There are a variety of reasons why a company’s owners or top executives choose to use mergers and acquisitions methods. Some of these strategic mergers and acquisitions aim to solve a specific business issue. This could be, the buyer wants to add a new product line, expand their facilities or enter a new market. They may choose to obtain expertise and intellectual property, or eliminate competition by purchasing competing businesses. A strategic M&A for a professional services organization is frequently about establishing credibility. Another reason could be to add intellectual firepower, or shifting the balance of power in a specific market.
Mergers and Acquisitions (M&A)
We looked into companies that had obtained extremely high valuations a while back. It was a modest company that specialized in video game production, and it saw a lot of action throughout time. This company was sold for ten times its revenue. We inquired from the acquiring corporation as to why they were willing to pay such money. Their motivations were crystal evident.
The target firm provided required qualifications as well as contracts with a required client. Moreover, if the purchasing firm doesn’t have these competencies, it will be at severe disadvantage when competing for future work. In other words, they believed the acquiring firm’s long-term value was far more than the inflated purchase price. While firms do buy or merge with other companies for a variety of reasons, there are risks too. Reasons to buy may include improving their own growth or fending off competition. At the same time, the risks involved can lead to a disastrous Merger and Acquisition deal. These include overpaying or a failure to effectively integrate the two organizations.
Why Mergers and Acquisitions
- Fill key gaps in service offerings or client lists
- A cost-effective method of acquiring talent and intellectual property
- Possibility of leveraging synergies
- Incorporating a new business strategy
- Shortening learning curves and saving time
Mergers and Acquisitions deals that are key successes: The Gilead Sciences-Pharmasset M&A
Gilead Sciences (GILD), the world’s largest maker of HIV drugs decided on a deal. They made a $11 billion offer for Pharmasset was a developer of hepatitis C experimental treatments, in November 2011. Gilead offered $137 per Pharmasset share in cash, representing an 89 percent premium over the stock’s last closing price.
The Pharmasset transaction was a risky one for Gilead. As a result, Its stock dropped nearly 9% on the day it was disclosed. However, few business bets have paid off as spectacularly as this one. The FDA approved Gilead’s medicine Sovaldi in December 2013. This was after proving to be astonishingly effective in treating hepatitis C, a disease that affects 3.2 million Americans.
While Sovaldi’s $84,000 price tag for a 12-week course of treatment sparked some debate, Gilead had a market capitalization of $159 billion by October 2014. Therefore, this rose up from $31 billion immediately after the Pharmasset acquisition. Gilead has a market cap of $85.66 billion as of July 2021, indicating that things have calmed down.
