Mergers and Acquisitions: Key Terms You Should Know

mergers and acquisitions

In mergers and acquisitions, merging parties or different entities form a new entity. In corporate finance, mergers and acquisitions are also referred to as Merger-and Acquisition. A successful merger or acquisition in corporate finance often depends on the performance of the acquired firm or firms. However, there is also a potential negative impact of mergers and acquisitions transaction. M&A activity stats shows transaction can result to a decrease in market share, cash flow problems, and a reduction of competitive advantages.

There are three main types of mergers and acquisitions, a combination of the existing brands of the acquired firm, an all-cash deal, and a combination of cash and stock. In a combination of the two firms, the acquisition target can either take over the entire company or just a specific segment. The all-cash deal may be executed if the price of the brand is significantly less than the total cost of buying and closing the transaction. In case of an all-cash deal, the shares of the target firm are sold to the acquiring firm. Another variation of this type of mergers and acquisitions is the all-stock deal, which requires 100% ownership of the target firm. There are other varieties such as an operating lease, preferred stock, preference shares, warrants, and derivatives.

In some mergers and acquisitions, financial statements of the acquired firm are prepared for the benefit of the new owners. These financial statements are provided after the acquisition. These statements provide information regarding the net effect of the merger or acquisition on the basis of the combined firm’s revenues, expenses, and assets. It also discusses the effect of the transaction on the control of the acquired firm’s business, the nature of its operations, and the financial and operating results of the business over the period of the transaction. These statements are required to comply with the requirements set forth by the US GAAP (Generally Accepted Accounting Principles).

Acquisitions usually involve two parties: one acquiring company and another selling company. The acquiring entity is the buyer of the business. The selling entity is the seller of the business. Mergers and acquisitions in the financial domain are measured by transaction price. This price pertains to the value of a share of the target firm after the purchase and acquisition costs have been deducted.

Purchasing a business is the process of creating a new entity and becoming the owner of that new entity. The new company may be made up of the purchasing body, which are the one who purchases the target firm, and the seller, who is the one who sells the target firm. The purchaser is called the merged company. The merging body may decide to form a partnership where the new company will be formed as a joint venture and will be managed by one or more of the members of that partnership; or it may choose to form an entity and become a corporation where all the shares of the corporation will be owned by one shareholder.

The process of making a merger or acquisition involves a lot of paperwork. In addition to handing over all the shares of the target firm to the purchaser, the acquiring entity also has to hand over all the debts of the target company to the seller. The selling price cannot exceed the market price of the target firm. Furthermore, there may be restrictions on the transfer of certain assets and bank charges may be levied. All these have to be agreed upon by both the parties involved.

There are two types of mergers and acquisitions in the financial domain: buyouts and tender offers. The buyout is the direct replacement of the targeted firm with another firm. A tender offer is a sale of some of the target company’s assets to raise funds for the purchase. Tender offers are much preferable, as they result in quick transactions. Also, it is quite common for large firms to use the buyout option when there is a dire need for cash and they will not be able to raise sufficient funds through conventional means.

There are three major components of a successful acquisition: cash, ownership interest and net worth. These three terms are closely related and they are also divided by the size, equity and structure of the acquired firm. For instance, a private equity deal, also known as an acquisition, is a more complex transaction than a merger and is usually valued using book value pricing. A public buyout is a straightforward acquisition that is valued using cash metrics. Finally, acquisitions that are considered to be in the best financial interest of the company are classified as distressed sales.