WHAT IS M & A ? WHY M & A ? STEPS IN M & A DEAL ?
MERGERS AND ACQUISITIONS (M&A)
Mergers and acquisitions
and corporate restructuring - or M&A for short - are a big part of the corporate
finance. One plus one makes three: this equation is the special alchemy of a
merger or acquisition. The key principle behind buying a company is to create
shareholder value over and above that of the sum of the two companies. Two companies
together are more valuable than two separate companies -at least, that’s the
reasoning behind M&A. This idea is particularly attractive to companies
when times are tough. Strong companies will act to buy other companies to
create a more competitive, cost-efficient company. The companies will come
together hoping to gain a greater market share or achieve greater efficiency.
Because of these potential benefits, target companies will often agree to be
purchased when they know they cannot survive alone.
A corporate merger is
essentially a combination of the assets and liabilities of two firms to form a
single business entity. Although they are used synonymously, there is a slight
distinction between the terms ‘merger’ and ‘acquisition’.
Strictly speaking, only a corporate combination in which one of the companies
survives as a legal entity is called a merger. In a merger of firms that are
approximate equals, there is often an exchange of stock in which one firm
issues new shares to the shareholders of the other firm at a certain ratio. In
other words, a merger happens when two firms, often about the same size, agree
to unite as a new single company rather than remain as separate units. This
kind of action is more precisely referred to as a “merger of equals.” Both companies’
stocks are surrendered, and new company stock is issued in its place. When a
company takes over another to become the new owner of the target company, the
purchase is called an acquisition. From the legal angle, the ‘target company’ ceases
to exist and the buyer “gulps down” the business and stock of the buyer continues
to be traded.
In summary, “acquisition” is generally
used when a larger firm absorbs a smaller firm and “merger” is used when
the combination is portrayed to be between equals. For the sake of discussion,
the firm whose shares continue to exist (possibly under a different company
name) will be referred to as the acquiring firm and the firm’s whose shares are
being replaced by the acquiring firm will be referred to as the target firm. However,
a merger of equals doesn’t happen very often in practice. Frequently, a company
buying another allows the acquired firm to proclaim that it is a merger of equals,
even though it is technically an acquisition. This is done to overcome some legal
restrictions on acquisitions.
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