What are mergers and acquisitions?

One of the main goals of business is to deliver positive returns for shareholders — and company executives frequently turn to mergers and acquisitions, also known as M&A, to achieve this.

Photo by Anna Nekrashevich on Pexels.com

Mergers and acquisitions are similar in that they involve more than one company, but they differ in a few key ways.

In a merger, two companies combine to form one company. For example, if Company A wants to merge with Company B, Company A will exchange its shares with shares of Company B to create a new combined company. For a merger to happen, approval is typically required by the shareholders of both firms. Additionally, government regulators may have to provide approval before the merger takes place.

In an acquisition, a company is purchased, or taken over, by another company. For example, if Company A wants to acquire Company B, Company A will purchase Company B using cash, stock, or a mixture of the two. This process may seem similar to a merger, but the acquired company will operate under the main company instead of forming a combined company. Acquisitions are also subject to shareholder and regulatory approval.

Companies conduct mergers and acquisitions for various reasons. As previously mentioned, companies conduct M&A to deliver positive shareholder returns. Companies may also conduct M&A to gain access to new markets, technologies, or customers.

One of the most notable mergers in history is that between Exxon and Mobil to form the combined company ExxonMobil. In 1998, this became one of the largest mergers to take place, valued at $82 billion.

Whenever a merger or acquisition is announced, stock in the company being acquired will typically rise significantly. This is primarily due to a premium being placed on the acquired company by the acquirer.

M&A is an exciting area of finance, business, and the stock market because it’s how companies get even stronger and more effective!