Mergers and acquisitions (M&A) are processes that change the structure of companies, open up new markets and create value for investors.

Key concepts

M&A (Mergers and Acquisitions): The process of combining and acquiring companies to create value.

Target company: A company that is the target of an acquisition.

Acquiring company: A company that buys another company.

Synergy: The effect of combining companies that is greater than the sum of their values.

Due Diligence: The examination of a company before a transaction is completed.

Antitrust: legal restrictions that prevent monopolisation of the market.

Controlling interest: the number of shares that give the right to control a company.

Definition and history

Mergers and acquisitions are used to change market positions, optimise business models and create competitive advantage. Historically, M&A deals began to develop actively in the late 19th century in the United States during the so-called 'monopoly era', when large companies merged to dominate their industries. Later, with the development of financial markets and globalisation, these processes became an integral part of corporate strategies worldwide.

Types of M&A deals

Horizontal merger: the integration of companies that operate in the same industry and have similar products or services (e.g. two banks).

Vertical merger: integration of companies operating at different levels of the same production chain (e.g. a car manufacturer and a parts supplier).

Conglomerate merger: the integration of companies from different industries with no direct link between their activities.

Friendly takeover: a process in which one company buys another by mutual agreement.

Hostile takeover: when the attacking company buys a controlling stake without the consent of the target company's management.

Share-swap merger: a merger in which companies exchange shares, creating common ownership without cash payments.

Each type of M&A deal has its benefits and risks that should be considered when making decisions about integrating companies.

Goals and objectives of M&A deals

Why do companies merge and acquire each other?

Mergers and acquisitions (M&A) are one of the most important strategies for companies in today's business environment. They help companies to strengthen their market position, improve efficiency and adapt to changes in the competitive environment.

The main strategic objectives of M&A

Expanding market presence

Companies use M&A to enter new markets or strengthen their position in existing regions. They can quickly acquire a customer base and infrastructure and expand their geographic footprint without making significant investments in their development.

Strengthening competitive advantage

Mergers and acquisitions provide an opportunity to close the gap with market leaders or strengthen dominant positions. Acquiring competitors also helps to increase profitability.

Business diversification

Companies seek to reduce risk by broadening their product or service portfolio. Acquiring businesses in related or entirely new industries helps to stabilise revenues and avoid dependence on a single market.

Gain technological advantage

Through mergers and acquisitions, companies gain access to unique technologies, patents, research data, facilities and other developments that can significantly accelerate innovation and new product development.

Reduce costs and increase efficiency

Consolidating business processes helps to reduce operating costs, eliminate duplication of functions and improve resource management. This helps to increase business margins and improve financial stability.

Rapid company growth

Instead of growing a business organically, which can take years, companies use M&A to gain new assets, customers, and resources immediately.

Global expansion

International M&A deals help companies enter global markets, gain access to new customers and strengthen their position in the international environment.

Supply chain optimisation

Merging with suppliers or distributors helps companies control costs, ensure stable supply and reduce dependence on external factors.

Acquiring human capital and expertise

M&A deals are often aimed at acquiring skilled labour, management experience and expertise to help companies develop their business more effectively.

Stages of M&A deals

The M&A process consists of several key stages, each of which plays an essential role in ensuring a successful deal. Proper planning and execution of these stages helps to minimise risk, maximise deal efficiency and achieve the desired strategic objectives.

Preparation

The fundamental stage in which the strategic objectives of the deal are defined, potential target companies are identified and an initial analysis of their suitability is carried out.

Defining deal objectives

Before embarking on an M&A deal, a company must clearly define its objectives. These may be to expand market presence, diversify the business, acquire new technology or expertise, reduce costs or eliminate a competitor.

Selecting the target company

Once the objectives have been defined, the search for potential target companies begins. Sources of information may include financial reports and public data, industry analysis, contacts with investment banks and internal market research.

Preliminary analysis and assessment of fit

Before formal negotiations begin, it is important to carry out an initial assessment of the target company, which includes analysing its financial strength, investigating its market position and identifying key risks and prospects.

Company valuation

Once a potential M&A target has been identified, a detailed assessment of its financial position, business processes and legal aspects is carried out. This stage helps the buyer make an informed decision and determine the fair value of the deal.

Due diligence

Due diligence is a comprehensive review of the target company, including.

• Financial analysis (verification of revenues, expenses, profitability, debt load);
• Legal analysis (review of corporate documents, litigation, contracts);
• Operational analysis (assessment of business processes, management efficiency, logistics);
• Technological audit (assessment of intellectual property, patents, level of automation);
• Human resources analysis (verification of human resources potential, social commitment, corporate culture).

Determining the value of a company

There are several approaches to the valuation of the target company.

• The comparative analysis method: valuation based on the market value of similar companies;
• The discounted cash flow (DCF) method: analysis of future financial flows;
• The liquidation value method: valuation of the company's assets in the event of its liquidation;
• The book value method: valuation based on accounting data.

Valuing a business allows the buyer to understand whether the asking price is in line with market realities and to determine the optimal structure of the deal.

Negotiating and closing the deal

At this stage, the key terms of the deal are defined, financial aspects and regulatory issues are agreed upon, and legal documents are signed.

Negotiations

The M&A negotiation process can last from several months to a couple of years. Key aspects of the discussions include the final purchase price, the form of payment, payment terms and deferrals, warranties and obligations of the parties, and the transition and integration process.

Preparation and execution of legal documents

Once an agreement has been reached between the parties, legally binding documents are executed.

• Letter of Intent (LOI): a preliminary agreement setting out the main terms of the transaction;
• Final Sale and Purchase Agreement: setting out the deal’s details and the legal obligations of the parties;
• Regulatory approvals: if the transaction is subject to antitrust regulation, the relevant approvals must be obtained.

Completion of the deal

Once all documents have been signed and the necessary legal procedures have been completed, the transaction is formally completed. At this stage, assets are transferred, money is paid, the business is reorganised, and the integration process takes place.

M&A impact on business

Mergers and acquisitions have a direct impact on companies at several levels: financial, operational, strategic and market. Let's have a look at the main impacts of such deals.

Financial impact

M&A can increase a company's market value by increasing its assets, revenues, and access to financial resources. At the same time, leveraged deals can increase debt and financial risks.

In addition, cost optimisation by combining business processes and reducing duplication of functions can increase profitability. However, acquisitions can also lead to increased operating costs associated with integration.

Operational impact

M&A can help to make more efficient use of assets and improve resource management.

However, mergers often involve headcount reductions, which can affect team morale, lead to talent leakage and lower productivity.

Acquisitions also frequently require the synchronisation of technology solutions, which can involve the cost of upgrading or replacing legacy systems.

Strategic impact

Mergers and acquisitions allow companies to enter new markets, add new products or services, and reduce dependence on a single source of revenue.

A successful merger can help a company strengthen its market position, gain new customers and reduce competition.

However, if the companies do not share a common vision for growth, a merger can lead to a loss of focus, reduced efficiency and management problems.

Impact on the market

After a merger, the market can become less competitive, giving the company more pricing power, but it can also attract the attention of antitrust authorities.

A successful M&A deal can increase investor confidence and lead to an increase in the share price. However, an unsuccessful deal can cause the share price to fall because of concerns about financial risks.

Acquisitions can also lead to changes in service quality and pricing, which can cause customer churn.

What are the benefits of M&A deals?

Financial benefits

Combined companies usually have a higher market value, which attracts investors and facilitates access to finance.

Costs are optimised by reducing duplication of functions and making operations more efficient.

Besides, the diversification of revenues and assets reduces the risk of financial distress and increases business stability.

Operational benefits

A merger improves logistics and automates business processes.

The company also gains access to new talent, experience, and management resources.

Don't forget that mergers and acquisitions often lead to faster adoption of new technologies, which increases competitiveness.

Strategic benefits

M&A provides access to new geographies and customer segments without the need to build infrastructure from scratch.

At the same time, by acquiring competitors or strategic partners, a company can gain greater market share and strengthen its position in the industry.

Finally, it reduces the company's dependence on a single product or market, making it more resilient to economic changes.

Risks and Disadvantages of M&A deals

Financial risks

Buying a company requires significant financial resources, which can lead to an increased debt burden.

Planned cost savings and increased profits may not be achieved due to integration problems.

Investors may react negatively to the deal, causing the company's market capitalisation to fall.

Not to be forgotten are hidden debts, legal liabilities or underestimated reorganisation costs, which can significantly increase financial risks.

Operational risks

The integration of corporate cultures, business processes and IT systems requires considerable effort and time.

Uncertainty and change in the business may cause valuable employees to leave the organisation.

Operational delays may occur during the merger process, negatively impacting productivity.

Incompatibility of management approaches and values can lead to demotivation of employees and deterioration of the working atmosphere.

Strategic risks

If the companies have different development visions, synergies may be lost.

Management may focus on integration to the detriment of core business activities.

Antitrust authorities may block the deal or impose restrictions on its implementation.

Large merged companies may lose flexibility and speed in strategic decision-making due to management complexity.

Risks to the market

Changes in the business model, pricing, or service may result in the loss of the customer base.

If the deal does not deliver the expected benefits, competitors may take advantage by attracting dissatisfied customers and employees.

Unrecognised liabilities or litigation may result in additional costs and reputational risk.

Negative market or customer perception of the deal can undermine the company's credibility and reduce its competitiveness.

Legal and financial aspects of M&A deals

Legal aspects

Regulatory and approval processes. M&A transactions are subject to antitrust and other regulations. It is important to obtain regulatory approvals to avoid legal impediments.

Contracts and legal obligations. A purchase or merger involves detailed due diligence on ownership, contracts, litigation, and other legal nuances.

Protecting shareholder rights. M&A transactions can affect the rights of minority shareholders, so it is essential to consider mechanisms to protect their interests.

Intellectual property. The transfer of patents, trademarks, and other intellectual property rights requires proper legal registration.

Labour law. The integration of businesses influences employees, so it is significant to comply with labour standards, contractual obligations and redundancy procedures.

Financial aspects

Business valuation. Determining the fair market value of the business is key to pricing the transaction and negotiating between the parties.

Financing the deal. M&A transactions can be financed through equity, debt, equity issuance or other financing mechanisms.

Deal structure. Transactions can take the form of asset purchases, mergers or share purchases, which determines the tax and financial implications.

Tax implications. M&A transactions can have tax implications for companies, including changes in tax residency, tax benefits and other liabilities.

Financial review. Financial statements, debt levels, liquidity, and other financial metrics should be reviewed before a transaction.

Legal formalisation

Legal formalisation M&A deals can take the form of a merger, an acquisition, or an asset purchase. Each option has its legal characteristics.

• Merger: two companies merge to form a new legal entity, and their assets and liabilities are transferred to the new structure;
• Acquisition: one company buys out the other completely, and the absorbed company ceases to exist;
• Asset acquisition: the purchase of individual company assets (real estate, equipment, patents) without a full merger or change in corporate structure.

The main document regulating the terms of the transaction is the sale and purchase agreement. It contains a description of the object of the transaction (shares, assets, intellectual property, etc.); the transaction value and the settlement procedure; the guarantees and obligations of the seller and the buyer; and the procedure for resolving disputes and possible sanctions for failure to comply with the terms of the transaction.

Transactions are subject to review by antitrust, tax and financial regulatory authorities.

Once the transaction has been completed, it is necessary to register the change in ownership with state registries, amend the articles of incorporation, and notify shareholders, creditors, and employees of the change in corporate structure. Also, ensure that new contractual obligations are fulfilled and internal procedures are adjusted.

Tax implications

Taxation will depend on the structure of the deal. Asset sales may be subject to VAT, duties and other levies. Share sales are most often subject to income or capital gains tax.

Some countries provide tax incentives for reinvesting the proceeds of an M&A transaction in business development, using tax credits or deferred tax liabilities, and reducing the corporate tax rate on mergers.

The acquiring company typically assumes the tax debts and liabilities of the acquired company, the obligation to submit to additional tax audits and possible legal claims related to past tax violations.

In the case of international M&A transactions, it is important to consider profit sharing requirements between countries, the need to justify the prices of domestic transactions between companies, and double taxation in the absence of relevant treaties between countries.

Unrecognised tax liabilities may result in fines and penalties for non-payment of taxes, litigation with tax authorities, loss of tax benefits and increased tax burden.

In addition to basic taxes, M&A transactions may be subject to filing fees for changes in corporate documents, state duties on transfer of ownership, and capital gains taxes if the transaction involves a significant increase in the value of assets. Also, don’t forget about local taxes if the company operates in multiple jurisdictions.

Global M&A Trends 2024–25

According to GlobalData, there were 50,523 M&A deals worldwide in 2024, a 6.7% decrease from the previous year. Declines were seen across all market segments: venture capital deals fell by 17.2%, private equity deals by 2.1%, and direct acquisitions between companies by 0.4%.

By region, North America (-10.6%) and South America (-15.2%) saw the most significant decline in activity, followed by Europe (-6.7%), the Middle East and Africa (-4.7%). Asia-Pacific was the most resilient region, with activity falling by only 1.4%. Strong growth was seen in India (+13.7%), Japan (+30.2%), and South Korea (+8.2%).

Regarding deal volume, the global market showed a slight recovery, with the value of announced deals increasing by 5% in 2024 compared to 2023, while the number of deals decreased by 17%.

In the US, total deal value increased by 6%, and in the UK, it also increased, despite the general downturn in Europe, thanks to a few mega deals.

Meanwhile, the number of large deals is growing; in 2024, there were over 500 deals worth over $1 billion, of which 72 were 'mega deals' worth over $5 billion. The three largest deals in 2024 were in different sectors: retail (Dealroom.net), the financial sector, and IT (PwC).

ESG factors in M&A

In recent years, environmental, social and governance (ESG) factors have had an increasingly significant influence on M&A transactions. Companies and investors now take these factors into account when evaluating potential acquisitions and conducting due diligence.

According to Deloitte, 91% of respondents (large company leaders and private equity investors) reported high confidence in their ability to assess the ESG profile of a target company. In 2024, 72% of respondents admitted to having turned down a deal because of 'red flags' in ESG.

In other words, poor ESG performance can derail deals: a poor environmental history, labour disputes, or weak corporate governance can force a takeover to be abandoned. Conversely, good ESG management can create synergistic value, for instance, through resource savings and improved reputation.

Organisations are increasingly integrating ESG into their deal strategy, taking advantage of improved analytics and data on non-financial risks. According to a KPMG survey, despite slowing markets, deals involving ESG due diligence are on the rise; leading investors are linking ESG to their investment strategy and looking for value in compliance and sustainable growth.

ESG factors, therefore, influence both deal strategy (selecting targets with a green profile) and post-deal integration (e.g. implementing sustainability policies).

Digital technology, AI, and automation in M&A

Modern digital technologies and artificial intelligence (AI) are becoming increasingly prevalent in the M&A process. They can speed up routine tasks and improve the quality of analyses. For instance, AI is already being used for due diligence to process large volumes of documents: algorithms can automatically sort, organise and summarise information from hundreds of contracts and financial reports, thereby significantly speeding up the process.

According to an analysis by EY, AI solutions can help to identify problem areas and deal with risks earlier, thereby increasing the efficiency of a company's due diligence. Additionally, machine learning–based analytics platforms can identify potential acquisition targets, predict synergies, and model integration scenarios.

Automation also extends to deal management, including workflow and negotiations, as well as post-integration processes such as data consolidation and joint planning. Consequently, digital transformation renders M&A processes more responsive, thereby reducing the impact of human error.

At the same time, experts emphasise that the role of humans is not disappearing. AI is a decision support tool, but experienced specialists are still responsible for the final analysis and strategic decisions.

Post-deal integration (PMI): challenges and best practices

Successful PMI is a critical stage that largely determines the outcome of a deal. The main challenges here are merging company cultures and processes, retaining key employees, and realising intended synergies.

A lack of attention to integration is often the cause of M&A failures. According to various estimates, 70–90% of deals fail to deliver the expected value, frequently due to problems at the integration stage. This is known as the 'failure' of the deal. To minimise these risks, it is recommended that integration planning begins early (by creating a dedicated PMI team before the deal is finalised), that communication is transparent, and that a common corporate culture is established.

It is also important to define the KPIs of integration success in advance and assign responsibility at all levels. The human factor is also critical: maintaining the loyalty and motivation of staff, especially top managers and those with corporate knowledge, is essential.

Best practice includes creating an Integration Management Office, clearly dividing tasks between management teams from both companies and elaborating on technical and operational integration step by step (IT systems, financial processes and trade chains).

Finally, successful integration requires flexibility, so be prepared to adapt plans during the process and react quickly to unexpected challenges.

Risks: geopolitical instability and global trends

Today's M&A deals are taking place amid high levels of geopolitical and economic uncertainty. In 2024, the global trend of rising interest rates and trade tensions slowed M&A activity worldwide. KPMG notes that higher interest rates and 'geopolitical tensions' have 'impacted deals': markets have slowed, and investors' priorities have shifted towards more conservative strategies.

Russia's military aggression against Ukraine, sanctions, protectionism, and logistical disruptions are forcing investors to assess risks more carefully. Many companies are avoiding deals involving risky jurisdictions and strengthening their due diligence on antitrust and export restrictions.

At the same time, however, some countries view M&A as an economic policy instrument: for example, the anticipated change in leadership in the US (with Donald Trump's potential presidency) could lead to reduced regulation and new incentives for deals. However, the market is not losing its fears: inflation, a shortage of engineering talent, and supply gaps (especially in technology and raw materials) pose additional barriers.

In the context of global turmoil, the bottom line is that M&A transactions require increased attention to risks. Key factors include political stability, currency and trade policies, and macroeconomic trends such as GDP growth and inflation rates.

Despite these challenges, M&A activity has historically remained sensitive to economic cycles. Analysts predict that lower interest rates and an influx of 'cheap' money should gradually revitalise activity in the coming years.