Mergers and acquisitions are relatively common events, but they are not understood as well as many other business topics are. This post will give you a broad overview of what mergers and acquisitions are as well as why businesses undergo them.
According to Investopedia’s definition, an acquisition involves one company buying “most or all of another company’s shares,” which gives the first business control of the second. Then, the acquiring company can decide what to do with the acquired company. When making decisions after an acquisition, the acquiring company does not need the approval of the shareholders of the acquired company.
Acquisitions occur for many reasons, including a desire for synergy and to take advantage of economies of scale. They can also be used to engage with foreign markets and gain infrastructure. And, naturally, they can be a way for a company to reduce its competition.
Acquisitions can be friendly or much less so. In a friendly acquisition, the target firm—that is, the one being acquired— “agrees to be acquired,” per Investopedia, and the process is relatively cooperative. An unfriendly acquisition occurs without the target company’s consent. This is also known as a hostile takeover.
The terms mergers and acquisitions are sometimes used interchangeably, but there is an important distinction between the two. (In fact, Investopedia defines mergers separately from acquisitions.) Mergers create a business entity that did not exist before. They are mutual in nature and tend to take place in generally equal terms between roughly equivalent companies.
They benefit the shareholders of each firm for many of the same reasons that acquisitions can, including the increased market share and lower costs. Following a merger, the new company’s shares are split up between the original shareholders of the two merged businesses.
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