Mergers & Acquisitions

A merger is the combination of two similarly sized companies combined to form a new company. An acquisition occurs when one company clearly purchases another and becomes the new owner. A merger or an acquisition usually starts out with a series of informal discussions between the boards of the companies, followed by formal negotiation, a letter of intent, due diligence, a purchase or merger agreement, and finally, the execution of the deal and the transfer of payment.

The key idea behind M&A is the creation of synergy -- that is, the creation of value that is greater than the sum of the parts of the combining companies. This notion, and the people in M&A who facilitate it, greases the skids of commerce by helping companies grow, shed dead weight, find the money to pursue new ideas, and bring new and better products to market.

When two companies join in an optimal fashion, the resulting entity has better economies of scale, better use of resources, and a more effective market presence, all of which lead to more profit and sustainable competitive advantage. Thus, for many CEOs, navigating a successful merger or acquisition can be a crown jewel professionally.

But if managers lack foresight, take their eye off the ball (by failing to tend to the day-to-day business while working on a merger or acquisition), or cannot overcome challenges that a deal will present, mergers and acquisitions can prove to be expensive mistakes