Course → Unit 10: Advanced Topics → Lesson 10.1

Mergers and Acquisitions (M&A)

Some of the single biggest one-day stock price jumps in market history didn't come from a blowout earnings report — they came from a company announcing it was being bought, which is why understanding how deals get done, and how to judge whether they make sense, is one of the most practically useful skills in finance.

Why companies buy each other: strategic rationale

Nobody pays a premium to acquire a company for fun. Every deal has a rationale, even if it's later proven wrong. The most common reasons fall into a few buckets:

• Horizontal acquisitions — buying a direct competitor to gain market share, reduce competition, or achieve scale. If two rival bubble tea chains merge, the combined company can negotiate better prices with suppliers and close overlapping stores.
• Vertical acquisitions — buying a supplier or a customer to control more of the supply chain. A phone maker buying a chip designer secures its own component supply and denies it to rivals.
• Synergies — the financial term for the extra value created when two companies combine, beyond what they were worth apart, usually expressed as "1 + 1 = 3." Synergies come from cutting duplicate costs (two head offices become one), cross-selling products to each other's customers, or combining technology neither company could build alone.
• Acquiring talent or technology — sometimes called an "acqui-hire," where the real prize is a team or a piece of technology rather than the target's revenue. Facebook's 2012 purchase of Instagram for roughly $1 billion, when Instagram had barely any revenue, is the classic example: Facebook was buying a product, a team, and a threat removed, not a P&L.
• Diversification and new markets — buying into a new geography or product category faster than building it from scratch.

The deal process: from initial approach to close

Real M&A deals move through a fairly consistent sequence, even though the details vary:

1. Initial approach — the acquirer (or its investment bank, see Lesson 10.2) makes contact, often informally, to gauge whether the target's board is open to a sale.
2. Non-disclosure agreement (NDA) and due diligence — once there's mutual interest, the target opens its books. The acquirer's lawyers, accountants, and bankers pore over financial statements, contracts, and legal risks to confirm the business is what it claims to be.
3. Valuation and negotiation — both sides argue over what the company is worth, using the tools from Lesson 9.4 (DCF, comparable multiples) as ammunition, and negotiate a price, usually expressed as a premium over the target's current share price.
4. Definitive agreement — a legally binding contract is signed, specifying price, structure (cash or stock — see Lesson 10.2), and conditions.
5. Regulatory approval — competition authorities (in Singapore, the Competition and Consumer Commission of Singapore, or CCCS) review whether the deal would reduce competition too much. Large cross-border deals may need approval in multiple countries.
6. Shareholder vote — the target's shareholders must usually approve the deal.
7. Closing and integration — money and shares change hands, and the much harder work of actually merging two companies' systems, cultures, and teams begins. Most studies suggest a large share of mergers fail to deliver the promised synergies precisely because integration is underestimated.

Accretion and dilution: how acquirers think about deal maths

Before any deal closes, an acquirer's finance team runs a simple but crucial test: will this deal increase or decrease our earnings per share (EPS)? A deal is accretive if it increases the acquirer's EPS after the deal, and dilutive if it decreases it. This matters because the stock market often reacts to EPS changes directly — a dilutive deal can send an acquirer's share price falling even if the strategic logic is sound.

The intuition is easiest to see with a stock-for-stock deal. Consider Acquirer Co., with $200 million in net income and 100 million shares outstanding, giving it EPS of $2.00. Its stock trades at $40, so its price-to-earnings (P/E) ratio is 20. It agrees to buy Target Co., which earns $50 million in net income across 50 million shares (EPS of $1.00) and trades at $15 (P/E of 15), paying entirely in Acquirer stock at Target's current market value.

The reason it worked out this way: Acquirer's stock was "more expensive" per dollar of earnings (P/E of 20) than Target's (P/E of 15). Every dollar of Acquirer stock issued bought more than a dollar's worth of Target's earnings, at least relative to Acquirer's own valuation. As a rule of thumb, buying a lower-P/E company using higher-P/E stock tends to be accretive — which is exactly the setup in this lesson's self-check below.

Hostile vs friendly takeovers

Most M&A deals are friendly takeovers: the acquirer approaches the target's board, both sides agree the deal makes sense, and the board recommends shareholders accept it. A hostile takeover happens when the target's board rejects the approach, but the acquirer pursues the deal anyway — usually by taking the offer directly to shareholders through a tender offer (a public offer to buy shares directly, bypassing the board) or by trying to replace the board through a proxy fight (convincing shareholders to vote out the directors who are blocking the deal).

Boards facing unwanted attention have developed defenses with colorful names, most famously the poison pill: a plan that lets existing shareholders (other than the hostile bidder) buy additional shares at a steep discount if a single buyer crosses a certain ownership threshold, diluting the acquirer's stake and making a takeover prohibitively expensive.

Case study: Grab and Uber's Southeast Asia merger

In March 2018, Uber announced it was selling its entire Southeast Asian operations — ride-hailing and food delivery across Singapore, Malaysia, Indonesia, and beyond — to its regional rival Grab. Rather than a cash sale, Uber received a 27.5% equity stake in Grab in exchange, and Uber's CEO joined Grab's board. It was, in effect, Uber admitting it could not profitably out-compete Grab in the region and choosing to take an ownership stake in the winner instead of continuing to burn cash fighting it.

For Grab, the deal consolidated its dominant position in Southeast Asian ride-hailing overnight — exactly the kind of horizontal, market-share-driven rationale described above. But it came with a cost: the Competition and Consumer Commission of Singapore investigated the deal and, in 2018, fined both Grab and Uber a combined S$13 million for substantially reducing competition in the ride-hailing market, and imposed behavioural remedies on Grab (such as not entering exclusive arrangements with drivers) for a period afterward. The case is a useful reminder that "the deal process" above is not just a formality — regulators genuinely can, and do, intervene when a merger threatens competition, even after the companies involved have already agreed to terms.