M&A refers to the aspect of corporate strategy, corporate finance, and management dealing with the buying and selling of companies.
Explain the characteristics of mergers and acquisitions
The terms "merger and acquisition" mean slightly different things. When one company takes over another and clearly establishes itself as the new owner, the purchase is called an "acquisition".
A merger happens when two firms agree to go forward as a single new company rather than remain separately owned and operated.
Mergers are generally differentiated from acquisitions partly by the way in which they are financed and partly by the relative size of the companies. Various methods of financing an M&A deal exist: cash, stock, financing options.
Mergers and Acquisitions have, at times, failed to add as much value as initially imagined by the parties involved. Acquiring a company involves integrating two businesses, which can take time and slow both companies down. When considering a M&A it's helpful to consider the "Better-Off Test" which goes something like this: Do the business units create and capture more value if they are related than they could as separate, single-business entities without formal ties?
Factors that matter include lower costs–shared activities, shared resources, economies of scale or scope-, and increased willingness to pay.
The Better Off Test in the context of horizontal scope: Can a firm achieve lower average costs or higher average prices by including multiple business units in same firm?
Economies of scope (aka, synergies) make productdiversification efficient if they are based on a similar common use. For example, as the number of products promoted is increased, more people can be reached for dollar spent.
Diversify if (cost of having units A & B in same firm) < (cost of unit A in firm A) + (cost of unit B in firm B) - Boost in Willingness To Pay (aka, cross-selling) - Diversify if (WTP of activities A & B if done in same firm) > (WTP of activity A in firm A) + (WTP activity B in firm B)