The merger and acquisition (M&A), market is a vital part of the growth strategy for many public companies. Large public companies with surplus funds are often seeking acquisition opportunities to achieve organic expansion. M&A is usually a merger of two companies that are in the same industry, at similar levels of the supply chain.
In general, a company may purchase another in exchange for cash, stock or even debt. The investment bank that is involved in the sale may sometimes provide financing to the company that is buying it (known as staple financing).
M&A begins with an assessment of the target, which includes financial reports along with business plans, management plans, as well as any other pertinent information. This process is referred to as valuation and is carried out by the company that is buying it or outside consultants. Typically, the business performing valuation must consider more than just financial data, for instance, culture fit and other factors that will impact success of the deal.
The most common reason for a company to create a merger is to boost growth. Adding to the size of an organization gives it economies of scale that reduce operating costs and improves bargaining power with suppliers of raw materials, technology or services. Diversification is another reason to increase a company’s capacity to weather downturns within the economy or to provide an income that is more stable. Lastly, some companies acquire competitors to increase their standing on the m&a market state market and eliminate any potential threats. This is known as defensive M&A.
