Why do mergers and acquisitions happen?

Why do mergers and acquisitions happen?

Why do mergers and acquisitions happen?

Mergers and acquisitions is a process of bringing together two entities or assets and forming into one company by merging or acquiring. It aims to stimulate growth, gain competitive advantages, increase market share, influence supply chains, etc. However, there is a thin line between merger and acquisition. A merger is termed as uniting of two companies in which one of the companies ceases to exist post absorption by the other company. While an acquisition is when one acquiring company acquires a majority stakeholder of the target company which retains its name and legal structure.

  • Merger results in the formation of a completely new business, where the stockholders of both corporations agree of the alliance and receive mutual equity shares in the newly formed business.
  • The acquisition of assets occurs where one company obtains the assets of another, with the approval of the target entity's shareholders. This type of event often occurs in cases of bankruptcy, where ASC assists acquiring companies bid on various assets of the liquidating company.

Causes for Mergers and acquisitions:

  1. Synergies: By consolidating business activities, overall proficiency tends to rise and across-the-board costs tend to drop since each corporation tries to leverage off the other business's strengths.
  1. Growth: Mergers provide an opportunity for the other company to increase its market shares without high investment. Also, the acquirers buy a competitor's business for a certain price as a horizontal merger to increase the value of a business.
  1. Increase Supply-Chain Pricing Power: By purchasing out one of its suppliers or distributors, a company can eradicate an entire tier of costs. Under the vertical merger, usually a company saves the margins that supplier was previously adding to its costs and by buying out a distributor, business gains the ability to ship out goods at a lower cost.
  1. Eliminate Competition: Mergers and acquisitions permit the acquirer to eradicate future competition and gain a larger market share. Whereas a large premium is needed to convince the target company's shareholders to accept the offer. It is common for acquiring business's shareholders to sell their shares and push the lower price, in response to the company paying too much for the target company.



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