Importance Of Debt & Equity Financing

Posted by transworldma on December 15th, 2022

One often hears of the term mergers & acquisitions that are shortened to M&A. Admittedly, this is a specific business strategy that can help a company or corporation obtain more market share, thus securing a good position in the concerned industry. Most people have heard of how Amazon acquired Whole Foods Market. Even more exciting was the news about Microsoft and Linkedin becoming a single entity. One has o be aware of the rules before considering either a merger or an acquisition today. It may be time to learn the basics of corporate acquisitions to remain abreast of business techniques before trying to expand into unchartered territory or beat a competitor conclusively.

 It is essential to understand that an acquisition involves gaining control of another company by purchasing a majority of its shares. Owning more than 50% of shares enables a company to make business decisions in its favor. It is a common business strategy that is often carried out with the target company’s approval. On the flip side, disapproval does not halt the process of acquisition either.

While most citizens are aware of huge acquisitions between corporations and multinational companies, both M&A are carried out throughout the business world, with smaller and medium-sized companies being involved in the process.

Reasons for acquiring other companies

· Economies of scale- The acquiring company gains financially by increasing its production by using the facilities and workforce of the acquired company.

· Diversification - To enter a new market that has remained unexplored by the acquiring entity so far. It gains by taking advantage of the know-how and expertise of the acquired company so that the venture remains profitable.

· Foreign Operations- A Company based in the USA may be eager to enter foreign markets. This can be done quickly by acquiring another company that is based in another country is the simplest way to make one’s presence felt overseas.

· Strategy for Growth- A big company often runs into trouble due to a lack of resources and a low workforce. One of the best ways to combat such a situation is to acquire a small company and utilize its resources, thus improving the revenue.

· To Eliminate Competition- Operating in a market with too many competitors may b counterproductive. An ideal solution in such circumstances is to acquire the smaller players and merge with the tougher competitors, thereby joining forces to increase profitability.

· New Technology- No production line can survive or remain relevant by shunning technology. Unfortunately, the bigger players who have been operating for decades may be out of depth when it comes to using technology. Most find it cost-effective to acquire new companies that have installed appropriate technology and know how to utilize it successfully.

Making an acquisition is not easy. It requires careful consideration of multiple aspects and checking of profitability as well as the legal implications before going ahead with it.

Raising the required capital can be done by checking the possibilities of debt & equity financing well before proceeding with the M&A.