Sunday, December 05, 2010

Mergers & Acquisitions (M & A)

In our fast-changing world, M & A is essential for survival of the fittest. He who can adapt and change accordingly to the circumstance will emerge as the winner.

The purposes of M & A are to enhance competitiveness, create cost-efficiency, boost revenue, and improve earnings per share. Hence, the rage when an M & A is announced.

A merger is different from an acquisition. When two companies combine forces to build a new entity, it's called a merger. A new name will probably come about for the new company. If Proton and MBMR merge, a new name, something like P & M may emerge as the new company.

When a big company takes over a small company, its called an acquisition. The small company simply disappeared while the big company retains its old name. The reverse of M & A are spinoffs and carve-outs.

An M & A is supposed to create a win-win situation. But not all M &As are bed of roses. Many have not turned out to be as lucrative as envisaged, and many are fiascos. One reason why an acquisition may fail is that the style of management of the acquiring company may not suit the old guards of the acquired company. Flexible working hours, a relaxed dress code and easy access to top management may become things of the past. This may create resentment resulting in shrinking production.

Thus when an M & A is announced, it may not be a time to cheer but a time to weep and fear. Nevertheless, an M & A announcement is often a catalyst that has a dramatic impact on the stock price. This creates the opportunity to make some fast bucks.

In an acquisition, the target company's stock price will rise the fastest. If you have the ability to identify companies that are likely candidates for takeovers, you hold the key to great wealth. Of course this ability does not come without much knowledge and experience. So it is not easy. But then, who says that money-making is easy?