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Why Consider a Merger or Acquisition?

Guest post by: Stan Prokop

Article Overview: The article highlights some reasons for the choice of business owners and management to consider a merger or acquisition, and the benefits of some of these types of transactions .

Why Consider a Merger or Acquisition?

Mergers and Acquisitions, commonly called "M & A 'in high finance parlance is one of the more exotic areas of finance and business.

Generally larger transactions in this area are handled by investment bankers or merchant banks, but everyday a number of small and medium size businesses either complete or contemplate such transactions.

Generally when a business owner or management team contemplates a merger or acquisition there is a 'strategy 'behind the transaction. Let's look at some of the reasons for considering such a transaction.

Many companies simply realize that there is business logic and a risk component to diversifying out of their core businesses. We all know that 'diversification' is preached in all areas of financing, including our personal financial strategies. Companies who merge or acquire other firms for diversification realize they are lowering overall business risk.

Many times there are some classic synergies that can make a transaction in the 'M & A' environment very appealing. If a firm has a strong brand and they can add additional products to that brand then and grow both profits and sales that becomes a viable transaction. A smaller firm might have more of a 'reputation' than a 'brand' of course.

In the current business and economic environment there are many undervalued or struggling companies. These businesses can be perhaps purchased at a bargain, and may in fact be worth many times their current valuation due to unique circumstances.

The other reason companies consider a merger specifically is the ability to lower costs while at the same time increasing revenue. That is simply a scenario in which many costs can be lowered in the overhead and operating expense departments. Or in some cases, say a manufacturing company, efficiencies can be realized. Unfortunately this sometimes comes at a 'human cost 'as downsizing is common in this area of mergers and acquisitions.

In some cases an acquisition can simply be current management buying the company from the current owners. This is typically called an LBO, or 'leveraged buyout '. Management usually puts in some new equity into the company and in many circumstances assets are refinanced at the same time.

In summary the merger and acquisition area is a unique area of business financing. Business owners must have a solid rationale, as well as a strategy, for contemplating these types of transactions.

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Article Tags: mergers and acquistions



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