Beginner's Guide to Mergers and Acquisitions

Understanding the basics of mergers and acquisitions can help you make important investment decisions for your portfolio. Many companies go through mergers and acquisitions on a regular basis and you need understand how the process works. Here are the basics of mergers and acquisitions and how they work.

Mergers and Acquisitions

Mergers and acquisitions is the process of growth or expansion within a particular company. With a merger, a company is going to join forces with another company in order to increase business possibilities. With an acquisition, a company will purchase another company in order to integrate it into their existing business model. Both methods represent a scenario that is going to increase the reach of a particular business. Many of these deals can be very substantial in size. For example, most of them deal with dollar amounts in excess of $100 million. Therefore, whenever a merger or acquisition takes place, you are likely to hear about it on the financial news.

Purpose

The purpose of a company going through a merger or acquisition is to increase shareholder value. They want to create a business that is more efficient and can bring in more profit for the shareholders. This can be done in a number of different ways when a merger or acquisition occurs.

What Happens

When a merger or acquisition occurs, the company will be able to become more efficient in a number of different ways. For example, most of the time they are going to cut back on staff costs. This means that they will combine departments and eliminate unnecessary jobs. They are also going to take advantage of economies of scale now that they are much larger. They will be able to negotiate lower prices on materials and save money overall. Another common reason that mergers or acquisitions occur is to purchase new technology. For example, if a smaller company owned a patent on a revolutionary new device, a larger company might purchase that company in order to gain access to the device.

Valuation

Whenever a merger or acquisition is about to take place, the target company has to be evaluated. The company that is going to purchase the other company needs to know the approximate value of the target company. Analysts will use a variety of different techniques in order to arrive at the value of a company. They will compare the company against other similar companies. They will also use financial ratios in order to determine the true value of the company.

Investor Impact

When a merger or acquisition occurs, it can impact investors in both companies drastically. Most of the time, a merger or acquisition is going to result in an increase in the price of the stocks involved. This means that most investors love to hear of a potential merger or acquisition. If a company is being acquired, the shareholders of the company will receive shares of stock in the purchasing company. This means that they might receive more or fewer shares of stock depending on the values of the two stocks.

 

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