The value of global M&A deals worldwide amounted to $2.5 trillion in 2023, with contributions from United States being more than half of the total, the sectors in demand being technology, media and telecommunications. Besides the US, the Chinese firms have been targeting technology and healthcare sectors, followed by India & Brazil being next attractive M&A destinations, particularly in consumer goods, technology and energy sectors.

Looking ahead, the global M&A market is poised for both challenges and opportunities. While certain sectors will see impact owing to rising interest rates, inflation, and geopolitical tensions, the overall trend is moving towards consolidation and innovation- driven acquisitions. Again, sectors like technology, healthcare and energy will remain in forefront of M&A deals.

By the numbers, worldwide M&A in 2024 grew to $3.45 trillion (as of December 19), with the US contributing to $1.55 trillion while Europe and Asia is around the $800 billion mark. The average transaction value in the mergers and acquisitions market amounts to $181 million in 2024.

Let’s look deeper into what defines M&A

M&A refers to transactions between two companies combining in some form. If two companies of similar size combine to form a new single entity, it is called a merger. But when a larger company acquires a smaller company, thereby absorbing business of the smaller company, it is called an acquisition. These M&A deals can be friendly or hostile, depending upon the approval of the target company’s board.

M&A transactions can be horizontal, vertical or a conglomerate. A horizontal merger happens between two companies that operate in similar industries that may or may not be direct competitors. Example being Disney (owned by Disney) merged with Hotstar(owned by Star Network) for entering into India as a joint streaming platform and is called Disney + Hotstar. A vertical merger happens between a company and its supplier or a customer along its supply chain, thus consolidating its position in the industry. A good example here is of Walt Disney (a mass media & entertainment company) acquired Pixar Animation Studios (an innovative animation studio) for $7.4 billion in 2006. A conglomerate transaction is usually done for diversification reasons and is between companies in unrelated industries. Amazon purchasing Whole Foods in 2017 combined the Amazon’s e-commerce expertise with Whole Food’s grocery retail operations, expanding Amazon’s market reach and product offerings.

There are several reasons why M&A occurs.

•    To create or unlocking synergies, when the combined company is worth more than the two companies individually. Drivers of synergies remain as cost or revenue.
•    To grow inorganically. It is a faster way for a company to achieve higher revenue as compared to an organic growth. A company can gain by acquiring company with latest capabilities without the risk of developing same internally.
•    In a merger, the resulting entity will attain a higher market share and will gain the power to influence the prices.
•    Companies in cyclical industries feel the need to diversify their cash flows to avoid significant losses in their industry. Acquiring a target in a non-cyclical industry with diversify and reduce the market risk.
•    Acquiring the company with tax losses enables the acquirer to use the tax losses to lower its tax liability. While there can be a tax benefit from merger, mergers are not usually done just to avoid taxes.

Here’s quick look at a typical 10-Step M&A deal process.

1. Develop an acquisition strategy – A good strategy revolves around the acquirer having a clear idea of what they expect to gain from making the acquisition – what their business purpose is for acquiring the target company (e.g., expand product lines or gain access to new markets).

2. Set the M&A search criteria –Determining the key criteria for identifying potential target companies (e.g., profit margins, geographic location, or customer base).

3. Search for potential acquisitions targets–The acquirer uses their identified search criteria to look for and then evaluate potential target companies.

4. Begin acquisition planning–The acquirer makes contact with one or more companies that meet its search criteria and appear to offer good value; the purpose of initial conversations is to get more information and to see how amenable to a merger or acquisition the target company is.

5. Perform valuation analysis–Assuming initial contact and conversations go well, the acquirer asks the target company to provide substantial information (current financials, etc.) that will enable the acquirer to further evaluate the target, both as a business on its own and as a suitable acquisition target.

6. Negotiations–After producing several valuation models of the target company, the acquirer should have sufficient information to enable it to construct a reasonable offer; once the initial offer has been presented, the two companies can negotiate terms in more detail.

7. M&A Due Diligence –It is an exhaustive process that begins when the offer has been accepted; it aims to confirm or correct the acquirer’s assessment of the value of the target company by conducting a detailed examination and analysis of every aspect of the target company’s operations – its financial metrics, assets and liabilities, customers, human resources, etc.

8. Purchase & Sale Contract–Assuming due diligence is completed with no major problems or concerns arising, the next step forward is executing a final contract for sale; the parties make a final decision on the type of purchase agreement, whether it is to be an asset purchase or share purchase.

9. Financing strategy for the acquisition–The acquirer will, of course, have explored financing options for the deal earlier, but the details of financing typically come together after the purchase and sale agreement has been signed.

10. Closing & integration of the acquisition–The acquisition deal closes, and management teams of the target and acquirer work together on the process of merging the two firms.

Besides due diligence, valuation remains one of the most critical aspect of M&A deal.

In M&A, valuation process is conducted by the acquirer as well as the target. Former will want the lowest price but latter will want the highest. The deal typically leverages any of the three major valuation methods.

•    Discounted cash flow – the target price is calculated based on its future cash flow. 
•    Comparable company analysis – relative valuation metrics for public companies are used to determine the value of the target.
•    Comparable transaction analysis – valuation metrics for past comparable transactions in the industry are used to determine the value of the target.

Forms of Acquisitions can be any

Stock Purchase – The acquirer pays the target firm’s shareholders cash and/ or shares in exchange for shares of the target company. Target’s shareholders receive compensation.

Asset Purchase –The acquirer purchases the target’s assets and pays the target company directly.

A good example here is when Aris International (styled as ARRIS), an American telecommunication equipment company engaged in data, video and telephony systems for homes and businesses acquired Motorola’s TV cable box division in December 2012. All assets and IPR were acquired for $2.35 billion (in cash & stock). This integration allowed Arris to expand its market share in cable industry and integrate Motorola technology in it.

Conclusion

Top dealmakers expect global mergers and acquisitions volumes to surpass $4 trillion in 2025, buoyed by the new government in the US, with broadly a pro-business stance. The outlook is further buoyed by hopes of deregulation and lower taxes. Dealmakers see levels of activity above 10-year average in 2025.

“Dealmaking is a profession unto itself – the world’s highest paying profession. Things don’t just fall into place by accident. A good dealmaker understands that it’s his job to finesse things into place.” – Anonymous

Disclosures
·Investment in securities market are subject to market risks. Read all the related documents carefully before investing ·The securities quoted are for illustration only and are not recommendatory

·Registration granted by SEBI, membership of BASL (in case of IAs) and certification from NISM in no way guarantee performance of the intermediary or provide any assurance of returns to investors