News By/Courtesy: POOJA KATEEL | 27 Apr 2020 23:14pm IST

Mergers and Acquisitions is the common term used to describe the Consolidation of corporates through various types of their transaction, consolidations, purchase of assets of other companies, etc. When one company takes over the assets of another company and becomes the new owner of the taken-over company, such a purchase is called an acquisition—the buyer company or entity absorbs the business of the other company. The stocks of the company continue to be traded but in the name of the new buyer. Merger, as a concept, is different from the acquisition. It refers to a process where two firms of approximately the same size, but one stronger than the other, forces the other to move forward as a single entity, rather than operating separately. In such a situation, the stocks of both companies are surrendered, and new stocks are issued in the name of the new company.

Types of mergers:

  1. Horizontal merger- This when two companies are equal in strength, and they have the same product line, they might even be rivals in the market
  2. Vertical merger- The two companies are not of the same stream when they choose to merge, like a customer company and a supplier company.
  3. Conglomerate Merger- this refers to the merger between two companies that have no common business or any common relationship. The goal of such mergers will be wither to extend their product range or their market range

Other than mergers and acquisitions, there are other concepts such as Consolidation and tender offer. In Consolidation, there is the creation of a new company. The condition is that the stockholders of both the companies must approve of the Consolidation. After the approval, they receive equity shares in the new company. In a tender offer, one company offers to buy another company for a particular price. The offer is made directly to the shareholder, bypassing the management and the Board of Directors of the Company. All these are used as various methods to have a more competitive market and to improve the quality of goods and services in the market.

The general advantage behind mergers and acquisitions is that it provides a very productive platform for the companies to grow and flourish. It is used to increase market penetration in a particular area. Through this process, new markets are accessed, and the growth momentum is balanced. Another main advantage is that, when two companies of two different product lines are merged, new product mixes are introduced into society. The rationale behind mergers and acquisitions is that two entities are more profitable than individual companies, and even the shareholder value can be increased this way.

Section Editor: Pushpit Singh | 28 Apr 2020 5:11am IST

Tags : #businessstrategies

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