Mergers and Acquisitions
Mergers and Acquisitions are complex processes that require careful planning and execution. These processes allow companies to combine resources and expertise, achieve economies of scale, and enhance innovation and operational efficiency. It also contributes to entering new markets and expanding the customer base, which enhances the competitiveness of companies.
Merger:
It is a union of interests between two or more companies that results in the emergence of a new entity or the establishment of a new company, as there are three types of mergers:
- Horizontal merger: It is a merger that occurs between two institutions working in the same economic activity to achieve economies of scale and create monopoly powers.
- Vertical merger: It is a merger that takes place between institutions operating in complementary economic activities, to achieve the economics of modern technology and reduce costs.
- Diversified merger: It is a merger that takes place between companies with different economic activities. It may be for the purpose of increasing the diversity of products or the geographical extension of the market, or for the purpose of diversifying research into unrelated activities.
Acquisition:
It is the financial and administrative control of one company over the activity of another company, there are four types of acquisition:
- Vertical acquisition: The parent company acquires a company located along its supply chain, either upstream (such as a vendor/supplier) or downstream (processor or retailer).
- Horizontal acquisition: The parent company purchases a competitor or another company in the same sector.
- Conglomerate acquisition: The parent company buys a company in a completely different industry or sector, in a marginal or unrelated business.
- Homogeneous acquisition: Also known as market expansion, this occurs when the parent company buys a company that operates in the same or closely related industry but has different lines of business or products.
The difference between a merger and an acquisition is that a merger means the merging of two equal companies to form one new company. In contrast, an acquisition refers to the purchase of one company by another company, where the purchasing company becomes the new owner of the acquired company.
Evaluating the company before a merger or acquisition is an important step to ensure the success of the process for both companies, as it contributes to ensuring the company’s clarity in several aspects, including:
Economic Value: Valuation helps determine the economic value of the target company as this allows the acquiring company to determine the appropriate price to pay for the shares or assets.
Performance and risk analysis: The evaluation provides an opportunity to analyze the performance of the target company and evaluate its risk profile, through financial performance indicators that calculate the strengths, weaknesses, opportunities and threats that the company faces.
Aligning culture and strategy: The evaluation process can reveal differences in organizational culture and structure between the two companies, making it easier for the acquiring company to evaluate the potential fit and readiness to face the challenges associated with a merger or acquisition.
Investment decisions: Company evaluation is used to make sound investment decisions, as the acquiring company can use the evaluation results to determine whether a merger or acquisition will increase competition, expand the business, and increase shareholder value.
There are several methods that can be used to evaluate a target company. Below are the most common methods:
Financial value analysis: The current value of the company includes the assessment of assets, liabilities, and future financial expectations. This method uses many technologies such as:
- Estimating the net asset value.
- Estimating the expected value of earnings (Earnings Multiples).
- Estimating the future value of cash flows (Discounted Cash Flow).
Market analysis: It is based on comparing the target company with similar companies in the market, and analyzing the prevailing factors in the market and how they affect the company's financial value.
Value-added analysis: It focuses on analyzing the factors that add value to the target company, such as a strong brand, advanced technology, and good relationships with customers, suppliers, and other factors that contribute to value creation.
Debt analysis: It focuses on estimating the company’s obligations and its ability to generate income to repay these obligations.
It is preferable to use more than one evaluation method, as using more than one method helps to obtain a comprehensive and balanced view of the actual value of the target company, evaluate the financial and non-financial aspects of the deal, and reduce the risks of relying on the method Only one.
Financing Methods:
A distinction is usually made between mergers and acquisitions based on the financing methods used, including:
- Cash financing: Cash is mainly used in acquisitions rather than mergers.
- Loans: The deal is financed by borrowing capital from banks or Other financial institutions.
- Blended financing: A mixed combination of cash, stocks, loans, and securities can be used.
- Shares: The purchasing company’s shares are used to finance the deal and are converted into shares in the purchasing company.
The use of the financing method depends on multiple factors, such as the size of the deal, the valuation of the participating companies, and the financial outlook of the purchasing company.
The share structure is subject to fundamental changes during mergers and acquisitions, for various reasons that have a direct impact on the value of shareholders’ investments and the course of the companies involved. Among these effects:
- Exchange stocks: The acquiring company's shares are converted into shares in the purchasing company at a certain percentage. The acquiring company's shareholders receive the purchasing company's shares in the specified ratio.
- Dilution or modification of shares: The number of shares issued to the acquiring or purchasing company's shareholders may be reduced. This aims to distribute the financial value fairly and balanced among shareholders.
- Change in the value of shares: The share price of both the acquiring company and the purchasing company may change, based on market evaluation and the interactions of the parties involved in the merger.
- Change in rights and privileges: A change in the rights and privileges related to the possession of shares may occur after the merger, in accordance with the conditions stipulated in the merger agreement and applicable legislation.
The potential effects on the shares of the two companies in the event of a merger vary based on the individual circumstances of each deal and the terms of the agreement.
Key mergers and acquisitions include:
- The merger of Al Ahli Saudi Bank with Samba Financial Group:
The merger between Al Ahli Saudi Bank and Samba Financial Group stands out as the largest and fastest consolidation in the region recently. This merger led to the establishment of the largest banking entity in the Kingdom, with assets exceeding 900 billion Saudi riyals. This merger created a massive and competitive financial force locally and regionally, positioning the new bank as one of the largest financial institutions in the Middle East. It is expected to serve approximately 25% of the retail and commercial banking sectors in the Kingdom.
- Delivery Hero's Acquisition of The Chefz
Delivery Hero failed to acquire The Chefz. Delivery Hero is a German company that provides online restaurant delivery services in more than 50 countries. The company had previously acquired “HungrStation” but failed in its attempt to acquire The Chefz due to rejection by the General Authority for Competition.
- Uber's Acquisition of Careem
Uber acquired its largest competitor in the transportation and delivery sector in the Middle East, Careem, for $3.1 billion, making it one of the largest deals in the region's technology sector. Now, Careem is considered a wholly-owned subsidiary of Uber, but it will retain its brand name. Both Uber and Careem believe that this acquisition will provide opportunities to expand the diversity and reliability of services available through their applications. The Saudi Competition Authority has imposed conditions and commitments for a period of 3 years aimed at protecting consumers and ensuring that the market remains open to competitors.
Prepared By:
Reema Ahmed ALNami
Lubna aiman Almudaifer
Dema Alsharef
Foziyah Tareg Alsowailem
References:
https://www.sahalfirm.com/blog
https://www.emkan.com.sa/Blog/Details/21
https://www.investopedia.com/terms/a/acquisition.asp
https://www.e3melbusiness.com/blog
https://fastercapital.com/arabpreneur
https://corporatefinanceinstitute.com/resources/valuation/merger-vs-acquisition