The merger and acquisition (M&A), market is a key part of the growth strategy of many public companies. Large public companies with excess cash are usually looking for acquisition opportunities to achieve organic growth. In the majority of cases, M&A involves two companies in the same industry and at similar levels of the supply chain coming together to create value.
In general, a company could purchase another for cash, stock, or even debt. The investment bank that is involved in the sale may sometimes provide financing to the buyer’s company as well (known as 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, is carried out by the acquiring firm or consultants. The company that performs the valuation needs to take into account more than just financial information. They also have to consider other aspects like the culture fit and other factors that can impact the success of the deal.
The most common reason for a company to conduct a merger or acquisition is to boost growth. The size of the business increases its bargaining power and reduces costs. Diversification is another reason to increase the capacity of a company to weather downturns within the economy or to earn a more stable income. Lastly, some companies acquire competitors to solidify their position in the market and remove the possibility of future threats. This is referred to as defensive M&A.