The scope for mergers and acquisitions is a broad topic that has shaped the global order for companies. Over the years, companies have successfully managed to grow through acquisitions and/or mergers. Acquisitions and mergers are often used interchangeably in the finance world, however, legally an acquisition refers to the case when a company absorbs the target company, whilst a merger case is when both companies join forces.
Recent M&A developments include those related to Fiat Chrysler and Peugeot discussing a proposed merger, while recently Alphabet acquired Fitbit Inc.
Companies set their growth strategy through organic growth (by scaling their operational business) and/or acquire companies that will contribute to consolidated growth.
In an acquisition, determining a fair value is central for both parties. Often, both parties will engage in intense negotiations to achieve a favourable deal. Despite the inherent self-interest to drive the valuation to their benefit, both parties will have to compromise on their expectations for a deal to be concluded. Achieving a fair deal for the acquiring company is central for its expansion and future growth.
Acquiring companies will not want to overpay given the target firm’s expected synergies while target companies will not want to be underpaid given their perceived added-value. Accretive acquisitions over the years, include Disney’s purchase of Marvel and Google’s $50 million acquisition of Android (which at the time was an unknown mobile start-up company).
On the contrary, a notable expensive mistake related to Quaker Oats acquiring Snapple (a company producing bottled tea and juices). The company overpaid on its $1.7bn deal to acquire Snapple. As Quaker Oats failed to transfer value-added skills to Snapple, it shrank miserably which resulted in Quaker Oats selling Snapple for $300m (just a year after), meaning a loss of $1.4bn on the deal alone.
What has been the M&A activity this year? Figures show that completed mergers and acquisitions amounted to $1.6 trillion translating into 29,600 deals, while pending and proposed deals amount to another $2.9 trillion. Out of the total $4.5 trillion, North America registered the highest activity with c.50 per cent of the deals; while Europe ranked second with 25 per cent of the deals.
Interestingly, the leading nation that was targeted this year within the European region was the UK. The economic impact from Brexit uncertainty depressed asset prices making selective business opportunities an attractive prospect for would be acquirers. Indeed, the year on year growth in M&A activity in the UK was 15 per cent having a total deal value of $414bn when compared to the second ranked nation (Germany) that had a total deal value of $157bn.
The nation that attracted the most capital inflows from other regions was the US with a total value of c. $3.5 trillion. This reiterates the country’s attractiveness on the world stage, as acquiring companies from all regions seek to tap the US as an economic base to springboard their operations.
In the finance arena, top investment banks seek to advice on these deals as it involves lucrative money. US investment banks dominate the adviser league given their competitive advantage revolving around the fact that the US attracts the most deals. For this year, Goldman Sachs holds the top spot with a market share of 20% having a total deal value in excess of $1 trillion. The other two banks that make up the top three are Morgan Stanley (17 per cent market share) and JP Morgan (16 per cent market share).
In conclusion, mergers and acquisitions are an essential tool for companies to supplement their business model. The profit maximising ideology underpinning executive management teams necessitates that expansionary endeavours seek to screen M&A opportunities in order to ensure future sustainable growth.
Disclaimer: This article was issued by Jesmar Halliday, investment manager at Calamatta Cuschieri. For more information visit www.cc.com.mt. The information, view and opinions provided in this article are being provided solely for educational and informational purposes and should not be construed as investment advice, advice concerning particular investments or investment decisions, or tax or legal advice.