Mergers and acquisitions
When one company buys another, it is making the biggest capital allocation decision it can. M&A creates some of the most dramatic share price moves in markets, and some of the most expensive mistakes.
Why companies do deals
- Synergies: cost savings from combining operations, or revenue gains from cross-selling.
- Growth: buying a market, product or technology faster than building it.
- Consolidation: reducing competition and gaining scale.
- Less flattering reasons: empire building, or covering up slowing organic growth.
How deals are priced
Buyers almost always pay a takeover premium over the target's undisturbed share price, often 20-40% or more, to persuade shareholders to sell. The justification is synergies, which is why the key question is whether the synergies are worth more than the premium paid.
Targets are valued with the tools from this track: DCF, trading multiples of comparable companies, and the multiples paid in previous deals (precedent transactions).
Cash or shares
Paying cash (often borrowed) means the buyer's shareholders keep all the upside and risk. Paying in shares means the target's shareholders share in both. A buyer paying in shares may believe its own stock is expensive. Analysts check whether a deal is accretive (raises the buyer's EPS) or dilutive (lowers it), though accretion alone doesn't mean value is created.
The process in the UK
UK public takeovers follow the Takeover Code. Once an approach leaks or is announced, the bidder has 28 days to make a firm offer or walk away (“put up or shut up”). Most deals are done by a scheme of arrangement, which needs approval from 75% of shares voted and the court. Hostile bids go directly to shareholders without board support.
Merger arbitrage
After a deal is announced, the target usually trades slightly below the offer price, reflecting the risk the deal fails (regulators, financing, shareholder votes). Merger arbitrage funds buy the target to capture that spread, and lose heavily if the deal collapses.
Why many deals disappoint
Studies consistently find that acquirers' shareholders often see little or no gain, while target shareholders capture most of the value through the premium. Overpaying, overestimating synergies and clashing cultures are the usual reasons.
Key takeaway
A good deal is one where the value created exceeds the premium paid. Judge acquisitions by price and integration, not by headlines.
Educational content only, not financial advice. Investing involves risk and you can lose money.