The merger and acquisition (M&A), market is a key part of the growth strategy for many public companies. Large public companies that have excess cash are usually looking for opportunities to acquire for organic expansion. In the majority of cases, M&A involves two companies in the same industry and at a similar level of the supply chain, coming together to generate additional value.
In general, a company could purchase another for cash, stock or even debt. The investment bank involved in the sale may occasionally provide financing to the buyer’s firm too (known by the term staple financing).
M&A begins with an assessment of the target. This includes financial reports and business plans, as well as management plans, and other pertinent information. This process, known as valuation, may be carried out by the firm that is buying the company or consultants. Typically, the business performing valuation must consider more than just financial data, including the fit of its culture and other factors that will impact success of the deal.
Growth is the most frequent reason for a merger or an acquisition. The size of the business increases its bargaining power, and it reduces costs. Diversification is another reason to enhance a company’s ability to weather downturns within the economy or to earn steady income. Certain companies buy competitors to strengthen their position in the market and to eliminate potential threats. This is referred to as defensive M&A.
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