The idea behind companies engaging in mergers and acquisitions is to build a stronger, more competitive combined company in the marketplace. There are many things within a merger that can impact a business including benefits and costs, sensible and dubious motives, risks associated with foreign mergers, and determining whether to initiate a cash or stock transaction for the merger.
Mergers are a tool used by companies to expand their operations and increase profitability. When companies engage in a merger, the acquiring company assumes all assets and liabilities of the target company. A merger, or merger of equals, is often financed by stock, known as a stock swap. There are two methods of merging through stock swap, which include one company taking ownership of the other company and issuing cash and/or securities in the acquiring company to the former shareholders, or another method includes creating a third company which takes ownership over both companies in exchange for shares issues to the shareholders of the two companies (wikipedia.com). If stock is offered to acquire a company, the cost of the merger depends on the gains and those shares are paid to the acquired firm (Brealey, Myers, & Marcus, 2004, p. 599).
Companies can also acquire other companies by paying cash. Acquisitions financed through debt are called leveraged buyouts or LBO. Often the assets of the company being acquired are used as collateral for the loans in addition to the assets in the acquiring company. The benefit of a leveraged buyout is to allow companies to borrow large sums of money without committing a lot of their capital. In a cash transaction, the cost of the merger is not affected by the size of the merger gains (Brealey, Myers, & Marcus, 2004, p. 599). Also, the shares of a leveraged buyout are taken off the public market and are no longer traded on the open market.
There are sensible motives for companies to engage in mergers and acquisitions (M & A). Sensible motives that...