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Explain the process of mergers & acquisition
The main purpose of mergers and acquisition is to form different or same individual companies into one unit.
Merger means combining similar companies (size) to form a new single unit whereas acquisition is when larger companies acquire smaller companies or absorption of smaller companies by bigger companies. Depending on the acquirer company board, the merger and acquisition can be friendly or hostile.
Types of merger
The types of merger are as follows −
Horizontal − Merger between two similar companies.
Vertical − Merger between company and customer/company in its supply chain.
Conglomerate − Merger between companies in different sectors.
Forms of integration
Statutory − Occurrence merger when acquirer is larger than target company
Subsidiary − Target becomes subsidiary of acquirer
Consolidation − New entity is formed after deal (acquirer and target company cease to exist)
Major valuation methods used by an acquirer are as follows −
- Discounted cash flow method.
- Comparable company analysis.
- Comparable transaction analysis.
The process of merger and acquisition is explained below −
Developing strategy − Good strategies are made by having clear cut ideas, purpose of acquisition, what returns are expected from acquisition etc.
Criteria − Potential targets are determined by certain criteria (location, profit margins etc.)
Acquisition targets − By considering the criteria, the potential acquisition targets are evaluated.
Planning − Approaching selected targets and carrying out initial conversation are made to get more information and next steps are planned accordingly.
Valuation analysis − By providing the required information of the targeted company, the value of the targeted company is analysed.
Negotiations − After analysis, initial offer is made and can be negotiated further.
Due diligence − After an offer is accepted, a detailed assessment is made to verify if the early assessment made is correct or not.
P&S contract − Next step is to make a final decision on type agreement, whether it is an asset purchase or share purchase.
Financing strategy − Exploring financing options for deals. Details will be disclosed after signing the deal.
Closing − Both the managements work together to complete the merging process.
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