Both Mergers and acquisitions are prominent aspects of corporate strategy, corporate finance, and management. The process of M&A deals with the ways of buying, selling, dividing, and combining different companies. The process may help the involved entities to grow rapidly in their sector or location, or it may also help them flourish in a new field.

The process of merger involves combining two companies as a single company. In a merger, both the companies mutually agree to merge themselves. The process of merger is adopted for business growth, and it is done on a permanent basis. A merger takes place between two companies. However, more than two companies can also participate in the process. There are two important concepts in a merger:

Acquiring company – It is the single existing company that purchases most equity shares of another company

Acquired company – It surrenders its majority of equity shares to the acquiring company.

In the process of acquisition, one company buys most of the company ownership stakes of the target company to obtain control over the same. Acquisitions often form a vital part of a company’s growth strategy. For such firms, it is more beneficial to take over an existing firm’s operations rather than expand its own operations. Acquisitions can be either friendly or hostile. In Friendly acquisitions, the target firm offers its agreement to get acquired. Whereas in hostile acquisitions the target firm does not give any agreement, thus the acquiring firm purchases a large stake of the target company to have a majority stake in it.

Methods of Financing an M&A:

Cash – Such dealings are usually termed acquisitions rather than mergers. This is because the shareholders of the target company are removed from the big picture while the target comes under the control of the bidder’s shareholders (indirectly).

Stock – Here the Payment is often in the form of the acquiring company’s stocks. These stocks are issued to the shareholders of the acquired company.

Break-up Fee

A break-up fee is paid if a transaction is not completed. This may happen if a target company walks away from the transaction. This may happen after a merger agreement or stock purchase agreement is signed. This fee is designed in such a way that it discourages other companies from making bids for the target company. In case the acquiring company walks away from a transaction, after signing the agreement, a reverse breakup fee is paid. The reverse breakup fees are usually 2-4% of the target company’s equity value. But this is also subject to negotiation between the two companies.