The market for mergers and acquisitions (M&A) is a key element of many public firms growth strategies. Large public companies that have excess cash often seek opportunities for acquisitions to gain organic growth. For the most part, M&A involves two companies within the same industry and with similar levels of the supply chain working together to produce additional value.

In general, a business can purchase another for cash, stock or even debt. Sometimes the investment bank involved in the sale of one company may also provide financing to the company that is buying it (known as the staple financing).

M&A starts with an evaluation of the target, which includes financial reports including business plans, management plans, and other relevant information. The process is known as valuation and can be carried out by the acquiring company itself or outside consultants. Typically, the company that conducts valuation should consider more than only financial data, such as culture fit and other factors that will impact success of the deal.

The most popular reason to create a merger is to grow. By increasing the size of a company gives it economies of scale, which reduces operational costs as well as increases bargaining power with suppliers of raw materials, technologies or services. Diversification is another reason to increase the capacity of a company to business vdr weather downturns in the economy or to generate a more stable income. Certain companies purchase competitors to increase their standing in the market and to eliminate potential threats. This is referred as defensive M&A.