What Are Mergers and Acquisitions (M&A)? Types, Valuation & Examples Explained

Mergers and Acquisitions (M&A) is a commonly used term in business, corporate finance, and the stock market. For beginners, it may sound complicated, but the idea is simple—companies come together to grow, compete better, or strengthen their position.

You may have seen news like Walmart acquiring Flipkart or Vodafone merging with Idea—these are real-life examples of M&A.

In this article, you will learn what mergers and acquisitions mean, why companies do them, their types, structures, valuation methods, and simple real-world examples, explained step by step.

What Are Mergers and Acquisitions (M&A)?

Mergers and acquisitions (M&A) refer to business transactions where two companies combine in some form. This combination can happen by merging completely, buying another company, or acquiring important assets or shares.

In simple terms, M&A is about one company joining hands with or taking over another company to achieve business goals such as growth, efficiency, or market expansion.

A company can carry out Mergers and acquisitions (M&A) in the following ways:

• Buy another company fully and become its owner
• Merge with another company to form a new business
• Purchase major assets of another company
• Buy shares to gain control of management

All these activities are together called mergers and acquisitions.

Merger vs Acquisition (Clear Difference)

Although the terms merger and acquisition are often used together, they do not mean exactly the same thing. Understanding this difference is very important for beginners.

What Is an Acquisition?

An acquisition happens when one company buys another company and becomes its owner. The acquired company may continue to operate under its own name, but control shifts to the buyer.

Acquisitions can be:

• Friendly, when both companies agree
• Hostile, when the target company does not agree

Example: When Walmart acquired Flipkart, Flipkart continued its business, but Walmart became the majority owner.

What Is a Merger?

A merger happens when two companies of similar size come together and form one new company. In most mergers, both companies agree to the deal.

Example: Vodafone and Idea Cellular merged to form Vodafone Idea (Vi), combining their customers, networks, and operations.

Merger vs Acquisition – Simple Comparison

Why Do Companies Go for Mergers and Acquisitions?

Companies do not enter mergers and acquisitions (M&A) randomly. These decisions are usually made to achieve clear business objectives that support long-term growth and stability.

Below are the main reasons why companies choose M&A:

1. Faster Business Growth

Growing a business organically takes time. By acquiring or merging with another company, a business can grow much faster by gaining:

• Existing customers
• Established products or services
• Ready-made infrastructure

Example: Walmart entered the Indian e-commerce market quickly by acquiring Flipkart instead of building a platform from scratch.

2. Cost Savings and Synergies

When two companies combine, they can reduce duplicate costs such as:

• Offices
• Staff
• Technology systems

This cost reduction is called synergy, where the combined company becomes more efficient than two separate companies.

3. Stronger Market Position

M&A helps companies increase market share and reduce competition. A larger company often has better pricing power and brand strength.

Example: The Vodafone–Idea merger helped the company compete better with other large telecom players in India.

4. Diversification of Business Risk

Companies operating in one industry may face ups and downs. By acquiring a business in a different sector, they reduce dependency on a single source of income.

5. Tax Benefits

Sometimes, companies with profits acquire loss-making companies to use tax loss carryforwards and reduce future tax liability. However, tax benefits are usually a secondary reason.

Types of Mergers and Acquisitions

Mergers and acquisitions can be classified into different types based on the relationship between the companies involved. Understanding these types makes it easier to analyse real-life business deals.

1. Horizontal Merger

A horizontal merger takes place between two companies operating in the same industry and at the same level of the business chain.

Why it happens:

• Increase market share
• Reduce competition
• Achieve economies of scale

Example: Facebook acquiring Instagram—both operate in the social media space.

2. Vertical Merger

A vertical merger happens when a company merges with its supplier or distributor.

Why it happens:

• Better control over supply chain
• Reduced dependency on third parties
• Lower operational costs

Example: Amazon acquiring Whole Foods to gain control over physical grocery retail.

3. Conglomerate Merger

A conglomerate merger involves companies from completely unrelated industries.

Why it happens:

• Business diversification
• Risk reduction

Example: A technology company acquiring a gaming company.

Forms of M&A Integration

After a merger or acquisition is completed, companies can be integrated in different legal and operational ways. These are known as forms of M&A integration.

1. Statutory Merger

In a statutory merger, the acquiring company absorbs the target company completely. The target company ceases to exist as a separate legal entity.

Key point:

• Assets and liabilities move to the acquiring company
• Only one company remains after the deal

2. Subsidiary Merger

In a subsidiary merger, the acquired company becomes a subsidiary of the acquiring company but continues its operations.

Key point:

• Brand and operations may continue
• Ownership changes, control remains with parent company

Example: Instagram continues to operate as a subsidiary of Meta (Facebook).

3. Consolidation

In a consolidation, both companies involved in the transaction cease to exist, and a completely new company is formed.

Key point:

• New legal entity is created
• Assets and liabilities of both companies are combined

How Mergers Are Structured

Mergers can be structured in different ways depending on how the transaction is financed and how the companies combine legally. The structure of a merger affects taxes, ownership, and financial reporting.

1. Purchase Merger

In a purchase merger, one company purchases another company using:

• Cash
• Debt
• Bonds or other financial instruments

Why companies prefer this:

• Assets can be revalued at purchase price
• Depreciation on higher asset value reduces taxable income

Simple example: Company A buys Company B for ₹200 crore using cash and debt. Company B’s assets are added to Company A’s balance sheet.

2. Consolidation Merger

In a consolidation merger, both companies are bought and combined under a newly created company.

Key features:

• Both original companies stop existing
• New company owns all assets and liabilities

Example: Two mid-sized companies combine and form a new brand with shared ownership.

How Acquisitions Are Financed

When a company decides to acquire another company, it must arrange money to pay for the deal. Acquisitions can be financed in different ways depending on the size of the transaction and the financial strength of the buyer.

1. Cash Payment

In a cash acquisition, the buyer pays cash to purchase the target company.

Key points:

• Simple and quick method
• Buyer must have strong cash reserves

Example: Amazon paid cash to acquire Whole Foods.

2. Share (Stock) Payment

In a stock acquisition, the buyer issues its own shares to the shareholders of the target company.

Key points:

• No immediate cash outflow
• Shareholders of the target become part-owners of the acquiring company

3. Debt Financing

The acquiring company borrows money from banks or issues bonds to fund the acquisition.

Risk involved: Higher debt increases interest burden and financial risk.

4. Mixed Offering

Most large M&A deals use a combination of cash and shares, known as a mixed offering.

Simple example: Company A acquires Company B by paying ₹100 crore in cash + ₹50 crore in shares.

Valuation in Mergers and Acquisitions

Valuation is one of the most important parts of mergers and acquisitions (M&A). It helps both the buyer and the seller decide what a company is actually worth.

The buyer wants to pay the lowest possible price, while the seller wants the highest. To reach a fair value, certain standard valuation methods are used.

1. Price-to-Earnings (P/E) Method

This method values a company based on its profits.

Formula: Company Value = Annual Earnings × Price-to-Earnings (P/E) Ratio

Example:

• Annual profit = ₹10 crore
• Industry Price-to-Earnings (P/E) = 15
• Company value = ₹10 × 15 = ₹150 crore

2. Enterprise Value to Sales (EV/Sales) Method

This method is used when profits are low or unstable, but revenues are steady.

Key point: The buyer compares the target company’s sales with similar companies in the industry.

3 Discounted Cash Flow (DCF) Method

The DCF method estimates the value of a company based on future cash flows.

Simple explanation: Money received in the future is worth less today. So future cash flows are discounted using the company’s WACC (Weighted Average Cost of Capital).

This is one of the most detailed but complex valuation methods.

4. Replacement Cost Method

This method estimates how much it would cost to build the same business from scratch.

Limitation: It does not work well for service-based businesses where people and ideas are the main assets.

Impact of Mergers and Acquisitions on Shareholders

Mergers and acquisitions (M&A) directly affect shareholders of both the acquiring company and the target company. These effects can be short-term as well as long-term.

Impact on Acquiring Company Shareholders

• Share price may fall temporarily due to high acquisition cost
• Increased debt may raise financial risk
• Long-term benefits may come from growth and synergies

Impact on Target Company Shareholders

• Share price usually rises before the deal
• Shareholders often receive a premium over market price
• Payment may be in cash, shares, or both

Voting Power Impact

In stock-based mergers:

• Total number of shares increases
• Existing shareholders’ voting power may dilute

This dilution is more significant for shareholders of smaller companies.

Friendly vs Hostile Takeovers

Takeovers under mergers and acquisitions can be either friendly or hostile, depending on the attitude of the target company’s management and board.

Friendly Takeover

A friendly takeover happens when:

• The board of directors approves the deal
• Shareholders support the acquisition

Key point: Most M&A deals are friendly because cooperation makes integration smoother.

Hostile Takeover

A hostile takeover occurs when:

• The target company’s management does not agree
• The acquiring company bypasses the board and buys shares directly from shareholders

How it works: The buyer purchases a large number of shares from the open market or through a tender offer to gain control.

Examples

Below are simplified and summarised examples of well-known mergers and acquisitions, keeping them short and easy to understand.

Example 1: Facebook and Instagram (link)

Facebook acquired Instagram in 2012 for approximately ₹8,000 crore. Instagram continued operating as a separate brand, while Facebook used its technology and user base to help Instagram grow faster.

Example 2: Amazon and Whole Foods (link)

Amazon acquired Whole Foods in 2017 for around ₹1.1 lakh crore in an all-cash deal. This acquisition helped Amazon enter physical grocery retail, while Whole Foods gained access to Amazon’s logistics and customers.

Example 3: Marriott and Starwood (link)

Marriott acquired Starwood to become the world’s largest hotel company. The deal expanded Marriott’s global presence, loyalty programs, and created cost and revenue synergies.

Popular M&A Examples

Here are some other well-known mergers and acquisitions to understand the types and strategies used:

Acquisitions (One company buys another)

Mergers (Two companies combine)

Types of M&A Highlighted

• Horizontal: Facebook & Instagram (competitors)
• Vertical: Amazon & Whole Foods (retailer & supplier)
• Conglomerate: Tech company acquiring a gaming company

Conclusion & Key Takeaways

Mergers and acquisitions (M&A) help companies grow, reduce competition, diversify, and strengthen market presence. For beginners in India, understanding M&A improves knowledge of corporate finance, stock markets, and business strategies.

Key Points to Remember:

• Difference Between Merger and Acquisition: Merger = two companies form a new company; Acquisition = one company buys another, which may continue under its name.
• Types of M&A: Horizontal, Vertical, Conglomerate.
• Forms of Integration: Statutory, Subsidiary, Consolidation.
• Financing Methods: Cash, Stock, Debt, Mixed Offering.
• Valuation Methods: P/E ratio, EV/Sales, DCF, Replacement Cost.
• Impact on Shareholders: Share prices may fluctuate; voting power may dilute.
• Friendly vs Hostile Takeovers: Friendly = cooperation; Hostile = bypass management.
• Practical Indian Examples: Vodafone-Idea, Walmart-Flipkart.

By keeping these points in mind, beginners can understand M&A news, follow corporate strategies, and interpret stock market movements more confidently.