Mergers and acquisitions are common in today’s business world. They’re also a lot of fun. However, there are a few things you should understand before jumping into the deep end.
What is Business Merger and Acquisition?
A merger or acquisition occurs when two companies combine their resources to create something new. The acquiring company purchases all assets from the acquired company for cash. This can be done with an asset purchase agreement where both parties agree on the price paid by each party. It can also occur through a stock exchange. In this case, one company buys another company’s shares at market value.
The most popular type of M&A is called a friendly takeover. A friendly takeover happens when a larger corporation acquires a smaller competitor without using any legal means. For example, if PepsiCo wanted to buy Coca-Cola, they would not have had to go through a court battle because it was considered a friendly transaction.
Why Do Companies Merge & Acquire Each Other?
There are many reasons why businesses merge and acquire other companies. Some examples include:
1) Cost-Cutting – If a company has excess capacity that isn’t being used efficiently, merging with another company could help them save money. By combining forces, these companies will likely find ways to cut costs while still maintaining quality products.
2) Market Expansion – When a company wants to expand its reach, buying out another company may allow them to do so more easily than starting up its own operations. Buying out another company allows them to take advantage of the existing infrastructure and customer base.
3) Brand Protection – Sometimes a brand name becomes too well known within certain industries. As such, it makes sense for a large company to protect themselves against losing control over their brand. One way to do this is to buy out another company that owns the same brand as theirs.
4) Product Development – Another reason why companies might want to merge is to develop better products. Combining different ideas together creates unique solutions that no single company could come up with alone.
5) Technology Transfer – Many times technology transfer takes place between corporations. These transfers often involve patents and copyrights. Patents give inventors exclusive rights to use inventions for a specific period of time. Copyrights grant authors ownership of intellectual property like books, movies, music, etc.
6) Strategic Planning – Oftentimes, mergers happen due to strategic planning. Large organizations need to plan ahead to ensure success. Having access to multiple sources of information helps them make decisions about what direction to move forward.
7) Financial Reasons – There are some cases where a company simply needs extra capital to grow. An acquisition provides them with the funds needed to continue growing.
8) Legal Reasons – Sometimes, a company decides to merge with another company just to avoid having to deal with lawsuits. Since litigation is expensive, avoiding it altogether is usually cheaper than dealing with it later.
9) Political Reasons – Politics plays a role in every aspect of life. In fact, politics can be found everywhere from your local school board meeting to international relations. The merger or acquisition process involves political maneuvering on both sides. This includes lobbying politicians, negotiating contracts, and even bribing officials.
10) Personal Reasons – Finally, sometimes people decide to get married or start families. It doesn’t matter how big or small an organization is; family members always play a part in decision making.
How Does an Acquiring Company Decide to Buy Another Company?
There are many factors involved when deciding whether or not to acquire another company. Some of those include:
• Size – A larger acquiring company means they have greater resources at their disposal. Larger companies tend to offer bigger benefits packages that attract employees. Smaller companies don’t have the financial backing necessary to provide competitive salaries.
• Industry Experience – Companies that operate in similar fields know each other very well. Therefore, they already share knowledge and experience. When two companies combine forces, they create something new – a hybrid!
• Market Share – If one company has more market share than the other, then buying the smaller company will help increase its own sales. Buying a competitor gives the buyer a chance to gain customers without spending money advertising.
• Competitors – Acquisitions occur because competitors see potential growth opportunities. For example, if one company owns several factories but lacks marketing skills, merging with another company that does this would allow them to expand globally.
Is it Better for Shareholders if One Company Buys Out its Competitor?
The answer depends on why the original company was created in the first place. If the goal was to become successful, then yes, shareholders benefit by selling out to a large corporation. On the other hand, if the purpose behind creating the company was philanthropic, then no, shareholders do not benefit as much.
Are All Mergers Bad?
No, all mergers aren’t bad. Many good ones take place between businesses that complement each other perfectly. These types of mergers often result in increased profits. Other examples include combining different products together.
If you are looking for a business broker, Transworld Business Advisors is your best option. We can provide you with the best service and guidance as your business broker. With Transworld’s worldwide reach, we can help you find the right buyer for your business. Contact us today to learn more about our services.