What is meant by mergers and acquisitions?
Which developments have taken place in the American M&A market?
Which current developments can be observed in the global M&A market?
What strategic considerations are necessary prior to an M&A transaction?
1.1 The Term “Mergers and Acquisitions”
Business combinations (Own representation based on Wirtz, 2012, p.13)
- 1.
Mergers and acquisitions (M&A) are mergers and acquisitions of companies or their divisions or subsidiaries (Wirtz, 2012, p. 11).
- 2.
The term merger describes the amalgamation of two independent companies to form a single economic and legal entity. An acquisition represents the purchase of a previously independent company or part of a company. In the course of an acquisition, the target company loses its economic independence, but not necessarily its legal independence.
- 3.
M&A—in German, the merger of companies and acquisition of companies or shares in companies—stands for all transactions relating to the transfer and encumbrance of ownership rights in companies, including the formation of groups, restructuring of groups, mergers and, conversions in legal sense, squeeze-outs, financing of the acquisition of companies, formation of joint ventures and acquisition of companies (Mohr & Bärtl, 2012, p. 238).
- 4.
The term Mergers and Acquisitions (M&A), which originates from U.S. investment banking, describes the trading (purchase/sale) of companies, parts of companies, and interests in companies and is translated as mergers and acquisitions. In a broad version, it also includes cooperation (joint ventures, alliances, etc.) (Wirtz, 2012, p. 11).
- 5.
“M&A is a careful blend of art and science. On one hand, it is multidisciplinary, complex, and analytical. On the other, it is all about people, relationships, nuances, timing, and instinct. This dynamic blend produces opportunity coupled with conflict, ambiguity, and challenges, all supporting an exhilarating business ripe for those seeking to create value” (Marks et al., 2012, p. XVIII).
Business approach
Service approach
Under the business approach, an M&A process is described from the point of view of trading companies. This view is mainly represented in the Anglo-American area.
On the other hand, in German-language literature, the service approach has become established. It describes services offered by investment banks, M&A boutiques, law firms, and accounting firms (Ernst & Häcker, Applied International Corporate Finance, 2011, p. 2).
1.2 The Market for Mergers and Acquisitions
Mergers and Acquisitions have a long tradition, especially in the USA. As early as the time of the industrial revolution, numerous corporate transactions were concluded. Today this trend is continuing on a global scale.
1.2.1 The Phenomenon of US Merger Waves
The market for M&A is characterized by the periodic appearance of upswings and downswings. Similar to economic cycles, M&A activity over the past 100 years has also moved in waves. Although the individual merger waves have different drivers, triggers have historically always been external shocks that created adjustment pressure in affected industries and markets (Behringer, 2013, p. 40). The upswings in individual waves are usually due to economic changes, political decisions, or technical innovations. The downturns, on the other hand, are a result of economic crises and recessions in the global economy (Jansen, 2008, p. 131).
- 1.
First wave: The first wave of mergers took place toward the end of the nineteenth century, primarily in the USA. The driving force behind this movement was the industrial revolution. It led to a large wave of predominantly horizontal mergers in heavy industry, to avoid overcapacity and price degression (Wirtz, 2012, p. 96).
- 2.
Second wave: The second wave of M&A in the 1920s (the so-called roaring twenties) was triggered by new anti-trust laws and an economic upswing. This was followed by numerous vertical integrations of companies upstream or downstream in the value chain. The subsequent downturn was a consequence of the global economic crisis of 1929 (starting point: so-called black Friday), which led to a decline of 85% of M&A transactions within 1 year (Wirtz, 2012, p. 96).
- 3.
Third wave: In the 1960s, the next M&A wave could be identified, characterized by acquisitions in the energy and industrial mass production sectors. This time, the trigger was the companies’ desire for portfolio expansion and diversification. As a result, several broad-based conglomerates emerged (Wirtz, 2012, p. 97).
- 4.
Fourth wave: The fourth wave of M&A occurred in the 1980s and is also referred to as merger mania. The driving forces were the liberalization of monopoly and tax laws and the positive economic outlook of the future. Numerous horizontal corporate mergers took place as companies exploited the synergy potential. Another feature of this wave was a high number of hostile and highly leveraged takeovers for the first time (Wirtz, 2012, p. 97).
- 5.
Fifth wave: The fifth wave of M&A was triggered by increasing economic globalization, accompanying competitive and technological changes. It took place in the 1990s and, unlike previous waves, was particularly characterized by mega-deals, such as the merger of Daimler-Benz and Chrysler, which was a major factor. Also, the hype surrounding so-called dot-com companies played a major role. With the end of new economy, this wave also started to decline again (Wirtz, 2012, pp. 97–98).
- 6.
Sixth wave: From 2002 to 2007, the sixth wave of M&A was identified. It was fueled by a deregulated world and financial markets and was supported by a recovery of the global economy and positive development of emerging markets. The main players in this phase were primarily institutional investors (e.g., private equity and hedge funds), which financed a lion’s share of global transactions. The bursting of the credit bubble in the real estate market in 2007 marked the end of this wave of M&A and led to a widespread credit crunch in numerous markets (Wirtz, 2012, p. 98).
- 7.
Seventh wave: Officially, there is no talk of the seventh wave of M&A, but there are clear signs of it. Advancing globalization, new technologies, and at the same time, bulging war chests of various companies are already foreshadowing a seventh M&A wave (Furtner, 2011, p. 16).
The depression phases between each M&A wave become steadily shorter.
The rises at the beginning and the falls after each wave are very steep.
The duration of individual M&A waves is getting shorter and shorter.
1.2.2 Current Developments in the M&A Market
The German market for corporate acquisitions and mergers still remains less developed than in the USA or the UK. The global transaction volume for M&A transactions amounted to 3330 billion U.S. dollars in 2008, of which 32.4% was attributable to the USA and only 5.3% to Germany (Kunisch, 2009, p. 48). Furthermore, the M&A market in Germany is a relatively recent phenomenon. While the USA saw an initial surge in M&A activity as early as in the end of the nineteenth century, the market for M&A in Germany did not begin to develop until reunification. Mainly in 1999 and 2000, big deals such as Vodafone-Mannesmann or Daimler-Chrysler took center stage. However, the market for M&A in Germany almost collapsed just 2 years later, until finally in 2005 an increasing transaction volume was observed again (Raupach, 2007, p. 204).
The financial crisis caused a downward trend from mid-2007, which intensified dramatically in 2008. The downward trend reached its low point in mid-2009. This trough was passed in 2010 with regard to M&A activities at the global level, whereupon business with mergers and acquisitions picked up again (Spanninger, 2011, pp. 49–51).
The year 2015 was one of the best-performing years in terms of M&A transaction volume achieved. The total volume of M&A deals announced worldwide in 2015 set a new record of approximately USD 3800 billion (since 2007) and exceeded the already high prior-year figure of USD 3600 billion (Baigorri, 2016).
In the first half of 2020, 6938 M&A transactions with a total volume of approximately USD 901.5 billion were completed at the global level. Compared to the first half of 2019, this corresponds to a decrease in deals by approximately 32% and cumulative transaction volume by 52.7%. This significant decrease in 2020 is due to the global impact of the COVID-19 pandemic. For many companies, liquidity management is currently essential and investment projects, which include M&A transactions, are being postponed to a later date. As soon as the Corona crisis subsides, experience shows that M&A activity should pick up again as a result of decreasing company valuations (Mergermarket, 2020, p. 5).
1.3 Strategy Development in the Context of M&A Projects
In order to develop a comprehensive understanding of M&A projects, it is important to know strategic considerations in the run-up to a transaction. What motives guide M&A actors? What acquisition techniques are available to buyers? What are the different types of corporate acquisitions? Why do M&A transactions fail and why do others succeed? These questions are addressed in the following sections.
1.3.1 Motives for M&A Transactions
Business combinations result from the merger of two or more legally and economically independent companies to form larger economic entities (Ernst & Häcker, 2011, p. 2). The elaboration of typical motives for corporate takeovers is highly dependent on the specific situation. Depending on the plans and strategy of the buyer or seller, various reasons are decisive for an acquisition or divestment.
Multinationals are seeking to focus on their core business and are selling off parts of the company or subsidiaries.
A widespread reason for selling family businesses, which include a large proportion of SMEs, is unclear succession planning. If no suitable successor is available within the family or the existing management of the company founder, the company is usually put up for sale in the market.
In the context of investment financing, a medium-sized company often has no choice but to transfer the company to larger groups or competitors or to merge with other medium-sized companies. The reason for this is a usually low capitalization of the SMEs (Wirtz, 2012, p. 5).
After a short holding period, investment companies look for an exit and want to sell their holdings in the company again.
Heavily entrenched conflict situations between shareholders, such as a divorce between two shareholders, can also mean a company sale is the best option for the company’s continued existence (Sattler, 2010, p. 21).
Accelerating sales growth is a frequent driver for corporate acquisitions (RBS Citizens Financial Group, 2012, p. 10). Instead of a long-term organic growth path, the size of the company can therefore often be expanded more quickly through acquisitions than by building new structures.
Expanding geographic presence and entering new markets are other acquisition motives. Companies in Germany and Austria, for example, are seen as the gateway to Eastern Europe. This prompts companies around the world willing to expand to acquire companies from these countries, for example, to save themselves the trouble of setting up their own distribution network.
High levels of competition encourage companies to expand their market power by increasing their market share. This can secure their market position and reduce competitive pressure. In the most extreme form, this can lead to monopolistic structures (Jansen, 2008, p. 171) (Behringer, 2013, p. 43).
Access to specialized know-how and new technologies represents a further acquisition motive. If a company has unique technologies or special know-how, e.g., in the area of research and development, research and development, it can be a great advantage for an acquiring company to acquire these resources through a takeover instead of developing them internally through a process lasting many years.
A frequently cited driver in the context of a company acquisition is the realization of synergy effects. Cost synergies are realized, for example, through economies of scale and economies of scope. The costs of realizing various synergy potentials are often greatly underestimated. The greater the depth of integration between two companies, the greater the share of costs for synergy realization will be (Timmreck & Bäzner, 2012, p. 110).
Depending on the strategy, motives relating to production, the product portfolio, risk distribution, or taxes also come to the fore.
1.3.2 Takeover Techniques
A distinction with regard to the takeover technique makes sense primarily in the case of listed corporations, since their company shares are often freely traded on the respective stock exchanges. An important feature of such companies is the separation of ownership and management functions (Wirtz, 2012, p. 22). A corporate takeover can be either friendly or hostile in nature. Even if the majority of shareholders would approve a takeover, the tipping point is an approval or a disapproval by the target company’s management.
1.3.2.1 Friendly Takeover
A friendly takeover is one in which the management of the target company approves the change of ownership (Wirtz, 2012, p. 22).
In contrast to a hostile takeover, the incentive for a friendly takeover can come from both the buyer and the seller. The seller usually prefers to sell the target company in an auction process. This has the advantage that there are several bidding parties and a higher selling price can be achieved. From the buyer’s point of view, friendly takeovers are often more successful than hostile ones, as the management of the target company cooperates with the buyer and gives the latter the opportunity for detailed due diligence (Achleitner, 2002, p. 195).
1.3.2.2 Hostile Takeover
A hostile takeover is an attempted takeover that is carried out against the will of the target company’s management (Hölters, 2005, p. 37).
In Germany, at least not because of the strong medium-sized and owner-oriented corporate structure, so-called hostile takeovers were hardly represented until a few years ago. Also, the public attitude in Germany toward such M&A projects was rather negative. Since the successful takeover of Hoesch AG by Krupp AG (1991) and the attempted takeover of Thyssen AG by Krupp AG (1997), hostile M&A transactions have gained importance in Germany. One of the most spectacular cases of a hostile takeover was the takeover battle between Mannesmann and Vodafone, which ended in the purchase of Mannesmann by Vodafone.
A hostile takeover is often initiated by a tender offer. This is understood to mean a public takeover offer of limited duration by prospective acquirers, which is addressed directly to the shareholders of the target company. To make the offer more attractive to current shareholders, public takeover offers often contain a high premium on the current stock market price of the target company (Wirtz, 2012, p. 23).
Share buybacks: In Germany, the share buyback under Section 71 of the German Stock Corporation Act “Acquisition of own shares” is possible up to 10% of the share capital. This increases the share price and makes the target more expensive. Besides, the cash balance decreases or the debt increases, making the target company less attractive from a buyer’s point of view.
Poison Pills: Existing shareholders of the target company have the right to purchase a certain number of shares in the target company at a discounted price in an event of a takeover. The conversion of non-voting preferred shares into shares with voting rights is also conceivable.
Poison Put: There are contracts with the lenders of the target company which stipulate immediate repayment of loans as soon as control of the target company changes.
Staggered Board: The contracts of the Supervisory Board and Executive Board members are staggered over time. This makes it more difficult for the hostile acquirer to replace the existing management and control body.
Golden Parachutes: In the event of a hostile takeover, oversized special payments to the management of the target company can be agreed upon. This can make it too costly for the potential acquirer to gain control by replacing the existing management. However, a clear principal–agent conflict can be identified here.
Crown Jewels: The target company sells particularly attractive and lucrative business units (jewels) to a friendly company or carries out a spin-off. This can eliminate synergy potential from the perspective of the hostile acquirer and make the hostile takeover unattractive. However, this measure jeopardizes the corporate existence of the target company to a high degree.
Asset Restructuring: The target company acquires assets that a hostile acquirer is highly unlikely to want or which may cause antitrust problems during the course of a takeover.
White Knight: A friendly company makes a higher takeover bid and thus drives up the purchase price. In addition to a majority shareholding, this white knight can also provide the target company with sufficient funds as an alternative to prevent a hostile takeover.
1.3.3 Goals in an M&A Process
Seller’s perspective
Purchase price | • Maximizing purchase price |
Confidentiality | • Selection of M&A procedure • Identification of the correct buyer • Protection of confidentiality |
Execution speed | • Competitive environment • Minimal impact on operational daily business |
Process and transaction security | • Quality of execution • Security of funding • Closing conditions |
Risk mitigation | • Well-guided and structured process • Seller-favoring warranties in the contractual framework |
Decisive success criterion | • Keeping up competition among at least two bidders until the end |
Buyer’s perspective
Purchase price | • Minimizing purchase price |
Confidentiality | • Confidentiality agreement with minimum liability and long-term commitments |
Execution speed | • Fast deal closing • Minimizing transaction cost |
Process and transaction security | • Ideal financing structure |
Risk mitigation | • Positioning as best potential bidder • Buyer-favoring warranties in the contractual framework |
Decisive success criterion | • Exclusivity during auction process • Avoidance of counteroffers during bilateral processes |
1.3.4 Types of Company Acquisition
In general, the acquisition of a company can be executed in two ways. On one hand, the buyer can acquire shares in the company for sale. In this case, it is referred to as a share deal. On the other hand, the subject of corporate transaction may also include all or certain assets and rights of a target company. This scenario is referred to as an asset deal. Both types of acquisition are described below.
1.3.4.1 Share Deal
In a share deal, shares in a company are sold in their entirety, as a majority or as a minority. The object of the transaction is therefore the shares in the company. By transferring the shares to a new owner, the identity of the target company remains unaffected or the target company continues to exist as a legal entity (Wirtz, 2012, p. 286). Consequently, a transfer of assets and liabilities is not necessary (Jaques, 2012, p. 10).
Company sellers often prefer the share deal because, in contrast to an asset deal, all rights and obligations of the seller are transferred to the buyer in a complete sale. Accordingly, in addition to all assets and liabilities, all known and unknown risks are also assumed by the buyer. As a result, in the course of a share deal, the buyer insists on the seller providing comprehensive guarantees in order to take account of the information asymmetry.
From a tax point of view, the acquisition of shares in corporations (Ltd., Plc.) is of particular importance. There are attractive options such as transferring the purchase price to the future depreciation volume or deducting financing costs.
1.3.4.2 Asset Deal
One speaks of an asset deal when the buyer does not purchase the legal entity of a company, but only certain assets (Mohr & Bärtl, 2012, p. 241).
In this type of company purchase, the buyer acquires individual assets, intangible assets, and liabilities of the purchased company. The acquired assets are transferred to the balance sheet of the buyer company and, after the withdrawal of the purchase price by existing shareholders, an empty company shell remains on the seller side. Depending on the circumstances, this shell can subsequently be liquidated, sold, or used for new legal transactions.
In an asset deal, unlike in a share deal, not all rights and obligations are transferred to the buyer, but only to the owner of active and passive assets listed in the purchase agreement (Mohr & Bärtl, 2012, p. 241).
In terms of advantages, corporate buyers often prefer this type of company acquisition. The newly acquired assets can be transferred by the purchaser directly to the purchaser’s balance sheet with the release of hidden reserves and, together with any goodwill paid, can be amortized on a scheduled basis in subsequent years. This additional amortization leads to an improvement in future cash flows on the buyer side. Also, the acquired assets can be used as collateral for debt financing (Mohr & Bärtl, 2012, p. 286).
1.3.5 Common Success and Failure Factors of M&As
As already mentioned, around 56% of all mergers and acquisitions turn out to be failures in retrospect (Wirtz, 2012, p. 7). Furthermore, the following also applies in the area of mergers and acquisitions: “Ignorantia iuris nocet (Latin saying for ‘ignorance does not protect against punishment’).” In order to spare companies willing to sell or buy from the disadvantages of an M&A project—too high or too low a purchase or sales price, failure to recognize risks, termination of the transaction, failure to achieve planned synergies—the most common success and failure factors of corporate transactions are discussed below.
1.3.5.1 Success Factors of Corporate Transactions
Probably the most important success factor in M&A projects is the experience of those involved. If experienced managers and consulting specialists are involved in a transaction process, this significantly increases the success of an M&A project. As the number of corporate transactions increases, a company is generally in a better position to evaluate an M&A project, to structure and carry out due diligence, to complete the merger (post-merger integration), and thus to realize planned synergies. Essentially, M&A experience enables managers and consulting specialists to act swiftly and efficiently when problems arise in the M&A process, thanks to the problem-solving skills they have gained (Furtner, 2011, p. 48). Thus, it is also true in the M&A business that practice makes perfect.
Company vision
Company size
Corporate culture
Business areas of both companies
Cultural similarities and differences
As a rule, the greater the strategic fit, the more successful the corporate transaction. Acquisitions that demonstrate a high degree of fit with the buyer’s core activities and allow the buyer to expand into new geographic markets prove to be particularly successful (Behringer, 2013, pp. 366–367).
A third factor for success is the employees and management of the sold company. If many employees remain with the company following the corporate transaction, the success of the M&A project is often higher than if there is a high level of employee churn after the transaction is completed. At this point, however, a classic conflict of objectives arises, since various synergy effects can regularly only be realized by laying off employees. In terms of management, a familiar management team often has a positive influence on employee morale in the aftermath of an M&A transaction and also proves very helpful in the day-to-day operations of the acquired company. Keeping the old management or parts of the old management after the acquisition can contribute to a considerable stabilization of the acquired company (Behringer, 2013, pp. 368–370).
1.3.5.2 Failure Factors of Corporate Transactions
In retrospect the actual successes of M&A transactions are very often lower than expected because either the strategic considerations are already misguided, too high purchase prices are paid, or the hoped-for synergies do not materialize or are overcompensated by integration and coordination costs (See & Heinzelmann, 2012, p. 7).
If you only look at money, your M&A project will also reach its limits in the long term. If a company decides purely based on financial motives, such as shareholder value satisfaction or the financial self-interest of top management (through participation in sales and share price developments), then this plan is often not particularly successful. The purely financial focus is mostly a driving force of the short-term corporate view and corporate development and thus not a suitable goal for the long-term continuation of the company. Successful corporate mergers are those in which strategic goals have a priority position over financial goals (Furtner, 2011, p. 26).
An excessive price expectation on part of the seller is a further failure factor of several corporate transactions. One reason for this can be a company valuation carried out by M&A consultants, whose company value is inflated and thus attractive for the seller, to possibly initiate the transaction and position themselves as M&A sales consultants. A second reason for too high price expectations of the seller is to be found in his emotional attachment to his own company. In most cases, companies are more than just businesses to the owners. They are often lifeworks. Therefore, entrepreneurs often do not recognize problems or weak points of their company or recognize them insufficiently and are convinced that their company must achieve the absolute highest transaction value in a sale. If seller and buyer come to the negotiating table in both cases—company valuation and emotional attachment—it is difficult to agree on a fair price. The company sale would thus be on the verge of failure (Sattler & Seng, Unternehmensverkauf, 2010, p. 83).
Since M&A is often referred to as the supreme discipline of business administration, it is hardly surprising that managers and shareholders involved sometimes make irrational and emotional decisions because of the hoped-for subsequent prestige. “In the End, M&A is a flawed process, invented by brokers, lawyers, and supersized, ego-based CEOs” (Harding et al., 2013, p. 1). Thus, in some cases, corporate transactions are carried out for which there are no explanations from a rational point of view. Such wrong decisions are made not only by large corporations but also by medium-sized companies. The triggers are usually vanity, striving for power, and overestimation of one’s capabilities (hubris) on the part of the managers authorized to make decisions. As a result, these corporate transactions are usually doomed to failure.
Different corporate cultures and cultural aspects, in general, can also significantly limit or eliminate the success of a transaction. Particularly in post-merger integration, almost insurmountable barriers may come to light that has a negative impact on a business combination (Furtner, 2011, p. 27).
For an entrepreneur, the sale of a company is usually a one-time event. Often, the decision to sell is made at short notice and the seller only allows a short period of time until the transaction is completed. In other words, the complexity of corporate transactions and the time involved are often underestimated. If, for example, a medium-sized entrepreneur decides to sell a company, he often only realizes during the course of the transaction that precise planning, preparation, and execution of an M&A project leads to a neglect of the operative day-to-day business. Without sufficient understanding of M&A and the involvement of M&A specialists, this conflict of objectives leads to a clear reduction in success (Sattler & Seng, 2010, p. 81).
A pure focus on cost synergies also turns out to be a frequent failure factor. If the main objective of an M&A transaction is the realization of cost synergies, these transactions often turn out to be unsuccessful. The reason for this lies in the fact that earnings potential and synergy effects are often overestimated and in various cases cannot be realized at all or only after a long delay (Furtner, 2011, p. 27).
If one looks at a study on the M&A process written by Deloitte in 2012 (Reker & Götzen, 2012, p. 27), the importance of the preparation and integration phase in the transaction process has so far been underestimated by M&A players, whereas the importance of the company valuation and negotiations has been overestimated. To date, negative effects on resource allocation and process structuring can be derived from this.
Finally, the success of an M&A project depends crucially on optimal transaction preparation and rapid transaction execution. Anyone who ventures into a transaction unprepared and fails to recognize the momentum will have to pay dearly for this later. The process must therefore be carefully prepared and executed by both the buyer and the seller.