Mergers and acquisitions explained

Mergers and acquisitions capture the business headlines and many involve SMEs. John Cradden explains how they work.

Mergers and acquisitions (M&A) are regularly in the news, and coverage of such deals tends to be hoovered up by those involving large corporates or household names.

But there is also a large volume of such transactions taking place involving SMEs.

“The turmoil caused by the global financial crisis has seen the value of merger and acquisition deals in Ireland in the first quarter of 2023 drop by 87% compared to the same period in 2022”

But what exactly happens with mergers and acquisitions? Although habitually used together, the terms ‘mergers’ and ‘acquisitions’ each each describe two very different types of arrangement. In an acquisition, one company buys another and assumes ownership, while a merger is where two firms agree to come together to form a new legal entity under the banner of one corporate name.

The Irish Companies Act 2014 defines three types of merger (with the first two by far the most common):

  1. Merger by acquisition – where a company acquires all the assets and liabilities of another company, and assumes ownership
  2. Merger by absorption – where a company transfers all its assets and liabilities to its parent company
  3. Merger by formation of a new company – where all the assets of one or more companies are transferred to a newly formed company

Seeking synergies

But why, as a business owner, would you consider getting involved in a merger or acquisition?

The primary goal is to grow your company faster with less of the work and hard graft involved in doing it yourself. The basic idea is that the buyer will realise more revenue or cut down costs by acquiring a particular company.

A term that’s often used in this context is synergy, whereby the combination of two companies exceeds the value that they have as individual firms. This can be through cost synergies, economies of scale or the bargaining power with suppliers that comes with being a bigger entity. But it can also be achieved through generating more sales as a combined company.

Among the many reasons to acquire another firm is to grow market share, expand into other regions or countries, and diversify product offerings.

Another reason to buy another company is in order to acquire a technology or talent that you can exploit better than the target company. This saves time and money that would have to have been spent developing the target technology yourself.

All these motivations are certainly foremost in the minds of Irish SMEs looking to explore potential M&A deals. A 2022 survey of Irish SMEs by consulting firm Aon found that for those who were actively considering M&A transactions, their key reasons for doing so included a desire to increase business efficiencies (39%) and protect and grow market share (33%). Other key motivators include accessing skilled talent (28%), followed by strengthening the ability to navigate current volatility (20%).

Risky business

But a merger or acquisition can also be risky. While either deal can potentially transform your business, it could also transform it in the wrong way or end up not seeing any of the synergies you hoped it would generate.

If a potential merger or acquisition involves larger SMEs, it may need to be examined by the Competition and Consumer Protection Commission to see if such a deal could potentially lessen competition in the market and reduce choice for consumers. If the aggregate turnover of all the entities involved in the most recent financial year is over €60m and the turnover of each of the two or more entities involved is over €10m, then the CCPC needs to be notified.

M&A activity tends to be higher when there is economic confidence and certainty, which has been borne out by what’s happened so far this year. The turmoil caused by the global financial crisis has seen the value of merger and acquisition deals in Ireland in the first quarter of 2023 drop by 87% compared to the same period in 2022, according to figures by data provider Refinitiv, part of the London Stock Exchange Group (LSEG).

However, the number of deals agreed remains high at 115 deals, the highest first quarter of all time.

Nonetheless, SMEs appear to have been rowing back on M&A activity. The 2022 Aon survey found that only one in five were considering engaging in a merger or acquisition in the following two years, with rising inflation cited as the main risk for engaging in M&A activity – something that is undoubtedly still on the radar in 2023.

Depending on your goals and circumstances, an alternative to a merger or acquisition is a joint venture. A joint venture is an arrangement between two or more businesses to combine their resources in order to accomplish a specific business task, as opposed to setting up an entirely new business.

It’s often a temporary thing and dissolved once the agreed objective is achieved. It also enables the businesses to remain independent. It can be set up through a number of arrangements, such as a business partnership, limited cooperation or a separate joint venture business.

Main image at top: Photo by JESHOOTS.COM on Unsplash

John Cradden
John Cradden is an experienced business and personal finance journalist and financial wellbeing content designer.