M&A transactions are a way for companies to generate income in the short term. This type of transaction transfers funds away from the business in the form of the purchase price and equity share. This kind of transaction is only performed by businesses which are confident that they can be able to recover the money in the future, through higher revenues.

The main reason that companies engage in an M&A deal is to boost its competitive advantages. This can be accomplished by gaining access to new technologies markets, markets, and geographic locations. This is accomplished by the reduction of risks and the creation of economies-of-scale. A pharmaceutical company, for instance could acquire a biotech company in order to speed up the development of a treatment for high blood pressure.

A company may also do an M&A to acquire talent. It is not uncommon to see a large tech firm like Facebook to buy smaller companies that are just starting out. This isn’t the most common reason for M&A however it can happen from time to time.

When a buyer has decided that they have a good opportunity, they’ll create an agreement known as a Letter of Intent (LOI) and then conduct due diligence of their target company or firm. This involves reviewing the financial, operational and intellectual property information typically available in a virtual information room. This will reveal any hidden skeletons that could impact the purchase price, result in closing conditions being added or indemnities being negotiated.

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