The market for mergers and acquisitions (M&A) is a major component of a lot of public firms’ growth strategies. Large public companies that have excess cash are often looking for opportunities to acquire for organic growth. For the most part, M&A involves two companies that are in the same field and at a similar level of the supply chain working together to create value.
In general, a business may purchase another in exchange for cash, stock, or debt. The investment bank that is involved in the sale may sometimes provide financing to the buyer’s firm too (known by the term staple financing).
M&A usually starts with a thorough analysis of the target business, including financial reports including management and business plans, as well as other pertinent data. This process is known as valuation and can be carried out by the acquirer’s company or outside consultants. Typically, the firm performing valuation must take into account more than only financial data, including the fit of its culture and other factors which will affect the outcome of the deal.
Growth is the most common reason for a merger or an acquisition. The size of the business increases its bargaining power, and it reduces costs. Diversification is another way to improve a company’s capability to weather downturns within the economy or to provide a more stable income. Additionally, some companies buy competitors to establish their place in the market and to eliminate the possibility of future threats. This is referred to as defensive M&A.