The merger and acquisition (M&A), market is a key part of the growth strategy of many public companies. Large public firms that have excess cash typically look for opportunities to acquire other companies to achieve inorganic growth. M&A is usually a merger of two companies within the same industry, at similar levels in the supply chain.

Generally, a company can purchase another one for stock, cash or the assumption of debt. Sometimes the investment bank involved in the sale of a company will provide financing to the acquiring company as well (known as”strategy finance”).

M&A typically begins with a thorough assessment of the target company, including financial reports, management and business plans, as well as other pertinent data. This process is referred to as valuation. It can be performed by the acquirer’s company or external consultants. Typically, the company performing valuation should consider more than only financial data, such as cultural fit and other factors that affect the success of the deal.

Growth is the most common reason for a merger or an acquisition. The addition of size to the company can result in economies of scale that reduce operating costs and improves bargaining power with suppliers of raw materials, technology or services. Diversification can also increase the capacity of a company to weather downturns in economy or to earn steady income. Additionally, some companies buy competitors to strengthen their position on the market and eliminate any potential threats. This is known as defensive M&A.

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