What is Cost of Equity? – Meaning, Concept and Formula
February 12, 2025
Making assumptions is an integral part of every financial calculation. It is a known fact that if the assumptions are modified even slightly, the numbers on the model tend to change dramatically. The problem is that financial modeler is forced to make several assumptions while creating the model. When several of these assumptions are being […]
When a company is facing bankruptcy, it tries to free up as much capital as possible. This freed up capital is used to finance the operations of the firm. One way to free up the capital is to sell fixed assets of the firm. During the bankruptcy process, it is possible for a company to […]
We have seen in the previous article that estimating cash flows can be quite confusing and counterintuitive. This is not because they are difficult to calculate. It is just because the course of action taken is opposite to what would have been taken in the case of accounting. Accounting is concerned with matching expenses to […]
The problem with traditional financial theories is that they tend to operate in an ideal world! The underlying assumptions are that the information available is perfect, the investors are capable of interpreting the information. Another assumption is that there is a single right answer which can be mathematically worked out. However, when investors use this […]
Companies want to go public because it helps them raise cash, which can be used for further expansion. However, the promoters of these companies often do not want to go public since this would mean that their stakes would be diluted and that they would lose control over the company. A low promoter’s stake in […]
The nature of mergers and acquisition activity has drastically changed over the past few years. Earlier, most of the mergers and acquisitions happened because companies wanted to do horizontal or vertical integration. They either wanted to team up with their competitors and enjoy economies of scale, or they wanted to team up with their suppliers and control the entire supply chain.
However, of late, technology has changed everything. So much so that the motto and reasoning behind mergers and acquisitions have also changed completely. For instance, in most of the M&A’s which are happening in the retail sector, brick and mortar companies are not buying other brick and mortar companies. The trend is that a well-established but declining brick and mortar retailer is buying an online e-commerce company.
Similarly, in the United States, chains of pharmacy stores are buying out health insurance companies. The reality is that businesses are no longer stable. Instead, they continuously change. Therefore whenever an established player finds itself lagging in some space, it used mergers and acquisitions to become competitive.
Mergers and acquisitions are no longer strengthening the underlying core business. Instead, they are a mechanism to ensure that the company does not get left behind as rapidly changing technology changes the marketplace.
Some of the major reasons behind modern mergers and acquisitions have been listed in this article.
Hence, the number of acquisition targets is also low. This low number of potential targets is one of the major reasons that companies are looking at other newer sectors when they look at inorganic growth.
Mature industries are known for having stable businesses with single-digit rates of growth. It is no surprise that many investors aren’t willing to pay a premium to be a part of this action.
It is a known fact that many incumbents in traditional industries like car manufacturing and banking are taking over start-ups that have a technologically advanced product. For instance, companies which make advanced software for driverless vehicles are being taken over by traditional car companies.
Similarly, fintech start-ups are being taken over banks and insurance companies. Mergers and acquisitions are being used as a shortcut to acquiring technological prowess, which is both difficult and expensive to build.
Apple is amongst the companies which has used an acquisition to quickly shore up their technical capability. They have no skill or experience in building modems. This is the reason they acquired Intel and their 2200 employees. The acquisition enabled Apple to compete with the like of Qualcomm almost overnight!
It has been observed that the speed of M&A activity increases drastically during the recession period when funding from venture capitalists and other traditional sources dries up.
Smaller companies no longer have to worry about funding constantly. After the merger, these companies are constantly provided funding by the senior member of the alliance as long as they continue to do cutting-edge research.
For instance, consumer goods industries, as well as pharmaceutical industries, use very similar supply chains. Hence, the distribution network of one company can be used by another company even though it operates in a different industry. There are also many professional third party logistics companies which possess such assets. Hence, they are also routinely targeted by companies looking to undertake mergers and acquisitions.
It is a known fact that companies such as Google acquire competitors only to get a hand on their best talent. The problem with acquiring for talent is that the acquirer is expected to pay a premium, but there is no surety in return.
It is not possible to buy people, and they could simply find another job and quit the company. This is the reason why companies create agreements and trusts which provide financial incentives to entice employees to stay longer.
In traditional M&A settings, the focus was on hard capital assets like plant and machinery. However, now, the focus has subtly changed to employees as they are the engines of growth for companies nowadays.
The bottom line is that the mergers and acquisitions game has changed drastically. The targets, reasons as well as the amount paid for the acquisitions are quite different than what they used to be a couple of decades ago.
Your email address will not be published. Required fields are marked *