Merger and acquisition also known as M&A is considered as one of the most unusual aspects of business and finance. To be specific, merger is when 2 companies of equal size decides to join together in order to boost their sales and profits. Both surrender their stocks and new stock is issued.
On the other hand, acquisition is when a company that struggles financially gets purchased by a larger one, who then gets all of the former’s stock and makes it as a core part of their business.
Acquisition is more likely to be dry, as one entity always purchases the other. More often, this can be friendly and decided by both. However, there are times that a company is purchased out even though it is unreceptive to the idea.
Mergers have various types though, meaning, you have to look into the definitions before you make a decision on which one you like to enter into. You don’t want to suffer from the consequences of bad decisions or choice, right?
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Fundamentally, there are 2 ways on how you can go about a merger. This is whether it is a consolidation merger or purchase merger. Typically, whether one purchases out the other, but they both agree for it to be called a merger, or whether they become a new company together.
The following are the types of merger that you have to be knowledgeable of:
• Horizontal Merger – 2 companies on the same level join together in order to boost their sales and profit
• Vertical Merger – 2 companies on varying levels of the product line join together so that a retailer and a manufacturer can join force. The examples of these are as follows:
Product-extension Merger – 2 companies in the same retails area, but with diverse products merge.
Market-extension Merger – 2 companies selling the same product to varying markets join force.
Conglomeration – 2 unrelated businesses join force.
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There are times that businessmen really find it hard to decide on which of the 2 to go for. Often, companies will be unbalanced when it comes to size, so the larger one may choose to acquire, while the other chooses to merge. However, this is not always true in most cases. Deals can be frequently made and a buy merger might happen.
One example of this is when 2 companies join force in either way, a major competitor on the market is eliminated, leaving what must be a lucrative business with a bigger market share, so M&As are a very lucrative way on how to expand businesses if conducted properly.
In general, merchant banks or investment bankers handle the bigger transactions in this area. However, small and medium-sized businesses contemplate or complete such transactions.
When a management team or business owner contemplates an M&A, there is a technique used behind the transaction.
Several companies realize that there is a risk element and business component in order to branching out to their businesses. Diversification is one of the most commonly discussed topics in all the financing areas which include the preferred financial strategies of businessmen. Companies who acquire or merge with other firms for the process of diversification understand that they are lowering the overall risk of the business.
Several times, there are some old-time synergies that can make any M&A transaction appealing. If a certain firm has a good brand and they may add extra products to that brand, the sales and profits will grow dramatically.
In the present economic and environment, there are several struggling or undervalued companies. They can possibly be purchased at just a bargain, and may be worth several times their present valuation because of certain circumstances.
Another reason as to why companies greatly consider a merger is its ability in lowering cost while increasing the revenue. That is a common scenario in which the costs can be lowered in operating and overhead expense departments. In some cases, for an instance, efficiencies can be realized in a manufacturing company. Unluckily, there are times that this comes at a human cost. This is because downsizing is usual in this aspect of M&A.
There are also cases when an acquisition can be an existing management purchasing the company from the existing owners. This is referred to as a leveraged buyout or LBO. The management typically puts in some brand new equity into the company. In numerous circumstances, the assets o the company are refinanced all at the same time.
Merger and acquisition is a unique aspect in the field of business financing. Owners must always have a solid underlying principle and strategy in order to successfully contemplate this kind of transaction.
This is the reason why if you are planning to venture into business, you should have knowledge on what merger and acquisition is. By having proper guidance, you will not suffer from the consequences of any bad decisions.