Many companies go through mergers and acquisitions on a regular basis and if you are looking to do the same you need to understand how the process works. Below our experts explain the basics.
Mergers and Acquisitions
Mergers and acquisitions, is the process of inorganic growth or expansion within a given business. With a merger, a business is going to join forces with another company in order to increase business prospects, market reach or general possibilities. With an acquisition, a company will purchase another business in order to integrate it into their existing business model. Both methods represent a scenario that is going to increase the reach of a particular business. Many of these deals can be very substantial in size. For example, most of them deal with amounts in excess of £50 million. Therefore, whenever a merger or acquisition takes place, you are likely to read about about it in the financial news and it will often be the subject of specialist financial PR.
The purpose of a company going through a merger or acquisition is simple (and often misunderstood). It is to increase shareholder value. They want to create a business that has the prospects of being more efficient whilst maximising the potential to bring in more profit for the shareholders. This can be done in a number of different ways when a merger or acquisition occurs.
When a merger or acquisition occurs, the company may be able to enhance efficiencies in a number of different ways. For example, most of the time they are going to reduce staff costs. This means that they will combine departments and eliminate unnecessary duplication or jobs which are no longer required. They are also going to take advantage of economies of scale now that they are larger with the combined purchasing power of the newly created business or ‘newco’. They will be able to negotiate lower prices on supplies and materials and save money overall. Another common reason that mergers or acquisitions occur is to purchase new technology. For example, if a smaller company owned a patent on a revolutionary new device, a larger company might purchase that company in order to gain access to the device.
Whenever a merger or acquisition is about to take place, the target company has to be evaluated. The company that is going to purchase the other company needs to know the approximate value of the target company. Analysts will use a variety of different techniques in order to arrive at the value of a company. They will compare the company against other similar companies. They will also use financial ratios in order to determine the true value of the company.
When a merger or acquisition occurs, it can impact investors in both companies drastically. Most of the time, a merger or acquisition is going to result in an increase in the price of the stocks involved. This means that most investors love to hear of a potential merger or acquisition. If a company is being acquired, the shareholders of the company will receive shares of stock in the purchasing company. This means that they might receive more or fewer shares of stock depending on the values of the two stocks.
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