Mergers
& Acquisition is one of the major aspects of corporate finance world. The reason
behind M&A of two separate companies is that it creates more value as compared
to being on an Individual stand. With the clear objective of wealth maximization,
companies assess different opportunities by way of Merger or Acquisition. In
case of a Target company, M&A transaction gives its shareholders the
opportunity to cash out a significant premium, especially if the transaction is
an all cash deal. But if the acquirer pays partly in cash and partly in its
stock, the target company’s shareholders will get a stake in the acquirer, and
thus have a vested interest in its long-term success.
In
case of acquirer, the impact of M&A transaction depends on the deal size relative
to the company’s size. The larger the potential target, the bigger will be the
risk to the acquirer. An all-cash deal will substantially drain the acquirer’s
cash holdings. But since many companies rarely have the cash hoard available
for making full payment for a target firm completely, all-cash deals are often
financed by way of debt. This increases debt in the acquirer’s company; the
higher debt load may be justified by the additional cash flows contributed by the
target firm.
M&A
sometimes becomes successful and sometimes not. Sun Pharmaceuticals acquires
Ranbaxy is a classic example of a share swap deal. In the deal, Ranbaxy shareholders
will get four shares of Sun Pharma for every five shares held by them, leading
to 16.4% dilution in the equity capital of Sun Pharma.
Below
are the examples of M&A in India:
(Source: Livemint)
Thank You
Regards
Author: Ayush Choudhary
Kautilya
IBS Mumbai
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