ew markets, as one company who is having bad times seeks an infusion of additional resources from another, or as a company targeted for a hostile takeover moves to find a friendlier partner in order to forestall the takeover. In a friendly M&A action, the resulting two companies will continue their operations. In some cases, the operations will be combined in some fashion; in other cases, the operations will continue to be operated separately.
Hostile takeovers are what garnered the nation's attention in the 1980s as executives such as T. Boone Pickens and Carl Icahn moved to acquire companies, then sell off significant portions of the organization. The result was a large influx of cash for the acquiring company, but the wholesale destruction of the target organization. The primary difference between a friendly M&A action and a hostile one is that hostile takeovers typically result in the destruction of the current operation, and certainly the current management, of the target company.
M&A activities, just as other business activities, can be financed by cash, borrowed funds, or existing equity. Companies which have large amounts of cash on hand may choose to purchase other companies outright; this type of financing was used with success by Philip Morris when it purchased foreign cigarette subsidiaries (Levin, 1991, p. 2). In other cases, cash is combined with equity (stock) financing or is used to decrease the funds that have to be borrowed in order to conclude a specific transaction. Companies which have large sums of cash on hand, are, however, subject to takeover attempts themselves, so some caution is used by managers in these organizations.
Companies who enter into M&A activities nearly always use a third-party to help bring about the transaction. In some cases, these third parties are securities firms; in other cases, they are investment bankers. Often, the two are combined. These third parties help companies l...