Introduction to Business Acquisition and Mergers

Author-Abhinav Katyal

Introduction

When two businesses consolidate it is what is referred to as mergers and acquisitions (M & A). Mergers are when two businesses come together to become one, whereas acquisitions are when one business is taken over by another. One of the crucial facets of corporate finance is merger and acquisition. The fundamental premise underpinning mergers and acquisitions is that joining two distinct businesses together results in more value creation than either company acting alone. Companies continue to assess various prospects via the merger or acquisition route with the primary goal of wealth maximization. In this, the combining or merging of two businesses always creates synergistic value. You may evaluate the synergy value either using the revenues, expenses, or overall cost of value.

Some of the comparative metrics are: –

1. Price-Earnings Ratio (P/E Ratio) – This ratio allows an acquiring business to make an offer that is a multiple of the target company’s earnings. The P/E multiple for the target will be best determined by the acquiring business by examining the P/E for all the companies in the same industry group.
2. Enterprise-Value-to-Sales Ratio (EV/Sales) – This ratio allows the purchasing firm makes a bid that is a multiple of revenues while once again taking into account the price-to-sales ratios of other businesses in the same sector.
3. Replacement Cost – In some cases acquiring is based on the total cost of replacing the company. 
4. Discounted Cash Flow (DCF)- It allows the company to determine the current value of the firm according the future value Forecasted free cash flows (net income + depreciation/amortization − capital expenditures − change in working capital) are discounted to a present value using the company’s weighted average costs of capital.

MERGERS AND ACUISITION 

Almost often, acquiring corporations pay a sizable premium above the valuation of the target companies on the stock market. A merger is beneficial to shareholders when a company’s post-merger share price rises by the value of possible synergy. This is the main argument for doing so almost usually. 

If sensible owners would gain more by staying there, they would be extremely reluctant to sell. Therefore, regardless of what the pre-merger value tells potential purchasers, they would still need to pay more if they wanted to buy the firm. That premium is the future prospects of the seller’s business. The premium for purchasers is a portion of the post-merger synergy they anticipate would be possible.

Companies engage in mergers and acquisitions for strategic business reasons, which are mostly financial in nature. These include expanding distribution capabilities or entering newer markets to increase market share; diversifying the range of products and services offered (business diversification); leveraging economies of scale that cover any, some, or all areas of research and development, production, and marketing (horizontal mergers); gaining professional leadership by being acquired (by a smaller company); and overcoming challenges in a systematic and macro environment by combining ranks.

WHAT FALLS UNDER MERGERS AND ACQUISITION 

Following transactions are part of Mergers and Acquisition (M&A) 

1. Mergers – The boards of directors of the merging firms accept the union and request shareholder approval.
2. Acquisition – In acquisition, the acquiring corporation buys the majority of the acquired company, which keeps its name and organizational structure unaltered.
3. Consolidations – By integrating core companies and doing away with outdated organizational structures, consolidation results in the creation of a new firm. Shares of common ownership in the new company are distributed to shareholders of the two firms who have approved the merger.
4. Tender Offers – In a tender offer, one business proposes to buy the other business’s outstanding shares for a predetermined amount rather than the going rate. Bypassing management and the board of directors, the acquiring business makes the offer straight to the shareholders of the target company.
5. Acquisition Of Assets- In this one firm directly purchases the assets of another company in an asset acquisition. The shareholders of the firm whose assets are being bought must consent. It is customary during bankruptcy procedures for other businesses to bid on different assets belonging to the bankrupt company, which is then liquidated following the ultimate transfer of assets to the purchasing businesses.
6. Acquisition Of Management – In a management acquisition, sometimes referred to as a management-led buyout (MBO), executives from one firm buy a majority interest in another, thus taking it private. In an effort to assist fund a deal, these former executives frequently collaborate with a financier or former company leaders. Such M&A deals often need a large amount of debt financing, and the majority of shareholders must consent.

CONCLUSION

To summaries, Mergers and Acquisitions is a way of firm to expand their business, and restructure their organizations for future. It can be a company’s future protection from the bankruptcy, and also can be a potential  growth factor for a firm.

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