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What is M&A? And why it matters

September 4, 2013

Mergers & Acquisitions, also known as M&A, has dominated the financial media during this last year. Both in terms of headlines generated and fees earned, M&A activity has been very much in the public eye recently. But what exactly is M&A? And what does it matter for you and your investments? Let’s look at two quick definitions

Merger – A combination of two companies that results in the formation of one new company.

Acquisition – When one company buys another.

There is a lot of debate as to whether or not M&A is a net benefit to society, the markets, or anyone besides the bankers and attorneys that work on the deal – I have included links below that cover both sides of the discussion.

What I am more interested in however, are two things; what drives M&A activity, and what the impact could be on your money and your investments.

Taking a step back and looking at this conversation objectively, there are a few things that could definitely help drive M&A activity – low interest rates, easily obtainable (corporate) credit (debt), and an investment environment full of low-return investments. These three factors result in corporations that are flush with cash, have limited options for organic growth, and limited investment opportunities. Looking at it from that perspective, it makes perfect sense that the current economic climate is resulting in more and more M&A. Interest rates are low, corporate credit is relatively easy to obtain, and due to depressed economic growth, the returns that are available are not all that attractive. Combining these external forces with the pressure that management teams face to generate earnings growth, it is not a leap of imagination to see the appeal of M&A activity.

M&A can certainly have an impact on both you as a consumer and as an investor. Depending on the nature of deal, certain products/services that you use might go out of business or be absorbed into a larger operation. Stock that you have might be bought back and replaced with cash or stock in the new company.Either way, it is not the investment that you had initiated.

There can certainly be benefits to M&A for investors as well.

For one, if you own shares in the investment banks that do most of the advising on large M&A deals, you will benefit in terms of higher stock prices, enhanced buyback programs, and possibly higher dividend payouts. If you own shares of firm that is being acquired, the stock price usually pops when the acquisition is announced – acquiring firms usually pay a premium when they go into “acquisition mode.” Lastly, if you own shares in the firm doing the acquiring, your investment can benefit from the enhanced earnings stability, earnings growth, and diversification that M&A can bring.

There is certainly a lot to discuss with this topic – let me know if you would like more.

Happy Reading!


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