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Mergers and Acquisitions: A Guide to Understand

Mergers and Acquisitions: A Guide to Understand

Mergers and Acquisitions Defined:

The term “mergers and acquisitions” (commonly labeled as simply M&A) refers to a fundamental aspect of corporate management, finance and overall strategy, where companies partake in the buying, selling and combining of different companies to aid, finance or increase growth in a specific sector. Rather than having to create another business entity or completely overhaul an already existing model, the process of mergers and acquisitions enables companies to increase market presence, economies of scale, and diversification through one maneuver.

Difference between Mergers and Acquisitions:

Although the terms are commonly linked together, a merger and an acquisition are two separate maneuvers. An acquisition takes place when one company purchases another; the buying company assumes or swallows the purchased company for a price. The purchased company no longer has its own stock and transfers over all control to the purchasing company. Dissimilar to this maneuver, mergers are a form of consolidation, where two companies combine together to form a new company. In a merger, the participating company’s shares transform into one all-inclusive stock. The management and resources of the company are pooled together; that being said, a merger of equals, given the differences in size, market share and capital, is unlikely. As a result, a present-day merger typically occurs when one company buys another, but utilizes the purchased company’s resources and human capital. In essence, the purchased company still has a presence, but the majority of control is transferred to the buying company.   

The process of mergers and acquisitions may be executed with private or public companies, depending on whether the acquiree is or isn’t listed on a public exchange. Furthermore, the process of mergers and acquisitions may be executed in either a friendly or hostile manner. In contrast to an acquisition, mergers occur when two firms agree to move forward as a single, newly-formed company—as oppose to two separately owned and operated companies. This process typically occurs with companies that are similar in size, market presence and capital. In a merger, both companies’ stocks are surrendered and a new stock is issued to the public in its place. A famous example of a merger took place in 1999, when GlaxoWellcome and SmithKline Beecham agreed to agglomerate their resources and form a new company, GlaxoSmithKline.

In practice, mergers of equals don’t happen often; companies are rarely the same size. In most mergers, one company will buy another and, as part of the terms and conditions expressed in the mergers contract, allow the acquired company to proclaim that the deal is a merger of equals. That being said, being bought by another company typically carries negative connotations; therefore, by stating the deal was a merger, top executives and managers at the bought firm can view the takeover as more palatable. Similar in structure, a purchase deal may also be referred to as a merger; this transaction occurs when both CEOs agree that combining resources is in the best interest of each individual company. 

Benefits of Mergers and Acquisitions:

The basic rationale used to explain mergers is that the acquiring company seeks to improve their financial performance. The following reasons provide brief explanations as to why a company would partake in a merger:

Economies of Scale: The combined company can reduce its fixed costs by removing duplicate operations or departments; by lowering the costs of the companies, relative to a fixed revenue stream, the companies will enjoy increased profit margins

Increased Revenue and Market Share: The buyer in a merger absorbs a competitor and thus increases its market power

Taxation: A profitable business may buy a defunct company to use the acquired firm’s losses to their advantage by reducing their tax liability.


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