Mergers And Acquisitions Essay

1292 words - 5 pages

An important, some would say only, purpose of a business is to create value for the owners or shareholders. Businesses, because of the value represented, are often bought and sold by other businesses. The combining and/or buying of businesses is an industry all of its own called mergers and acquisitions. When two businesses find compatible reasons to combine their businesses and form a single business unit that is called a merger; when one business buys another company that is called an acquisition. This paper will look briefly at the nature and reasons for businesses merging and acquiring other businesses.Mergers and acquisitions (M&A) are generally about the battle for corporate control (Brealey-Meyers-Marcus, 2003, p.588). Corporate control is exercised by top level management that is hired by the board of directors. The only way to remove management is through the board of directors. Often that means replacing the board and hiring new management. There are essentially four ways to change corporate control: 1) Proxy contest; 2) purchase of the company by another (merger or acquisition); 3) leveraged buyout; and, 4) divestiture (Brealey-Meyers-Marcus, 2003, p. 588).Proxy ContestsProxy contests are campaigns by shareholders to wield enough power to cause changes in management by garnering enough votes of other shareholders to vote a single way. Obtaining legal permission to vote another's shares is called a proxy. Proxy contests are difficult, but have been successful in the past when management or board actions have been perceived to be against the best interest of the shareholders. It is the shareholders that elected the board of directors, it is the shareholders that can remove them.Merger or AcquisitionWhen a company recognizes a value in owning another company it may negotiate with the target company to merge and create a single company under the control of the initiating company (merger), or the target company may simply be purchased by tendering an attractive offer for the outstanding shares of the target company, or by purchasing the assets of the target company (acquisition) (Brealey-Meyers-Marcus, 2003, p.590). Mergers and acquisitions can be friendly, negotiated deals in which all parties see an increased post-sale value, or the effort may be considered a hostile attempt by one company to "take over" another company for reasons of its own, usually because it sees opportunity to change the management and create more value, realize economies of scale, or several other reasons that will be discussed later.Leveraged BuyoutThe purchase of a company by a group of private investors, usually with considerable borrowed money, is called a leveraged buyout, or LBO. LBOs result in the privatization of the company and the shares are no longer traded publicly. When the management of the company are the ones buying the company in this manner, it is called a management buyout, or MBO (Brealey-Meyers-Marcus, 2003, p.590).DivestituresAnother method...

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