The Merger and Acquisition Market
The merger and acquisition (M&A) market is a crucial element of the growth strategy for many public companies. Large public companies with excess funds are often seeking acquisition opportunities to achieve organic expansion. In the majority of cases, M&A involves two companies in the same industry at the same level of the supply chain coming together to produce additional value.
In general, a company may buy another company for stock, cash or the assumption of debt. Sometimes the investment bank involved in the sale of one company will also finance the buyer company too (known as staple financing).
M&A typically begins with a thorough assessment of the target company, including financial reports including management and business plans, as well as other pertinent information. The process, also known as valuation, may be carried out by the firm that is buying the company or consultants. The company who performs the valuation must consider more than just the financial information. They must also take into consideration other factors like the culture fit and other aspects, which can impact the success of the deal.
Growth is the primary reason for a merger or an acquisition. The addition of size to an organization gives it economies of scale which lowers operational costs as well as increases bargaining power with suppliers of raw materials, technology or services. Another motive is diversification which improves the ability of a business to weather cyclical downturns or to generate more stable revenue. Certain companies buy out competitors to increase their standing in the market and eliminate potential threats. This is referred as defensive M&A.