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When a deal is first announced, the share prices of both companies are likely to move up or down based solely on investor expectations. To accomplish this, however, the buyer must have a realistic assessment of how much the target company is worth. 4 For Better or WorseĪ successful merger should create shareholder value that is greater than the combined value of the separate companies. In fact, increasing competition from technology giants is one reason companies have been pursuing large mergers and novel cross-sector acquisitions. Other companies join forces across industries for strategic reasons or to diversify their lines of business. Some mergers result in industry or sector consolidation, but government regulators may scrutinize deals and/or block mergers that threaten competition. In addition, combining two workforces into one often results in headcount reductions. This might be achieved by increasing revenue, gaining access to talent or technology, or cutting costs.īigger corporations typically benefit from economies of scale, which enables them to negotiate lower prices for larger orders with suppliers. Synergy is the financial benefit that is expected to result from the joining of two companies. When one company purchases a controlling interest in another against the wishes of the target’s leaders, it is known as a hostile takeover these transactions are typically announced as acquisitions. However, some transactions that are technically acquisitions are announced as mergers when the deals are friendly, with both sides agreeing to fair terms. In this case, stock-holders of both companies generally receive shares in the new company. The target firm’s shareholders may receive stock in the buying company and/or have the option to sell their shares at a set price.Ī true merger occurs when two companies of roughly equal size combine into a single company and issue new stock. The target firm is absorbed by the buyer, and the buyer’s stock continues to trade.
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Deal-Making TermsĪn acquisition is the purchase of one company by another that is paid for with stock, cash, or both.
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Here’s a closer look at these important transactions and some possible implications for investors. The primary goal of a merger or an acquisition is to boost earnings growth by expanding operations, gaining market share, or becoming more efficient. 2 In addition, high stock prices provided plenty of equity for deals involving the exchange of stock, while low borrowing costs made it easier to finance acquisitions. corporations had plenty of cash to spend after a long string of solid profits. There has also been a notable rise in mega deals exceeding $10 billion. There were 4,425 deals worth $1.06 trillion - a 74% increase in deal volume over the same period of 2017. Merger and acquisition (M&A) activity in U.S.-targeted transactions surged to the highest level on record in the first half of 2018.