Essay Preview: M&A
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The phrase mergers and acquisitions (M&A) refers to the aspect of corporate strategy, corporate finance and management dealing with the buying, selling and combining of different companies that can aid, finance, or help a growing company in a given industry grow rapidly without having to create another business entity.
Although they are often uttered in the same breath and used as though they were synonymous, the terms merger and acquisition mean slightly different things. When one company takes over another and clearly established itself as the new owner, the purchase is called an acquisition. From a legal point of view, the target company ceases to exist, the buyer swallows the business and the buyers stock continues to be traded. In the pure sense of the term, a merger happens when two firms, often of about the same size, agree to go forward as a single new company rather than remain separately owned and operated.
Merger and acquisition activity is concentrated where there is an active stock market and trading in second-hand shares. The management strategy literature presents a range of theories justifying mergers and acquisitions:
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generation of synergies where one firm is weak in one or more areas and the other firm offer’s complementary strengths;
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increase in market dominance of the two firms if they consolidate as this will increase their market share;
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so-called economies of scale will arise, particularly where the M&A rationalizes duplications and results in a larger integrated operation; and,
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to discipline managers and install best-practice systems to improve performance.
In most cases, the acquiring companies will pay a substantial premium on the market value of the company they acquire. The reason for this relates to the notion of synergy: a merger or acquisition will benefit shareholder value when a companys post-merger share price increases by the value of potential synergy. Looking at it from the other perspective, it would be highly unlikely for rational owners of a company to sell their equity if they would benefit more by not selling.