The merger and acquisition (M&A) market is a crucial element of the growth strategy of many public companies. Large public companies that have excess funds are often seeking acquisition opportunities to achieve organic growth. Most of the time, M&A involves two companies in the same industry with similar levels of the supply chain coming together to generate additional value.
In general, a company may purchase another company for stock, cash or the assumption of debt. The investment bank involved in the sale will sometimes provide financing to the acquiring firm as well (known by the term «strategy financing).
M&A begins with an evaluation of the target. This includes financial reports and business plans, as well as management plans, and other relevant information. This process is known as valuation and can be carried out by the acquirer’s company or outside consultants. Typically, the company performing valuation must consider more than just financial data, such as cultural fit and other factors that can affect the success of the deal.
The most common reason for a company to make a merger or acquisition is to grow. By increasing the size of a business gives it economies of scale, which decreases operating costs and improves bargaining power with suppliers of raw materials, technologies or services. Diversification is another way to increase the capacity of a company to weather downturns in economy or provide more stability in income. Certain companies buy out competitors to increase their standing on the market and eliminate potential threats. This is referred to as defensive M&A.