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