What is Mergers & Acquisitions (M&A)
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Mergers and acquisitions (M&A) is the area of corporate finances, management and strategy dealing with purchasing and/or joining with other companies. In a merger, two organizations join forces to become a new business, usually with a new name. Because the companies involved are typically of similar size and stature, the term “merger of equals” is sometimes used.
In an acquisition, on the other hand, one business buys a second and generally smaller company which may be absorbed into the parent organization or run as a subsidiary. A company under consideration by another organization for a merger or acquisition is sometimes referred to as the target.
How M&A works?
A merger is the combination of two similarly sized companies combined to form a new company. An acquisition occurs when one company clearly purchases another and becomes the new owner. A merger or an acquisition usually starts out with a series of informal discussions between the boards of the companies, followed by formal negotiation, a letter of intent, due diligence, a purchase or merger agreement, and finally, the execution of the deal and the transfer of payment.
Quite often, these transactions can take six to nine months (smaller deals often take less time and larger deals often take more time), and they can be complex, particularly from legal and accounting perspectives. For these reasons, companies often hire investment bankers or other intermediaries to facilitate M&A transactions.
Benefits of M&A
Birds Eye View of the Benefits Accruing from Mergers and Acquisitions
The principal benefits from mergers and acquisitions can be listed as increased value generation, increase in cost efficiency and increase in market share.
Mergers and acquisitions often lead to an increased value generation for the company. It is expected that the shareholder value of a firm after mergers or acquisitions would be greater than the sum of the shareholder values of the parent companies.
An increase in cost efficiency is effected through the procedure of mergers and acquisitions. This is because mergers and acquisitions lead to economies of scale. This in turn promotes cost efficiency. As the parent firms amalgamate to form a bigger new firm the scale of operations of the new firm increases. As output production rises there are chances that the cost per unit of production will come down.