Financial Concepts: Mergers and Acquisitions

Mergers and Acquisitions

Mergers and acquisitions essentially encompass the process of companies buying other companies or combining together as one. The best way to explain this would be with an example:

Company A sees that Company B is a good competitor in the marketplace and feels that it would be beneficial for them both to merge into one entity. Company A and Company B combining is a merger the companies become a joint enterprise.

Company A sees that Company B is a good target and decides that it would be beneficial to purchase Company B. Company A acquiring, or buying, Company B is considered an acquisition since it is obtaining that company as another asset to its overall business.

As an initial public offering (IPO) raises capital for a company, so does a merger or acquisition. In this way, a company can liquidate their equity, or loosen up their cash flow, through the process of merging or being acquired.

In the case of venture capital and private equity as well, mergers and acquisitions are one large way firms and businesses exit and profit from their equity growth. Once a venture capital firm invests in a startup, they get a share of that business.

When that startup reaches a certain size after a period of high growth, another company may decide to purchase it at a much larger price than the venture firm had originally invested. That acquisition would be a means of exiting and profiting for both the firm and startup since most of their cash is tied up in the equity of the company.

Mergers and acquisitions are important concepts to understand since that is usually why conglomerates (a company with diversified interests in many different sectors, like Berkshire Hathaway or GE) exist. Take for example Disney, a large conglomerate that has acquired multiple companies like ESPN and ABC on its rise to the top of the entertainment industry.

You may love your Sprite and despise the commoners who sip upon Dasani water, but it just might turn out that both of those brands are owned by Coca-cola.