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

Mergers usually occur between companies of equal size that believe 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 the shareholders of both merging companies are given the same value of shares in the new company that they owned in one of the old companies. Therefore, if a shareholder owned $10,000 worth of shares before the merger, he or she would own $10,000 in shares after the merger. The number of shares owned would most likely change following the merger, but the value would remain the same.

Acquisitions

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 to maintain its reputation. When an acquisition occurs in this way, the purchasing company can acquire the target company 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.)

RELATED FAQS
  1. Why do companies merge with or acquire other companies?

    The reasons for company mergers and acquisitions include synergy, diversification, growth, improving competition, and supply ... Read Answer >>
  2. 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 >>
  3. 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 >>
  4. Why Do a Reverse Merger Instead of an IPO?

    Reverse mergers are often the most cost-efficient way for private companies to trade publicly. Read Answer >>
  5. What can a business do to prevent a merger?

    Learn how to prevent business mergers, including hostile takeovers, that are not in consumers' best interests through the ... Read Answer >>
Related Articles
  1. Investing

    What Investors Can Learn From M&A Payment Methods

    How a company pays in a merger or acquisition can reveal a lot about the buyer and seller.
  2. Investing

    The Wonderful World Of Mergers

    While acquisitions can be hostile, these varied mergers are always friendly.
  3. Investing

    The Merger: What To Do When Companies Converge

    Mergers occur when it’s beneficial for two companies to combine business operations. The question is; if you’re invested in a company that’s involved in a merger, will it benefit you?
  4. Investing

    Do Mergers Save Or Cost Consumers Money?

    A merger or acquisition can actually be beneficial to the customer - find out how, in this article.
  5. 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.
  6. Investing

    Reverse Mergers: The Pros And Cons

    Reverse mergers can provide excellent opportunities for companies and investors, but there are still some downsides and risks.
  7. Investing

    What Are Corporate Actions?

    Be a savvy investor - learn how corporate actions affect you as a shareholder.
  8. Small Business

    4 Cases When M&A Strategy Failed for the Acquirer (EBAY, BAC)

    Learn about four corporate mergers that were either unsuccessful or faced critical challenges. Discover which factors can cause an M&A strategy to fail.
RELATED TERMS
  1. Mergers and Acquisitions - M&A

    A merger is a combination of two companies to form a new company, ...
  2. Merger

    A merger is an agreement that unites two existing companies into ...
  3. Merger Mania

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

    A merger occurring between companies in the same industry. Horizontal ...
  5. Merger Of Equals

    A merger of equals is when two firms of about the same size come ...
  6. SEC Form 425

    The prospectus form that companies must file to disclose information ...
Hot Definitions
  1. Trustee

    A person or firm that holds or administers property or assets for the benefit of a third party. A trustee may be appointed ...
  2. Gross Domestic Product - GDP

    GDP is the monetary value of all the finished goods and services produced within a country's borders in a specific time period, ...
  3. Debt/Equity Ratio

    The D/E ratio indicates how much debt a company is using to finance its assets relative to the value of shareholders’ equity.
  4. Exchange-Traded Fund (ETF)

    A security that tracks an index, a commodity or a basket of assets like an index fund, but trades like a stock on an exchange.
  5. Net Present Value - NPV

    Net Present Value (NPV) is the difference between the present value of cash inflows and the present value of cash outflows ...
  6. Return On Equity - ROE

    The amount of net income returned as a percentage of shareholders equity. Return on equity measures a corporation's profitability ...
Trading Center