The term mergers and acquisitions (M&A) refers to the consolidation of companies or their major assets through financial transactions between companies.
Mergers and acquisitions are commonly divided by types:
- Horizontal: A merger that happens between two companies that operate in similar industries that may or may not be direct competitors.
- Vertical: A vertical merger takes place between a company and its supplier or a customer along its supply chain. The company aims to move up or down along its supply chain, thus consolidating its position in the industry.
- Conglomerate: This type of transaction is usually done for diversification reasons and is between companies in unrelated industries.
There are many motivating factors behind mergers and acquisitions. A common reason involves creating stronger market power.
This is particularly apt in a horizontal merger. Normally, in this type of M&A, the newly produced entity attains a higher market share and will gain the power to influence prices. Vertical mergers also lead to higher market power, as the company is more in control of its supply chain, thus avoiding external shocks in supply.
Sometimes the reasons for a merger and acquisition involve obtaining tax advantages. Tax benefits are looked into where one company realizes significant taxable income while another incurs tax loss carry forward.
Acquiring the company with the tax losses can enable the acquirer to use the tax losses to lower its tax liability.
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For more information, questions, comments, contact us.