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Mergers and Acquisitions. The Essence of Merger.
The Action of Acquisition. The Structure of Mergers. Details of Acquisitions.
Valuation Matters. Tender Offer. Acquisition of Assets. Management Acquisition. In an acquisition, one company purchases the other outright. The acquired firm does not change its legal name or structure but is now owned by the parent company. A merger is the combination of two firms, which subsequently form a new legal entity under the banner of one corporate name. Post-merger, some companies find great success and growth, while others fail spectacularly.
Horizontal merger : Two companies that are in direct competition and share the same product lines and markets. Vertical merger : A customer and company or a supplier and company. Think of a cone supplier merging with an ice cream maker. Congeneric mergers : Two businesses that serve the same consumer base in different ways, such as a TV manufacturer and a cable company.
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Market-extension merger: Two companies that sell the same products in different markets. Product-extension merger: Two companies selling different but related products in the same market.
Conglomeration : Two companies that have no common business areas. Purchase Mergers: As the name suggests, this kind of merger occurs when one company purchases another company. The purchase is made with cash or through the issue of some kind of debt instrument. The sale is taxable, which attracts the acquiring companies, who enjoy the tax benefits.
Acquired assets can be written-up to the actual purchase price, and the difference between the book value and the purchase price of the assets can depreciate annually, reducing taxes payable by the acquiring company. Consolidation Mergers: With this merger, a brand new company is formed, and both companies are bought and combined under the new entity. The tax terms are the same as those of a purchase merger. Replacement Cost : In a few cases, acquisitions are based on the cost of replacing the target company.
For simplicity's sake, suppose the value of a company is simply the sum of all its equipment and staffing costs. The acquiring company can literally order the target to sell at that price, or it will create a competitor for the same cost. Naturally, it takes a long time to assemble good management, acquire property and purchase the right equipment. This method of establishing a price certainly wouldn't make much sense in a service industry where the key assets — people and ideas — are hard to value and develop.
Admittedly, DCF is tricky to get right, but few tools can rival this valuation method. Compare Investment Accounts. The offers that appear in this table are from partnerships from which Investopedia receives compensation. Related Terms Acquisition Frenzy Is Alive and Well An acquisition is a corporate action in which one company purchases most or all of another company's shares to gain control of that company.
Corporate Action Definition A corporate action is any event, usually approved by the firm's board of directors, that brings material change to a company and affects its stakeholders. Register now Login. Close Notice of updates! Since the last time you logged in our privacy statement has been updated. We want to ensure that you are kept up to date with any changes and as such would ask that you take a moment to review the changes. You will not continue to receive KPMG subscriptions until you accept the changes.
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