The market for mergers and acquisitions (M&A) is an important part of many public firms growth strategies. Large public companies with surplus funds are often seeking acquisition opportunities to achieve inorganic growth. In the majority of cases, M&A involves two companies in the same industry with similar levels of the supply chain coming together to produce additional value.
A company may buy another company for stock, cash or the assumption of debt. The investment bank that is involved in the sale will sometimes offer financing to the buyer’s firm too (known by the term “strategy financing).
M&A begins with an evaluation of the target, which includes financial reports and business plans, as well as management plans, and any other pertinent information. The process is known as valuation and can be carried out by the acquiring company or external consultants. Typically, the company that conducts valuation should consider more than only financial data, including the fit of its culture and other factors that will impact success of the deal.
The most popular reason to conduct a merger or acquisition is to increase the size of the company. The size of the business increases its bargaining power and lowers costs. Another motive is diversification which improves the ability of a business to weather downturns in the market or to generate more stable revenue. Certain companies purchase competitors to improve their position in the market and to eliminate potential threats. This is known as defensive M&A.