The merger and acquisition (M&A) environment are active in the U.S. with over 17,000 deals executed in 2020, according to pwc.com. M&As are used to consolidate and grow companies.
Merger and Acquisition Types
An acquisition is accomplished when one company buys another. It becomes the prevailing owner. A merger is accomplished when two firms of about the same size are determined to combine themselves instead of operating separately.
Acquisitions can occur in several ways:
• One company purchases a majority stake in another firm, and both entities continue under their existing names and operating structures.
• Two companies combine their businesses and operate under a single identity.
• One company purchases another businesses’ assets, typically occurring during a bankruptcy proceeding.
• A management-led buyout (MBO) occurs when a company’s executives purchase control of another company and take it private.
Mergers can occur in these ways:
• Horizontal mergers combine direct competitors.
• Vertical mergers combine a customer with its supplier.
• Congeneric mergers combine two related businesses that serve the same customers.
• Market-extension mergers blend companies selling the same products but in different markets.
• Product-extension mergers combine different but related products in the same market.
• Conglomeration mergers combine two unrelated businesses.
Merger and Acquisition Financing
Merger and acquisition financing refers to the process of funding mergers and acquisitions. M&A financing can come from equity financing through one company selling its stock to fund the deal or a stock swap between companies. M&A financing can also come from debt financing that is acquired from lenders.
Equity financing does not have to be repaid and is good if a company’s valuation is high. It can, however, lead to a loss of control and is more expensive than debt.
Debt financing is cheaper than equity financing and does not lead to a loss of control. However, there is a limit on the amount that can be borrowed.
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