Mergers and Acquisitions refers to the aspect of corporate strategy, corporate finance and management dealing with the buying, selling and combining of different companies that can aid, finance, or help a growing company in a given industry grow rapidly without having to create another business entity. A merger is a combination of two companies to form a new company, while an acquisition is the purchase of one company by another in which no new company is formed.
Definition The main idea: – “One plus one makes three”. The equation is specially based on Merger or Acquisition. The key principle behind buying a company is to create share holder value over and above that of the sum of the two companies. Two companies together are more valuable than two separate companies together.
An acquisition is the purchase of one company by another company. Acquisitions are actions through which companies seek economies of scale, efficiencies and enhanced market visibility. All acquisitions involve one firm purchasing another – there is no exchange of stock or consolidation as a new company. Acquisitions are often congenial, and all parties feel satisfied with the deal. Acquisition has become one of the most popular ways since 1990. Companies choose to grow by acquiring others to increase market share, to gain access to promising new technologies, to achieve synergies in their operations, to tap well-developed distribution channels, to obtain control of undervalued assets, and a myriad of other reasons. So, because of the appeal of instant growth, acquisition is an increasingly common way to expand.
2. Mergers: The combining of two or more entities into one is called merger. Therefore, a merger happens when two firms agree to go forward as a single new company rather than remain separately owned and operated.
What makes Mergers and Acquisitions? These motives are considered for making of mergers and acquisitions:
1. Economy of scale: This refers to the fact that the combined company can often reduce its fixed costs by removing duplicate departments or operations, lowering the costs of the company relative to the same revenue stream, thus increasing profit margins.
2. Economy of scope: This refers to the efficiencies primarily associated with demand-side changes, such as increasing
3. Synergy: Better use of complementary resources.
4. Taxes: A profitable company can buy a loss maker to use the target’s loss as their advantage by reducing their tax liability.
5. Geographical Diversification: This is designed to smooth the earnings results of a company, which over the long term smoothen the stock price of a company, giving conservative investors more confidence in investing in the company.
6. Empire building: Managers have larger companies to manage and hence more power.
7. Increased revenue or market share: This assumes that the buyer will be absorbing a major competitor and thus increase its market power (by capturing increased market share) to set prices.
8. Cross-selling: For example, a bank buying a stock broker could then sell its banking products to the stock broker’s customers, while the broker can sign up the bank’s customers for brokerage accounts. Or, a manufacturer can acquire and sell complementary products.
9. Resource Transfer: Resources are unevenly distributed across firms and the interaction of target and acquiring firm resources can create value through either overcoming information asymmetry or by combining scarce resources.