During the M&A process two companies are merged to create a new company. This happens for many reasons, such as increasing sales, improving efficiency, and exploring new markets. A common goal is to create synergy, which means that the combined companies are more effective than they are on their own. M&A involves significant financial investments and therefore it is crucial for companies to perform due diligence before agreeing to a deal.
M&A professionals may collaborate with different teams to complete an acquisition including accounting, legal, and finance specialists. They use tools such as operational and financial analysis as well as financial modeling to determine the value of potential targets. M&A deals are often funded with stock, cash or borrowing. When a major company purchases smaller competitors with cash borrowed from private equity firms, it’s called a leveraged buyout.
The majority of M&A deals involve companies that are about the same size. Horizontal mergers are the most common kind of merger. Examples include the merging of video game publishers and tech hardware companies. In the third wave of mergers (1965-1989) companies diversified by purchasing various industries. This was done to lessen cyclical fluctuations in their revenue streams.
Overpaying is one of the most significant M&A risk factors. This can happen if a firm miscalculates how long it will take to reap synergies or when they roll the extra costs into its purchase price. M&A managers may also feel pressure from their team members and intermediaries.
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