M&A transactions are a method for companies to generate income in the short term. This kind of deal transfers funds away from the business through a purchase price and m&a transactions equity shares. This kind of transaction is only done by companies which are confident that they can get the money back in the near future via increased revenue.
The main reason why a company engages in an M&A deal is to boost its competitive advantages. This can be achieved through having access to the latest technologies, markets, and geographical locations. This can be achieved by the reduction of risks and the creation of economies-of-scale. For example a pharmaceutical company could buy a smaller biotech business to speed up the development of a new treatment for pulmonary arterial hypertension.
Another reason why companies could consider an M&A is to acquire skilled employees. This is the main reason why large tech companies like Facebook, buys smaller startups. This isn’t a typical reason for M&A but it does happen from time to time.
If a buyer decides there is a reasonable opportunity, they’ll create an Letter of Intent (LOI) and then conduct due diligence on their prospective firm or company. This entails reviewing the financial, operational and intellectual property information that is typically available in a virtual information room. This will uncover any hidden skeletons that could affect the purchase price and result in closing conditions being added or special indemnities being discussed.
