Mergers and Acquisitions (M&A) refer to transactions between two companies combining in some form.
Although mergers and acquisitions (M&A) are used interchangeably, they come with different legal meanings.
In a merger, two companies of similar size combine to form a new single entity.
On the other hand, an acquisition is when a larger company acquires a smaller company, thereby absorbing the business of the smaller company.
M&A deals can be friendly or hostile, depending on the approval of the target company’s board.
Why Do Companies Keep Acquiring Other Companies Through M&A?
Two of the key drivers of capitalism are competition and growth.
When a company faces competition, it must both cut costs and innovate at the same time.
One solution is to acquire competitors so that they are no longer a threat.
Companies also complete M&A to grow, by acquiring new product lines, intellectual property, human capital, and customer bases. Companies may also look for synergies.
By combining business activities, overall performance efficiency tends to increase and across-the-board costs tend to drop, as each company leverages off of the other company’s strengths.
Why Are Mergers and Acquisitions Important To a Company’s Overall Growth?
In a merger, two companies combine to form one company. In an acquisition, one company or investor group buys another.
Companies merge for strategic reasons to improve overall performance of the merged firm through cost savings, eliminating overlapping operations, improving purchasing power, increasing market share, or reducing competition.
Desired company growth, broadened product lines, and the rapid acquisition of new markets, technology, or management skills are other motives.
Another motive for merging is financial restructuring—cutting costs, selling off units, laying off employees, and refinancing the company to increase its value to stockholders.
There are three types of mergers:
In a horizontal merger, companies at the same stage in the same industry combine for more economic power, to diversify, or to win greater market share.
A vertical merger involves the acquisition of a firm that serves an earlier or later stage of the production or sales process, such as a supplier or sales outlet.
In a conglomerate merger, unrelated businesses come together to reduce risk through diversification.