Mergers and acquisitions explained

Mergers and acquisitions explained. Mergers and acquisitions are a multi-disciplinary field. In this video, we will focus on several financial and strategic aspects of mergers and acquisitions, by discussing the reasons for doing an M&A deal, the difference between the sale of assets and the sale of equity, accounting for business combinations, measuring deal success or failure, and examples of goodwill impairment (a possible indicator of a merger or acquisition gone bad).

⏱️TIMESTAMPS⏱️
00:00 Introduction
00:34 Reasons for mergers and acquisitions
02:50 Difference between the sale of assets and the sale of equity
04:03 Accounting for business combinations
05:20 Definition of goodwill
06:37 Measuring deal success or failure of mergers and acquisitions
07:47 Goodwill impairment examples
12:13 Successful mergers and acquisitions

There are many different reasons to do an M&A deal. One of the reasons that is very common for technology businesses (from biotech to software) is based on the strengths of the company leadership or the business as a whole. The seller might be great in the early stages of the lifecycle of a business: start-up and prototyping, but lacking on the skills to grow and harvest. The buyer might lack the skills for the early stages, but have strength in the area of scaling up, commercial roll-out and standardization. A deal that benefits both buyer and seller!

Here are some more reasons for an M&A deal from the perspective of the buyer: access to products, resources or markets (skip the growth stage and buy existing sales and profits), an opportunity to consolidate an industry (combining several smaller players into a bigger player), vertical integration (upstream – moving up the supply chain towards raw materials, or downstream – moving into finished products, distribution and direct customer interaction), or simply to shut down a competitor (if you can’t beat them, buy them!). Here are some reasons for an M&A deal from the perspective of the seller: monetize and retire (accepting an offer that’s too good to refuse, and retire at age 55, 45, 35 or even 25), the desire to start something completely new (due to boredom or changing interests), declining revenues (selling a struggling business), the less virtuous reason of transferring hidden risk to the buyer (which a buyer might detect during a thorough due diligence), or simply lacking the resources to grow the business to its full potential. When a deal is made and announced, the headlines are often dripping with euphoria. The combination of the businesses creates opportunities for unprecedented growth. The buyer expects to realize big revenue and cost synergies. In short, by combining two businesses, 1 plus 1 promises to become 3.

How can we measure the success or failure of an M&A deal? Let’s discuss four possible outcomes. The best outcome is for the euphoria of the deal announcement to become reality: 1 plus 1 actually turns out to be 3 over time, the whole is bigger than the sum of the former parts. It could be that 1 plus 1 turns out be just 2, no value added or lost from doing the M&A deal. Worse, 1 plus 1 could turn out be 1, the whole is smaller than the sum of the former parts. The worst outcome is a blow-up: the combined business goes bankrupt.

I hope you enjoyed this discussion of various financial and strategic aspects of #mergersandacquisitions.

Philip de Vroe (The Finance Storyteller) aims to make strategy, #finance and leadership enjoyable and easier to understand. Learn the business and accounting vocabulary to join the conversation with your CEO at your company. Understand how financial statements work in order to make better investing decisions. Philip delivers #financetraining in various formats: YouTube videos, classroom sessions, webinars, and business simulations. Connect with me through Linked In!