Merger & Acquisition
What Are Mergers and Acquisitions – “M&A”?
You probably would have heard about this definition: Mergers and acquisitions (M&A) is a general term used to describe the consolidation of companies or assets through various types of financial transactions.
Merger – M
A merger describes a scenario where two companies unite, and one of the companies ceases to exist after becoming absorbed by the other. Why does this happen? Because when a Merger occurs, two separate entities combine forces to create a new, joint organization. By the way, shareholders from both companies need to provide their approval before the Board of Directors can do this action.
Acquisition – A
Meanwhile, an acquisition refers to the takeover of one entity by another. An acquisition occurs when one company (the acquirer) obtains a majority stake in the target firm, which incidentally retains its name and legal structure.
When should M & A occur:
- When two entities wish to work together in one legal form: By combining business activities, overall performance efficiency tends to increase and across-the-board costs tend to drop, due to the fact that each company leverages off of the other company’s strengths.
- When you want to aim for growth – getting market share without incurring additional unnecessary costs: Mergers can give the acquiring company an opportunity to grow market share without doing significant heavy lifting. Instead, acquirers simply buy a competitor’s business for a certain price, in what is usually referred to as a horizontal merger.
- Controlling cost of products bought from supplier: By buying out one of its suppliers or distributors, a business can eliminate an entire tier of costs. Specifically, buying out a supplier, which is known as a vertical merger, often allows a company save on the margins the supplier was previously adding to its costs. By buying out a distributor, a company often gains the ability to ship out products at a lower cost.
- You want to eliminate Competition: Many M&A deals allow the acquirer to eliminate future competition and gain a larger market share. On the downside, a large premium is usually required to convince the target company’s shareholders to accept the offer. It is not uncommon for the acquiring company’s shareholders to sell their shares and push the price lower, in response to the company paying too much for the target company.
Come to us
If you need assistance in this area, do feel free to come to us. We can assist you and offer you our advice in order for you to make an informed decision. After that, do not fear as we will continue to help you out when you have decided to go into M&A with another company.
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