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Explain the concept of merger and acquisition
Merger is the process of combining two or more different companies as one company.
Acquisition is the process of taking control of one company by another. Consolidation of companies is called merger and acquisition. The main objective is wealth maximization and to create/increase their value.
Merger and acquisition can be done by the following
- Asset purchasing.
- Shares purchased.
- Trade of shares for assets.
- Trade of shares to share.
Important considerations for the merger and acquisition are as follows −
- Companies must be ready to take risks.
- Companies must narrow down from multiple bets.
- Companies should be patient, resilient and adapt to change.
Steps
The steps for merger and acquisition are as follows −
Pre-acquisition − Need for merger & acquisition is assessed, valuation and go for growth plan is then carried out.
Screening − Searching for suitable targets.
Valuation − After screening and grading the suitable targets, acquiring a company will go for further information/analysis.
Negotiations − After final selection through valuation, they will go for negotiations with selected targets and work on, if any modifications are needed.
Post-merger integration − After all the required processes are completed, a formal announcement will be made.
Reasons for failure
The reasons why merger and acquisition can be a failure are listed below −
Poor strategy − Choosing the company with dissimilar objectives and strategies.
Poor integration − No proper planning in the integration process.
Lack of information − Merger and acquisition are done without having adequate information.
Over optimistic − Bad decisions and over projections.
Types
The types of mergers and acquisitions are as follows −
Merger − By approval of the board of directors and stakeholders of companies, one company becomes part of another company.
Acquisition − By purchasing a major stake of a targeted company, one company acquires another company without changing its name/structure.
Consolidation − For creating a new company, stockholders of both companies should approve. This process is called consolidation.
Tender offer − Buying of targeted companies outstanding stocks at particular price
Acquisition of assets − Company acquires assets of targeted company. This is generally done during bankruptcy. Targeted company should get approval from shareholders.
Management acquisition − Company purchases controlling stake in targeted company and making it private. This type of acquisition is also called as management led buyout (MBO).
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