From a legal and financial point of view, both mergers and acquisitions generally result in the consolidation of assets and liabilities under one entity, and the distinction between the two is not always clear.
Specific acquisition targets can be identified through myriad avenues, including market research, trade expos, sent up from internal business units, or supply chain analysis.
Sometimes, however, a smaller firm will acquire management control of a larger and/or longer-established company and retain the name of the latter for the post-acquisition combined entity.
Another type of acquisition is the reverse merger, a form of transaction that enables a private company to be publicly listed in a relatively short time frame.
Asset purchases are common in technology transactions in which the buyer is most interested in particular intellectual property but does not want to acquire liabilities or other contractual relationships.
[12] An asset purchase structure may also be used when the buyer wishes to buy a particular division or unit of a company that is not a separate legal entity.
Divestitures present a variety of unique challenges, such as identifying the assets and liabilities that pertain solely to the unit being sold, determining whether the unit relies on services from other parts of the seller's organization, transferring employees, moving permits and licenses, and safeguarding against potential competition from the seller in the same business sector after the transaction is completed.
Alternatively, certain transactions use the 'locked box' approach, where the purchase price is fixed at signing and based on the seller's equity value at a pre-signing date and an interest charge.
Then, the balance sheet of the buyer will be modified and the decision maker should take into account the effects on the reported financial results.
The following motives are considered to improve financial performance or reduce risk: Megadeals—deals of at least one $1 billion in size—tend to fall into four discrete categories: consolidation, capabilities extension, technology-driven market transformation, and going private.
On average and across the most commonly studied variables, acquiring firms' financial performance does not positively change as a function of their acquisition activity.
[26] Therefore, additional motives for merger and acquisition that may not add shareholder value include: The M&A process itself is a multifaceted which depends upon the type of merging companies.
This type of M&A process aims at creating synergies in the long run by increased market share, broad customer base, and corporate strength of business.
In recent years, these types of acquisitions have become common in the technology industry, where major web companies such as Facebook, Twitter, and Yahoo!
Companies such as DuPont, U.S. Steel, and General Electric that merged during the Great Merger Movement were able to keep their dominance in their respective sectors through 1929, and in some cases today, due to growing technological advances of their products, patents, and brand recognition by their customers.
These companies such as International Paper and American Chicle saw their market share decrease significantly by 1929 as smaller competitors joined forces with each other and provided much more competition.
Due to high fixed costs, when demand fell, these newly merged companies had an incentive to maintain output and reduce prices.
[citation needed] One of the major short run factors that sparked the Great Merger Movement was the desire to keep prices high.
Another economic model proposed by Naomi R. Lamoreaux for explaining the steep price falls is to view the involved firms acting as monopolies in their respective markets.
Low transport costs, coupled with economies of scale also increased firm size by two- to fourfold during the second half of the nineteenth century.
In addition, technological changes prior to the merger movement within companies increased the efficient size of plants with capital intensive assembly lines allowing for economies of scale.
Many companies are being bought for their patents, licenses, market share, name brand, research staff, methods, customer base, or culture.
M&A practice in emerging countries differs from more mature economies, although transaction management and valuation tools (e.g. DCF, comparables) share a common basic methodology.
Profitability expectations (e.g. shorter time horizon, no terminal value due to low visibility) and risk represented by a discount rate must both be properly adjusted.
The first important step towards this objective is the development of a common frame of reference that spans conflicting theoretical assumptions from different perspectives.
On this basis, a comprehensive framework is proposed with which to understand the origins of M&A performance better and address the problem of fragmentation by integrating the most important competing perspectives in respect of studies on M&A.
For the dimension organizational behavior, the variables acquisition experience, relative size, and cultural differences were found to be important.
"[56][57] But failed mergers and acquisitions are caused by "hasty purchases where information platforms between companies were incompatible and the product was not yet tested for release.
Developing and implementing a robust due diligence process can lead to a much better assessment of the risks and potential benefits of a transaction, enable the renegotiation of pricing and other key terms, and smooth the way towards a more effective integration.
Complacency and lack of due diligence may cause the market dominant company to miss the value of an innovative product or service.