M&A transactions are a method for companies to generate income in the short term. However, this type of deal does take money away from the company through the purchase price and shares of equity. It is typically carried out by a business that is confident that it will get the money back in the form of increased revenue over time.
The main reason a company makes for a M&A deal is to increase its competitive edge. This is achieved by having access to the latest technologies, markets, and geographical locations. It is also possible by reducing risk and achieving economies of scale. For example pharmaceutical companies could purchase a smaller biotech company to accelerate the development of a new treatment for pulmonary arterial hypertension.
Another reason why a business might engage in an M&A is to acquire skilled employees. This is usually the reason why large tech companies like Facebook purchases smaller startups. This isn’t the most frequent reason for M&A, but it happens from time to time.
If a buyer has concluded that there is a good deal opportunity it will create an LOI and subsequently conduct due diligence on the target firm or. This involves reviewing the financial, operational and intellectual property information that is typically provided in a digital data room. This will uncover any skeletons in the closet which could affect the purchase price, resulting in closing conditions being added or indemnities being negotiated.
