Investing Answers Building and Protecting Your Wealth through Education Publisher of The Next Banks That Could Fail
Investing Answers Building and Protecting Your Wealth through Education Publisher of The Next Banks That Could Fail

Mergers & Acquisitions (M&A)

What it is:

Mergers & acquisitions (M&A) refer to the management, financing, and strategy involved with buying, selling, and combining companies.

How it works (Example):

A merger is the combination of two similarly sized companies combined to form a new company. An acquisition occurs when one company clearly purchases another and becomes the new owner. A merger or an acquisition usually starts out with a series of informal discussions between the boards of the companies, followed by formal negotiation, a letter of intent, due diligence, a purchase or merger agreement, and finally, the execution of the deal and the transfer of payment.

Quite often, these transactions can take six to nine months (smaller deals often take less time and larger deals often take more time), and they can be complex, particularly from legal and accounting perspectives. For these reasons, companies often hire investment bankers or other intermediaries to facilitate M&A transactions.

These intermediaries can help sellers find buyers (or vice versa), conduct the negotiations for a client, handle paperwork, and perform the due diligence on the other party. For this, the intermediary receives a fee, which is usually a percentage of the transaction amount.
 

Why it Matters:

The key idea behind M&A is the creation of synergy -- that is, the creation of value that is greater than the sum of the parts of the combining companies. This notion, and the people in M&A who facilitate it, greases the skids of commerce by helping companies grow, shed dead weight, find the money to pursue new ideas, and bring new and better products to market.

When two companies join in an optimal fashion, the resulting entity has better economies of scale, better use of resources, and a more effective market presence, all of which lead to more profit and sustainable competitive advantage. Thus, for many CEOs, navigating a successful merger or acquisition can be a crown jewel professionally.

But if managers lack foresight, take their eye off the ball (by failing to tend to the day-to-day business while working on a merger or acquisition), or cannot overcome challenges that a deal will present, mergers and acquisitions can prove to be expensive mistakes.
 

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