The market for mergers and acquisitions (M&A) is a key part of many public firms growth strategies. Large public companies that have excess cash typically seek opportunities to acquire other companies to gain organic growth. M&A is typically a merger of two companies in the same industry, with similar levels in the supply chain.
In general, a business can purchase another for cash, stock, or debt. The investment bank that is involved in the sale will sometimes provide financing to company that is buying it (known as staple financing).
M&A usually starts with a thorough examination of the target company including financial reports along with management and business plans, as well as other pertinent information. The process, also known as valuation, is performed by the acquiring firm or by consultants. The company who performs the valuation has to consider more than just financial information. They also have to take into consideration other factors like the cultural fit and other factors that will impact the success of the deal.
The most common reason for a company to conduct a merger or acquisition is to boost growth. The size of the company increases its bargaining power as well as lowering costs. Another reason to diversify is that it adds to a company’s ability to withstand cyclical downturns or provide more stable revenues. Additionally, some companies buy competitors to increase their standing in the market and eliminate potential threats. This is referred to as defensive M&A.
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