Assessing Your Target Business

Due diligence when looking into M&A

Once you have identified your target business it is important you critically assess the business. This is best done through interacting with the business's customers and suppliers. It may be a good idea to gain an insight into the business by asking customers what they think of their products and services. You can also ask them what they think about the competition in terms of payments and what their relationship is like with the owner. It will also be very helpful to go direct to the company and ask for financial information, cash flow information such as trends in sales and profits margins, future forecasts relating to the market and finances, stock levels, debts, information on their marketing and key employees as well as suppliers. Legal issues As well as considering aspects of your target business it is also essential you familiarise yourself with information on legalities and acts associated with an acquisition and merger. An important act that affects business sellers and buyers you should know about is the Data Protection Act. This act applies to anyone who holds information about living people such as information that identifies them, information on the personality and performance of an individual and also sex, religion, criminal records and race etc and is held on electronic format and sometimes on paper. The act prevents disclosing this information without the target companys consent. If you are granted permission you will be able to obtain a wide source of information. Expert M and A advice As is the case with other stages of a merger or acquisition it is recommended you seek the advice of an industry expert when assessing your target business. They will be able to provide helpful information and advice on the conditions of the market and any potential changes in the future along with any factors that will affect the market prices and margins. They can also find out information on the general position of the business and compare it with other companies in the market.
enefits of Mergers and Acquisitions are manifold. Mergers and Acquisitions can generate cost efficiency through economies of scale, can enhance the revenue through gain in market share and can even generate tax gains. The principal benefits from mergers and acquisitions can be listed as increased value generation, increase in cost efficiency and increase in market share. Benefits of Mergers and Acquisitions are the main reasons for which thecompanies enter into these deals. Mergers and Acquisitions may generate tax gains, can increase revenue and can reduce the cost of capital. The main benefits of Mergers and Acquisitions are the following:

Greater Value Generation

Mergers and acquisitions often lead to an increased value generation for the company. It is expected that the shareholder value of a firm after mergers or acquisitions would be greater than the sum of the shareholder values of the parent companies. Mergers and acquisitionsgenerally succeed in generating cost efficiency through the implementation of economies of scale.

Merger & Acquisition also leads to tax gains and can even lead to a revenue enhancement through market share gain. Companies go for Mergers and Acquisition from the idea that, the joint company will be able to generate more value than the separate firms. When a company buys out another, it expects that the newly generated shareholder value will be higher than the value of the sum of the shares of the two separate companies.

Mergers and Acquisitions can prove to be really beneficial to the companies when they are weathering through the tough times. If the company which is suffering from various problems in the market and is not able to overcome the difficulties, it can go for an acquisition deal. If a company, which has a strong market presence, buys out the weak firm, then a more competitive and cost efficient company can be generated. Here, the target company benefits as it gets out of the difficult situation and after being acquired by the large firm, the joint company accumulates larger market share. This is because of these benefits that the small and less powerful firms agree to be acquired by the large firms.

Gaining Cost Efficiency

When two companies come together by merger or acquisition, the joint company benefits in terms ofcost efficiency. A merger or acquisition is able to create economies of scale which in turn generates cost efficiency. As the two firms form a new and bigger company, the production is done on a much larger scale and when the output production increases, there are strong chances that the cost of production per unit of output gets reduced. An increase in cost efficiency is affected through the procedure of mergers and acquisitions. This is because mergers and acquisitions lead to economies of scale. This in turn promotes cost efficiency. As the parent firms amalgamate to form a bigger new firm the scale of operations of the new firm increases. As output production rises there are chances that the cost per unit of production will come down Mergers and Acquisitions are also beneficial

When a firm wants to enter a new market When a firm wants to introduce new products through research and development When a forms wants achieve administrative benefits To increased market share To lower cost of operation and/or production To gain higher competitiveness For industry know how and positioning For Financial leveraging

To improve profitability and EPS

An increase in market share is one of the plausible benefits of mergers and acquisitions. In case a financially strong company acquires a relatively distressed one, the resultant organization can experience a substantial increase in market share. The new firm is usually more cost-efficient and competitive as compared to its financially weak parent orgAdvantage of acquisition are :

Speed :It provide ability to speedily acquireresources and competencies not held in house.It allows entry into new products and new markets.Risks and costs of new product development decrease.

Market

power

:It

builds

market

presence.Market

share increases.Competition

decrease.Excessivecompetition can be avoided by shut down of capacity.Diversification is aggrieved.Synergisticbenefits are gained.

Overcome

entry

barrier

:It

overcomes

market

entry

barrier

by acquiring an existingorganization.The risk of competitive reactiondecrease. Financial gain :Organization with low share value or low price earning ratio can be acquired to take short term gains through assets stripping. Resources and competencies :Acquisition ofresources and competencies not available in house can be a motive for merger and acquisition. Stakeholder expectations :Stakeholder may expect growth through acquisitions.

Disadvantage of acquisition are:

Integration problems:The activities of new and old organizations may be difficult to integrate.cultural fit can be problematic.Employees may resit it. High cost :The acquirer may pay high cost,especially in cases of hostile take over bids.Value may not be added for the acquirer. Financial consequences :The returns fromacquisitions may not be attractive.Executed cost saving may not materialize. Unrelated diversification:This may create problem of managing resources and competencies. Too much focus:Too much managerial focus onacquisitions can be detrimental to internal development.

anization.

cquisition Versus Merger

Acquisitions differ from mergers, and those differences often emerge in the aftermath of either process. Negotiations during a merger process involve the relative ownership interest each company will hold in the merged entity. In an acquisition, on the other hand, negotiations focus on the relative value of each company in negotiating a purchase price. The implication is that merged companies will operate on a cooperative basis, while an acquisition involves absorbing part or all of another company. This is especially true concerning acquisitions of companies in the same industry.

Economies of Scale and Increased Efficiency

Acquiring a company in the same industry can result in reduced costs due to economies of scale. A major example of the economies of scale involves Wal-Mart, the world's largest retailer. Because of its sheer size, Wal-Mart can often decrease its expenses by buying in bulk and producing large quantities of goods in each production cycle. Acquiring a company in the same industry often results in enhanced economies of scale for a combined, larger entity, along with increased efficiency in production and other aspects of business operations.

Expanded Market Reach

If a company acquires a second company in the same industry, but in a different market area, the merged entity may cover a larger part of its market. This may come about by adding geographic areas, such as when a company that operates primarily in the east acquires a company in the same industry based in Los Angeles. However, expanded market reach also pertains to demographic and other factors, such as if a clothing store that traditionally caters to older women acquires a company with appeal to teenagers. This extended reach can be lucrative, but can also be difficult if the company fails to understand its new market, for example.

Tax and Legal Implications

Tax implications of acquisitions can be both advantageous and detrimental to the merged entity. In some instances, a profitable company can reduce its tax liability by acquiring a less profitable company in the same industry. However, in the United States and elsewhere, the law imposes limits on this process, sometimes resulting in reduced advantage for the acquiring company. Additionally, acquisitions accomplished through stock purchases can also result in potential liability for the company making the acquisition. Due diligence can limit this sort of exposure, along with a promise from the company selling shares to hold the acquiring company harmless, that is, exempt from adverse legal action.

Due Diligence
Meaning of zaqistion

Meaning
An acquisition is the purchase of one business or company by another company or other business entity. Consolidation occurs when two companies combine together to form a new enterprise altogether, and neither of the previous companies survives independently. Acquisitions are divided into "private" and "public" acquisitions, depending on whether the acquiree or merging company (also termed a target) is or is not listed on public stock markets. An additional dimension or categorization consists of whether an acquisition is friendlyor hostile. Achieving acquisition success has proven to be very difficult, while various studies have shown that 50% [1] of acquisitions were unsuccessful. The acquisition process is very complex, with many dimensions [2] influencing its outcome. Whether a purchase is perceived as being a "friendly" one or a "hostile" depends significantly on how the proposed acquisition is communicated to and perceived by the target company's board of directors, employees and shareholders. It is normal for M&A deal communications to take place in a so-called 'confidentiality bubble' wherein the flow of information is restricted pursuant to confidentiality [3] agreements. In the case of a friendly transaction, the companies cooperate in negotiations; in the case of a hostile deal, the board and/or management of the target is unwilling to be bought or the target's board has no prior knowledge of the offer. Hostile acquisitions can, and often do, ultimately become "friendly", as the acquiror secures endorsement of the transaction from the board of the acquiree company. This usually requires an improvement in the terms of the offer and/or through negotiation. "Acquisition" usually refers to a purchase of a smaller firm by a larger one. Sometimes, however, a smaller firm will acquire management control of a larger and/or longer-established company and retain the name of the latter for the post-acquisition combined entity. This is known as a reverse takeover. Another type of acquisition is the reverse merger, a form of transaction that enables a private companyto be publicly listed in a relatively short time frame. A reverse merger occurs when a privately held company (often one that has strong prospects and is eager to raise financing) buys a publicly listed shell company, [4] usually one with no business and limited assets. There are also a variety of structures used in securing control over the assets of a company, which have different tax and regulatory implications: