The market for mergers and acquisitions (M&A) is a key part of many public companies growth strategies. Large public companies with excess funds are often seeking opportunities to acquire for organic expansion. For the most part, M&A involves two companies within the same industry and at the same level of the supply chain coming together to create value.
Generally, a company can purchase another one for cash, stock or the assumption of debt. Sometimes, the investment bank involved in the sale of a company will provide financing to the acquiring company (known as the staple financing).
M&A begins with an evaluation of the target, which includes financial reports along with business plans, management plans, and other pertinent information. This process is referred to as valuation and is carried out by the acquiring company itself or outside consultants. Typically, the company that conducts valuation should consider more than just financial data, such as culture fit and other factors that will impact success of the deal.
The most common reason to do a merger or acquisition is to increase the size of the company. In addition, increasing the size of a company gives it economies of scale, which reduces operational costs and increases bargaining power with suppliers of raw materials, technologies or services. Another reason is diversification, which helps a business to weather downturns in the market or provide more stable revenue. Certain companies buy competitors to increase their standing in the market and remove potential threats. This is referred as defensive M&A.