A:

Mergers and acquisitions (M&A) are forms of corporate restructuring that are becoming increasingly popular in the modern business environment. The motive for wanting to merge with or acquire another company comes from management trying to achieve better synergy within the organization. This synergy is thought to increase the competitiveness and efficiency of the company.

Mergers usually occur between companies of equal size that believe that a newly-formed company will compete better than the separate companies can on their own. Mergers usually occur on an all-stock basis. This means that the shareholders of both merging companies are given the same value of shares in the new company that they previously owned. Therefore, if a shareholder owns $10,000 worth of shares before the merger, he or she will own $10,000 in shares after the merger. The number of shares owned will change following the merger, but the value of those shares remains the same.

However, mergers are rarely a true "merger of equals". More often, one company indirectly purchases another company and allows the target company to call it a merger in order to maintain its reputation. When an acquisition occurs in this way, the purchasing company can acquire the target company by either using all-stock, all-cash, or a combination of both. When a larger company purchases a smaller company with all cash, there is no change to the equity portion of the parent company's balance sheet. The parent company has simply purchased a majority of the common shares outstanding. When the majority stake is less than 100%, the minority interest is identified in the liabilities section of the parent company's balance sheet. On the other hand, when a company acquires another company in an all-stock deal, equity is affected. When this occurs, the parent company agrees to provide the shareholders of the target company a certain number of shares in the parent company for every share owned in the target company. In other words, if you owned 1,000 shares in the target company and the terms were for a 1:1 all-stock deal, you would receive 1,000 shares in the parent company. The equity of the parent company would change by the value of the shares provided to the shareholders of the target company.

To learn more, see The Basics Of Mergers And Acquisitions, The Wacky World of M&As and Mergers And Acquisitions - Another Tool For Traders..

RELATED FAQS
  1. How does a merger affect the shareholders?

    Explore the effect of a merger and understand how the process affects shareholders of the newly merged firm in terms of stock ... Read Answer >>
  2. How long does it take for a merger to go through?

    Corporate mergers and acquisitions can vary considerably in the time they take to be completed. There are a number of individual ... Read Answer >>
  3. Why do some mergers and acqusitions fall through?

    Most merger and acquisition (M&A) activities are carried out successfully, but from time to time, you will hear that a deal ... Read Answer >>
  4. What is a stock-for-stock merger and how does this corporate action affect existing ...

    First, let's be clear about what we mean by a stock-for-stock merger. When a merger or acquisition is conducted, there are ... Read Answer >>
  5. Why do companies merge with or acquire other companies?

    Some of the reasons for M&A include synergy, diversification, growth, improve competition, and increase in supply chain power. Read Answer >>
  6. How can I develop a profitable merger arbitrage strategy?

    Learn how to utilize a simple merger arbitrage trading strategy to profit from the typical temporary price discrepancies ... Read Answer >>
Related Articles
  1. Small Business

    The Basics Of Mergers And Acquisitions

    Learn what corporate restructuring is, why companies do it and why it sometimes doesn't work.
  2. Financial Advisor

    Acquire A Career In Mergers

    This exciting sector demands a lot from its advisors. Are you up for it?
  3. Small Business

    How To Profit From Mergers And Acquisitions Through Arbitrage

    Making a windfall from a stock that attracts a takeover bid is an alluring proposition. But be warned – benefiting from m&a is easier said than done.
  4. Small Business

    What's a Horizontal Merger?

    A horizontal merger occurs when companies within the same industry merge.
  5. Investing

    Cashing In On Corporate Restructuring

    Companies use M&As and spinoffs to boost profits - learn how you can do the same.
  6. Investing

    Mergers Put Money In Shareholders' Pockets

    Learn the five ways mergers and acquisitions can increase a company's value.
RELATED TERMS
  1. Merger Deficit

    An accounting term used to describe the situation when the total ...
  2. Merger Of Equals

    The combination of two firms of about the same size to form a ...
  3. All-Cash Deal

    1. The cash purchase of a target company. When an all-cash deal ...
  4. Merger Mania

    A period of time with significant merger and acquisition activity ...
  5. Horizontal Merger

    A merger occurring between companies in the same industry. Horizontal ...
  6. Synergy

    The concept that the value and performance of two companies combined ...
Hot Definitions
  1. Efficiency Ratio

    Ratios that are typically used to analyze how well a company uses its assets and liabilities internally. Efficiency Ratios ...
  2. Turkey

    Slang for an investment that yields disappointing results or turns out worse than expected. Failed business deals, securities ...
  3. Maintenance Margin

    The minimum amount of equity that must be maintained in a margin account. In the context of the NYSE and FINRA, after an ...
  4. Salvage Value

    The estimated value that an asset will realize upon its sale at the end of its useful life. The value is used in accounting ...
  5. Cryptocurrency

    A digital or virtual currency that uses cryptography for security. A cryptocurrency is difficult to counterfeit because of ...
  6. Promissory Note

    A financial instrument that contains a written promise by one party to pay another party a definite sum of money either on ...
Trading Center