The merger and acquisition (M&A) market is a crucial element of the growth strategy for many public companies. Large public firms that have excess cash typically seek opportunities to acquire other companies in order to achieve organic growth. M&A is usually a merger of two companies that are in the same industry, at similar levels in the supply chain.
In general, a company may purchase another company for cash, stock or the assumption of debt. The investment bank involved in the sale may occasionally provide financing to the buyer’s company as well (known as staple financing).
M&A starts with an assessment of the target, which includes financial reports and business plans, as well as management plans, and any other pertinent information. This process is referred to as valuation and can be carried out by the acquirer’s company or external consultants. The company that conducts the valuation needs to take into account more than just the financial information. They must also take into consideration other factors like the cultural fit and other aspects, which will affect the success of the deal.
The most frequent reason to make a merger or acquisition is for growth. The addition of size to the company can result in economies of scale, which reduces operational costs and increases bargaining power with suppliers of raw materials, technologies or services. Another reason is diversification, which helps a business to weather downturns in the market or provide more stable revenue. In addition, some companies purchase competitors to solidify their position in the market and eliminate the possibility of future threats. This is known as defensive M&A.
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