When one company wants to acquire another, where do they even start to figure out the right price to pay? Take a company with a similar client base, similar products, and similar business model. As the purchasing company, comparable transactions can be a way to value the company for sale…especially important when that target company isn’t publicly traded.
Example:
A Brazilian wax company, Slippery When Bon Jovi, wants to expand by buying another Brazilian wax company, Snail. Slippery When Bon Jovi specializes in older women wanting to, um...feel younger. But Snail has a client base comprising mostly Khardashian fans.
In trying to get a fair price, both companies will first look at other transactions that happened in the marketplace. (Investment bankers get paid to know this stuff.) They’ll look at what price those transactions paid per client. Per dollar of revenue? Per dollar of profit?
Then they’ll put on blindfolds, throw a dart at a dartboard, and hope that they get to some reasonable number that lets the transaction happen.
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Finance: What's the difference between m...23 Views
Finance allah shmoop what's the difference between mergers and acquisitions
all right people listen up Merger that's what's about to
happen here it's a merger acquisition that's what's about to
happen here Corporate america is kind of same thing when
two companies merge while they generally you know attracted to
each other hopefully respect each other they share stock or
combined the stocks of each side and you know combine
efforts and then and then cuddle afterwards if they're successful
at the merger than the combination of two roughly equals
yields more than the one plus one combo that made
them so two companies get together on generally equal ish
footing In that case acquisitions are a combining more like
that eating thing on much different footing The large company
eats or buys the target either using its more highly
valued stock currency or it's taft to do so Well
why would a company acquire another Well the target might
have one hundred employees ninety of whom can be fired
with massive expense savings after the acquisition For the acquirer
such that economically the acquisition won't just makes a whole
lot of financial sense acquisitions happen for market power reasons
As well like imagine the negotiating leverage that amazon would
have if it bought the next five biggest online retailers
Or maybe it'll just kill them Probably not legal for
them to buy him anyway given the monopoly like dominance
of amazon these days But wow that would be a
powerful set of acquisitions And that would be a good
reason for ems on to acquire a whole bunch Things
and bezos would grow even more powerful maybe too powerful
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