How To Value A Business

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Mergers and Acquisitions (M&A) is an umbrella term that refers to the combination of two businesses.

M&A gives buyers looking to achieve strategic goals an alternative to organic growth, while giving sellers an opportunity to cash out or to share in the risk and reward of a newly formed business.

When M&A is successful, it holds the promise of enhanced value to both the buyer and seller. For the buyer, it can:

Accelerate time to market with new products and channels

Remove competition (buying a competitor is called horizontal integration)

Achieve supply chain efficiencies (buying a supplier or customer is called vertical integration)

Meanwhile, the cost savings that might be achieved by the reduction of redundant jobs and infrastructure (called synergies) can be shared by both the buyer and seller: The anticipation of lower costs going forward allows the buyer to afford a higher purchase price.

When M&A is unsuccessful, it can destroy value and especially hurt the buyer (since the seller is already cashed out). Poor due diligence, mismanaged integration and overestimation of potential cost savings are common reasons why mergers and acquisitions can fail.

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Barring leaks to the media, the first time the world will hear about a merger is usually through a merger announcement press release issued jointly by both companies. This is how we learned of the LinkedIn acquisition on June 13, 2016

Microsoft Corp. (Nasdaq: MSFT) and LinkedIn Corporation (NYSE: LNKD) on Monday announced they have entered into a definitive agreement under which Microsoft will acquire LinkedIn for $196 per share in an all-cash transaction valued at $26.2 billion, inclusive of LinkedIn’s net cash. 

So LinkedIn shareholders will cash out. In this deal, each shareholder gets $196 in cold hard cash. However, buyers can also pay with their own stock in addition to, or instead, of cash.

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