Mergers Acquisitions

Mergers and acquisitions is an aspect of corporate strategy, corporate finance and management, dealing with the buying, selling, dividing and combining of different companies and similar entities that can help an enterprise grow rapidly.

A merger is a combination of two companies to form a new company, while an acquisition is the purchase of one company by another in which no new company is formed. Through mergers and acquisitions, a company can develop a competitive advantage and ultimately increase shareholder value.

Varieties of Mergers

From the perspective of business structures, there is a whole host of different mergers. Here are a few types, distinguished by the relationship between the two companies that are merging:

* Horizontal merger - Two companies that are in direct competition and share the same product lines and markets.

* Vertical merger - A customer and company or a supplier and company. Think of a cone supplier merging with an ice cream maker.

* Market-extension merger - Two companies that sell the same products in different markets.

* Product-extension merger - Two companies selling different but related products in the same market.

* Conglomeration - Two companies that have no common business areas. The concept of “conglomerate diversification” involves diversifying into products or services with no relationships to the existing business.

Motivations for M&A:

* Economies of scale: This refers to the fact that the combined company can often reduce its fixed costs by removing duplicate departments or operations, lowering the costs of the company relative to the same revenue stream, thus increasing profit margins.

* Increased revenue or market share: This assumes that the buyer will be absorbing a major competitor and thus increase its market power (by capturing increased market share) to set prices. Although this may be challenged by anti-trust/competition laws.

* Cross-selling: For example, a bank...