M&A transactions are a method for companies to earn revenue in the short term. However, this kind of deal can transfer funds away from the company in the form of purchase price and a share of equity. This type of transaction is only performed by businesses who are confident that they will recoup the money in the near future via increased revenue.
A company’s main motivation for an M&A deal is to improve its competitive edge. This can be achieved by having access to the latest technologies, markets, and geographical locations. This is accomplished by reducing risks and achieving economies-of-scale. A pharmaceutical company, for example might acquire a biotech company in order to speed up the development of a treatment for pulmonary arterial high blood pressure.
Another reason why a business might consider an M&A is to acquire talented employees. It is not uncommon for a large tech company like Facebook to purchase smaller start-up companies. This isn’t an usual reason for M&A however it can happen from time to time.
When a potential buyer has determined that there is a suitable deal opportunity, it will draft an LOI and subsequently conduct due diligence on the prospective company or firm. This involves reviewing financial, operational and intellectual property details that are typically stored in a virtual data room. This will expose any skeletons in the closet which could affect the purchase price, resulting in closing conditions being added or indemnities being bargained.
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