Business / M&Amp;Amp;A


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Autor:  anton  28 January 2011
Words: 554   |   Pages: 3
Views: 561

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 buyer's 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:

 generation of synergies where one firm is weak in one or more areas and the other firm offer’s complementary strengths;

пЃ¬ increase in market dominance of the two firms if they consolidate as this will increase their market share;

пЃ¬ so-called economies of scale will arise, particularly where the M&A rationalizes duplications and results in a larger integrated operation; and,

пЃ¬ 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 company's 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. In other words, a premium price has to be paid if a company wants to acquire another company, regardless of what the pre-merger market value is. Thus, for sellers the premium represents their company's future prospects, whereas for buyers the premium represents part of the post-merger synergy they expect to achieve.

The general supposition is that merger and takeover is a good thing because there will be benefits accruing to the larger company after the deal is done. Although we presented the many benefits that can arise from mergers and acquisitions, not all mergers and acquisitions are a success. Many of the surveys that compare post-acquisition performance with that before the deal are critical, often because due diligence was not well executed and expectations exceeded the real productive and financial fundamentals of the business being acquired.

Therefore, a great deal of importance is attached to the �due diligence’ test to avoid poor financial performance after the consolidation of two companies. This involves a careful check of a company’s report and accounts and the underlying assumptions made by the firm being taken over. Does it have sufficient insurance cover? Are commodity prices and material costs sufficiently hedged against price increases? Are the firm’s overseas sales hedged against currency risks? Does the firm you are acquiring have a strong customer base, and are suppliers reliable and sustainable into the future?

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