One size doesn't fit all. Many
companies find that the best way to
get ahead is to expand ownership
boundaries through mergers and
acquisitions. For others, separating
the public ownership of a subsidiary
or business segment offers more
advantages. At least in theory,
mergers create synergies and
economies of scale, expanding
operations and cutting costs.
Investors can take comfort in the
idea that a merger will deliver
enhanced market power.
By contrast, de-merged companies
often enjoy improved operating
performance thanks to redesigned
management incentives. Additional
capital can fund growth organically
or through acquisition. Meanwhile,
investors benefit from the improved
information flow from de-merged
M&A comes in all shapes and sizes,
and investors need to consider the
complex issues involved in M&A. The
most beneficial form of equity
structure involves a complete
analysis of the costs and benefits
associated with the deals.
Let's recap what we learned in this
A merger can happen when two
companies decide to combine into
one entity or when one company
buys another. An acquisition always
involves the purchase of one
company by another.
The functions of synergy allow for
the enhanced cost efficiency of a
new entity made from two smaller
ones - synergy is the logic behind
mergers and acquisitions.
Acquiring companies use various
methods to value their targets.
Some of these methods are based on
comparative ratios - such as the P/E
and P/S ratios - replacement cost or
discounted cash flow analysis.
An M&A deal can be executed by
means of a cash transaction, stock-
for-stock transaction or a
combination of both. A transaction
struck with stock is not taxable.
Break up or de-merger strategies can
provide companies with
opportunities to raise additional
equity funds, unlock hidden
shareholder value and sharpen
management focus. De-mergers can
occur by means of divestitures,...
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