Why Do Companies Do M&A Transactions?

M&A transactions are a means for companies to earn revenue in the short term. This type of transaction takes money away from the business through a purchase price and equity shares. This type of transaction is only carried out by companies who are confident that they will recoup the money in the near future via increased revenue.

The primary reason a business engages in an M&A transaction is to increase its competitive edge. This could be achieved by gaining access to new technologies, markets, and geographical locations. It is also possible by reducing risk and creating economies of scale. For example, a pharmaceutical company may buy a smaller biotech business to speed up the development of a novel treatment for pulmonary arterial hypertension.

Another reason why a business might consider an M&A is to acquire talented employees. This is often why the largest tech company such as Facebook purchases smaller startups. This isn’t a common driver for M&A but it does occur at times.

Once a potential buyer has concluded that there is a viable deal opportunity, it will draft an LOI and then conduct due diligence on the prospective company or firm. This entails reviewing financial, operational and intellectual property details that are typically available in a virtual information room. It will reveal any hidden skeletons that could impact the purchase price, which could result in closing conditions being added, or even special indemnities being bargained.

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