The merger and acquisition (M&A) market is a vital part of the growth strategy for many public companies. Large public firms that have excess cash usually look for opportunities to buy other companies to achieve inorganic growth. In the majority of cases, M&A involves two companies that are in the same field and at similar levels of the supply chain joining together to generate additional value.
In general, a company may purchase another company for cash, stock or the assumption of debt. Sometimes the investment bank involved in the sale of one company will also finance the acquiring company (known as the staple financing).
M&A usually begins with a thorough assessment of the target company, including financial reports along with management and business plans, and other relevant data. The process is known as valuation and can be carried out by the acquirer’s company or outside consultants. The company who performs the valuation must consider more than just financial data. They must also consider other aspects like the cultural fit and other factors that will affect the success of the deal.
Growth is the most popular reason for a merger or acquisition. Adding to the size of the company can result in economies of scale which lowers operational costs and boosts bargaining power with suppliers of raw materials, technologies or services. Another reason is diversification, which enhances a company’s capacity to weather cyclical downturns or to generate more stable revenue. Certain companies purchase competitors to strengthen their position on the market and remove potential threats. This is known as defensive M&A.