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Mergers & Acquisitions in Finance

By HWA | Publish On: September 12, 2011 | Posted In:

Mergers  & Acquisitions

Mergers and Acquisitions are important events in today’s business scenario. It is the phenomenon of either two or more companies coming together to form into one bigger organization or buyout of one company by another. These are business transactions in nature involving payment for each unit of stock.

A merger is a consolidation of two or more companies into one, an entirely new company. Acquisition on the other hand is the transfer of ownership and control of one company from the one group of shareholders to another. Leveraged buyout is observed in cases where a large proportion of debt is used for financing the buyout.

Mergers & Acquisitions in Finance

Types of Mergers

Mergers and Acquisitions come under three broad categories called horizontal, vertical and conglomerate mergers.

A Horizontal Merger is a merger taking place between companies belonging to one industry. The products of these companies are close substitutes.

A Vertical Merger is a merger which takes place between companies belonging to same industry, but the line of business is different. For example, a company in the telecommunications industry acquiring an internet service provider. Or a mobile phone based company acquiring a land phone based company.

A Conglomerate Merger is a type of merger in which companies which are totally unrelated coming together. For example, a company which is producing heavy engineering products acquiring a 7star chain of hotels can be considered as Conglomerate merger.

Why do companies buy other companies or two or more companies merge into one large company? The reason is that it is very easy to exercise market control when the amount of competition is reduced.

Other reasons include growing economies provide better opportunities which are best made use only through combining companies.

In an economy troubled by ever-increasing prices of raw materials, mergers and acquisitions provide economies to scale in production.

An entry into a new market can be made easier by acquiring an existing company. In this way, the expertise of the acquired company and the capital from the acquiring company can produce a new product whose cost can be very low when compared to other products in the market.

With the above advantages, mergers and acquisitions take place in an economy, which can give a different shape to the industry.

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