What Do You Know About Mergers And Acquisitions

Mergers and acquisitions, (M&A) are a big part of the corporate world. Everyday, investment bankers of Wall Street arrange mergers and acquisitions transactions, which join separate companies to form a larger one. When they are not forming large companies from smaller ones, the opposite happens and corporate finance deals break up companies and corporations through carve-outs, spinoffs, and tracking stocks.

Not surprisingly, these big actions are often included in the news. Finance deals can be worth millions, hundreds of millions, or billions of dollars. They dictate the fortunes and futures of the companies involved. For a Chief Executive Officer (CEO), restructuring a company through M&A, can represent the peak of his/her whole career. Thus, it's not surprising to hear and read about these big transactions.

Sure, mergers and acquisitions deals are eye-catching headlines, but how do these affect the investors? To understand the effect of M&A to investors, it's first important to understand the main idea behind M&A.

*The M&A Concept*

One plus one equals three: this equation mathematically describes the concept of a merger and acquisition. The main concept behind purchasing a company is to form a shareholder value above and over the conjunction of the two companies. Two companies formed as one are stronger than two separate companies; this is at least the main reasoning behind mergers and acquisitions.

This logic is particularly alluring and attractive to companies especially during the tough times. Strong companies act to buy and acquire other companies to form a more cost-efficient and competitive company. The two companies will join each other to gain a bigger market share or to accomplish greater efficiency. Because of these great benefits, the target companies often agree to be purchased and acquired when they know that it's hard for them to survive alone.

*Difference between Mergers and Acquisitions*

Although these two are often discussed and used as they were the same or synonymous, mergers and acquisitions differ from each other slightly.

When a company takes over another company and clearly establishes itself a new owner, the transaction is called an acquisition. From a legal perspective, the target company stops to exist and the buyer absorbs the business.

In the simplest definition of the term, a merger occurs when two different firms or companies agree to join each other as a new single company and the single ownership and operation stops. This action is more specifically called "merger of equals". The stocks of both companies are surrendered and the stock of the new company is issued to replace the old one.

However, in practice, "mergers of equals" do not happen very often. What usually happens is, when one company buys another, and as part of the deal, simply allows the acquired company to announce that the transaction is actually a merger of equals, even if it's an acquisition, technically.

Being sold and purchased often carries negative feedback and connotations; thus, by proclaiming the deal as a merger, top managers and deal makers try to make their takeover more pleasant.