MERGER AND ACQUISITIONS
Corporate mergers and acquisitions can have a great effect on a company’s growth prospect and long-term outlook but since merger and acquisition is a very lengthy process and involves a lot of legal things and aspects so if not carried out in a proper way it can cost a huge risk to the companies involved.In merger and acquisition one company merges with another company or one company acquires the another company and after which the acquiring company gets the legal rights for the business and for the financial transactions of the acquired company.
Difference between merger and acquisition: Though the terms merger and acquisitions are used interchangeably but there is technical difference between both the terms. When two companies of same size in terms of market capitals and holding comes together to form a single unit then it is called merger while when a big company takes control over a small or growing company it is called acquisition.
Following are the major reasons for merger and acquisition:
.1. Unlocking synergies
The common rationale for mergers and acquisitions (M&A) is to create synergies in which the combined company is worth more than the two companies individually. Synergies can be due to cost reduction or higher revenues. Cost synergies are created due to economies of scale, while revenue synergies are typically created by cross-selling, increasing market share, or higher prices. Of the two, cost synergies can be easily quantified and calculated.
2. Higher Growth
Most companies gets merged or acquired with the big companies to get higher growth without building internal infrastructure in a separate way
Many big companies want to create monopoly in their sector and want to be the single player of their type in the market so they acquire all the emerging and growing companies to cut off any sort of future competition.
4. Tax benefits
Tax benefits are looked into where one company realizes significant taxable income while another incurs tax loss carryforwards. Acquiring the company with the tax losses enables the acquirer to use the tax losses to lower its tax liability. However, mergers are not usually done just to avoid taxes.
Valuation in M&A
The acquirer and the target both execute the valuation process in an M&A transaction. The acquirer will seek to secure the best deal on the target, while the target will want the best deal. Since a result, valuation is a key component of mergers and acquisitions (M&A), as it assists the buyer and seller in determining the final transaction price. The following are the three main strategies for valuing the target:
- Discounted cash flow (DCF) method: The target’s value is calculated based on its future cash flows.
- Comparable company analysis: Relative valuation metrics for public companies are used to determine the value of the target.
- Comparable transaction analysis: Valuation metrics for past comparable transactions in the industry are used to determine the value of the target.
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