M&A transactions can be a convenient way for companies to generate revenue. This kind of deal transfers funds away from the company through an equity share. It is generally only performed by a company that is confident that it will earn the money back in the form of higher profits over time.
The primary reason for a company to make the purpose of an M&A deal is to increase its competitive advantage. This can be through accessing new technologies, markets and geographic locations. It can also be achieved by reducing risk and achieving economies of scale. A pharmaceutical company, for example could buy an biotech company to speed up the development of the treatment for pulmonary arterial high blood pressure.
Another reason why a business could consider an M&A is to acquire talented employees. It is not unusual to see a large tech firm like Facebook to purchase smaller start-up businesses. This isn’t the most common reason for M&A however it happens at times.
If a potential buyer has determined that there is a viable deal opportunity it will create an LOI and then conduct due diligence on the target firm or company. This includes reviewing the operational, financial information, and intellectual property that is typically stored in a digital data room. This will reveal any skeletons that have been hidden in the closet. These could impact the price of the purchase, or result in closing conditions and special indemnities being that are negotiated.