The Merger and Acquisition Market

The market for mergers and acquisitions (M&A) is a significant component of a lot of public companies growth strategies. Public companies with excess cash typically look for opportunities to acquire other companies to gain organic growth. M&A is typically a merger of two companies from the same industry, at similar levels in the supply chain.

In general, a company may buy another for cash, stock or even debt. Sometimes, the investment bank involved in the sale of one company will also finance the acquiring company as well (known as”strategy finance”).

M&A starts with an evaluation of the target, which includes financial reports and business plans, as well as management plans, and any other pertinent information. The process, also known as valuation, can be performed by the firm that is buying the company or by consultants. Typically, the business performing valuation has to consider more than only financial data, such as cultural fit and other factors that affect the success of the deal.

The most frequent reason to do a merger or acquisition is for growth. The addition of size to an organization gives it economies of scale which lowers operating costs and improves bargaining power with suppliers of raw materials, technologies or services. Another motive is diversification which enhances a company’s capacity to weather downturns in the market or provide more stable revenue. Certain companies purchase competitors to improve their position on the market and remove potential threats. This is referred as defensive M&A.

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