Mergers and acquisitions

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    Mergers and acquisitions (commonly abbreviated to M&A) is a term which can refer to all types of corporate restructuring.

    What is the difference between a merger and an acquisition?

    If two or more companies combine to form a new single business, this is known as a merger. Mergers are usually voluntary and the existing shareholders of both companies will retain an interest in the new business.

    If one company purchases another company (and no new company is formed), this is known as an acquisition. Unlike in a merger, the acquiring company will purchase the majority of the other company’s shares. An acquisition can also be referred to as a “takeover”.

    Why do mergers and acquisitions occur?

    The reasons behind mergers and acquisitions vary considerably but can include:

    • Increased revenue or market share
    • Vertical or horizontal integration
    • Diversification
    • Improved economies of scale
    • Improved overall efficiency
    • Taxation reasons

    Why are mergers and acquisitions of interest to investors?

    Mergers and acquisitions can impact the share price of the companies involved and so are of particular interest to investors.

    If, for example, a company is about to merge with or acquire another company, the share price of both could go up if the move is seen as mutually beneficial. However, the share price of an acquiring company can temporarily fall because of the costs involved in making such a big purchase.

    A company that is being bought will usually see their share price increase. This is in anticipation of a premium having to be paid for the stock to ensure that shareholders accept a bid.

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