evaluation

This is the final phase that focuses on integrating the operations, systems, and culture of

the merged entities. The objective is to realize the anticipated synergies and evaluate the success

of the transaction (Sighhania and Partners, 2021). The key activities are integration panning,

cultural integration, synergy realization, and post-merge valuation to assess performance using

KPIs and financial targets.

3. Key Legal And Regulatory Considerations In Mergers And Acquisitions

Legal and regulatory considerations are essential to ensure compliance with laws,

minimize risks, and protect the interests of all parties involved. One before engaging in any

M&A transaction, thorough due diligence is essential. This process involves evaluating the legal,

financial, and operational aspects of the target company (Rooks Rider Solicitors, 2024). It

involves reviewing contracts, leases, intellectual property rights, financial statements, regulatory

compliance, and litigation history. This ensures the identification of potential risks, liabilities,

and opportunities hence enabling informed decisions and negotiating more effectively.

Additionally, antitrust and competition laws are considered to prevent monopolistic practices and
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ensure fair competition in the market. A merger that reduces competition significantly can be

blocked to gain approval. Securities laws and regulations are also considered to protect investors

by ensuring transparency and fairness in the process.

The acquiring company is required to file documents such as Form 8-K and Form S-4

with the Securities and Exchange Commission. Tax implications and compliance are also

considered to optimize the tax impact of the transaction and ensure compliance with tax laws.

Employment law and labor regulations are also considered during the M&A process to address

issues related to employees, benefits, and labor contracts to ensure compliance with labor laws

(Rooks Rider Solicitors, 2024). Furthermore, intellectual property and data privacy regulation

should be considered to ensure compliance with data privacy laws during the process. It is

crucial to consider foreign investment rules, sector-specific regulations, and securities

regulations to avoid penalties, delays, and nullification of the transaction (Rooks Rider

Solicitors, 2024).

4. Steps in Understanding Pre-Merger Due Diligence

The pre-merge due diligence process steps include;

1) Evaluation of goals- determine the aim of the acquisition or merger such as expanding

market share, acquiring new technology, or entering a new market (Deal Room, 2024).

This helps in identifying the resources needed and ensures alignment with the company’s

overall strategy.

2) Analyze business financials- examining the financial records of the target company

ensures that they are accurate and reliable (Deal Room, 2024). This involves examining

balance sheets, income statements, tax documents, and debt schedules hence assessing

the company’s financial health, performance, and potential red flags.

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3) A thorough inspection of documents- this involves verifying that the business practices

comply with legal and industry standards and provides a deeper understanding of the

company’s operations (Deal Room, 2024). This involves site visits, interviews, and legal

compliance.

4) Business plan and model analysis- analyze the target company’s business plan and

operational model to determine its viability and how well it aligns with the company’s

goals (Deal Room, 2024). This ensures an understanding of the sustainability and

strategic fit of the target company.

5) Final offering formation- combine all the collected information to form a final valuation.

Use this valuation to determine the offer you will make to the target company (Deal

Room, 2024). The steps involve collaboration among various teams to ensure a fair and

justified offer. It involves employing valuation methods such as discounted cash flow

analysis.

6) Risk management- identify and evaluate potential risks associated with the acquisition,

including financial risks, operational risks, and market risks (Deal Room, 2024). Proper

risk management ensures that the company is prepared for any challenges that can arise

post-acquisition.
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References

Deal Room. (2024, November 8). The Ultimate Guide to the Due Diligence Process in

M&A. https://dealroom.net/faq/due-diligence-process#faq-8

Feldman, E. R., & Hernandez, E. (2022). Synergy in mergers and acquisitions: Typology, life

cycles, and value. Academy of Management Review, 47(4), 549-578.

https://journals.aom.org/doi/abs/10.5465/amr.2018.0345

Rooks Rider Solicitors. (2024). Key Legal Considerations for Mergers and Acquisitions:

Protecting Your Business Interests. https://rooksrider.co.uk/key-legal-considerations-for-

mergers-and-acquisitions-protecting-your-business-interests/

Sighhania and Partners. (2021, November 1). Stages of Mergers &

Acquisitions. https://singhania.in/blog/stages-of-mergers-acquisitions