What Are M&A Transactions?

M&A transactions are the acquisition of one company by another, typically for stock or cash. The goal is to gain an unabated competitive advantage in the market. It’s not the perfect solution for every strategic objective, but companies that understand what it has to offer and utilize it prudently should be able achieve significant growth.

One reason for M&A is that it allows companies to gain economies of scale, a phenomenon that says «one plus one is more than two.» For instance, when Facebook acquired WhatsApp and Instagram it was able to tap the growing demand of a this page new customer base without needing to invest massively in the development of these services. It also increased its size and market presence, which increased its bargaining power when dealing with clients or suppliers.

Another popular motive is empire building which is when managers have an incentive to purchase companies that will increase their market share or lessen competition. This strategy is extremely successful, if done in the context of well-defined objectives and with adequate financial predictions.

M&A can also help a company prosper and thrive in volatile markets. As credit quality decreased the banks began to merge to shield themselves against the Great Recession from 2008-2011. It’s also often used to diversify revenue streams by purchasing companies in another industry or in a different region. For instance, retail companies frequently acquire technology or e-commerce companies to open new markets and increase revenues. A common mistake is to think of M&A as a simple financial tool without considering the strategic value that is created.

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