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What You Need To Know About Mergers And Acquisitions

Mergers and acquisitions are a huge part of the corporate world and most people are not aware of what they really entail. Several merger and acquisition transactions are carried out today and they are based on bringing together two companies to form one. While these two terms are often used interchangeably, they have some slight difference. This article will explore some of the vital things concerned with mergers and acquisitions so that you can understand them better. Read on and find out more;

The Difference Between Mergers and Acquisitions

A merger takes place when two companies of equal standing join to create a new one. The stocks for all these firms are released and a new stock is created for the new company that has been formed. In most cases, the new company needs to be renamed. However, these instances do not happen commonly as companies buy out others. However, to avoid the bad connotation that comes with a company being bought out, the company leaders can refer to the transaction as a merger to avoid the effects of negative public reputation.

An acquisition is more or less similar to a merger in that it results in a new company being formed as a result of the combination of two different ones. However, the process of uniting these firms is what sets the difference as an acquisition is done when a company buys out another one. It may be friendly and on good terms or hostile depending on the situation.

Mergers and acquisition are often done in a bid to improve operations and sales but this is not always the case. It requires careful planning and strategies for the resulting company to be better than the individual ones.

Why Do They Happen?

The most obvious answer to this question is that companies want to get more value for their shareholders. However, the truth is that owners feel that combining forces will bring a host of other benefits for them and these serve as the main reasons why mergers happen. The main goal is to create more wealth and this can happen in various ways. Read on and find out some reasons why mergers and acquisitions happen;

Reduce Supply Costs

All firms have a supply and distribution network and this is a crucial part of how they are able to produce their goods and services. It also determines how much money they make when they sell the commodities to consumers. By buying out one of the suppliers, a company can reduce the associated costs and thus make more money from the sales. The same also applies to the distributors in that if a company can buy out one, they will make more money.

Eliminate Competition

There is no industry that has perfect competition and all that the companies in nay niche can do is to reduce the amount of competition they face. Some companies may startup and pose a huge threat to the established giants who could opt to buy them out to reduce the risk of them being overrun by the startups in the long run. This reduces the competition and phases out the potential risks that can be brought by the same.

Increase Market Share

It is easy to note that mergers and acquisition happen with large companies that have attained a certain level of maturity and now find it hard to increase market share. The only way of doing it is through mergers since they can now capture the market share of the other company. This can also happen with two small mid-sized or small companies that need to scale up to the next level.

Better Performance

When two companies join forces, they are able to perform better and reduce their associated costs. If all of them had an accounting department, they will need to reduce the people working there and thus save on employee costs. You might hear the term synergy applied in such transactions and it refers to the force that allows for cost efficiencies of the new business and a reason to justify it.

Completing The Deal

A merger and acquisition deal can be completed in several possible ways. One common one is the tender offer. In this way of doing it, one firm offers to purchase the outstanding stock of the other company and this proposal is first communicated to the shareholders. They are commonly used to initiate hostile takeovers and a successful offer will most definitely result in the merger of the two companies. When it is communicated to the media, it indicates the price and deadline by which the shareholders must accept or reject it.

Another possible way of going about it is the purchase of assets method where all the assets of a firm are purchased by the other in cash. This allows the merging firm to get particular company operating units and reduces the liabilities owed to people affiliated with those assets.

Mergers can also be done using the management of one of the companies such as where they are involved to make the firm cease to exist as a public one or push it to a private one.

Tax Issues

Mergers and acquisitions need to be done in consideration with the tax laws since they could easily turn out to be too costly for the parties involves. If the deal is done with stock as opposed to cash, then no tax is imposed. The need to stay away from hefty taxes explain why most of these transactions are done using stock. When it is completed this way, the new shares from the acquiring company stocks are offered directly to the target company’s shareholders or an entity that manages them. The holders are only taxed when they opt to sell their new shares.

Some essential things surrounding mergers and acquisitions have been mentioned and it should be noted that they can easily fail. One common reason behind this is poor communication between the two companies. It is necessary for all the involved parties to understand the details and do the due diligence so that any obstacle to the deal can be seen and dealt with before the process gets to its advanced stages.