Acquisitions are only slightly different from mergers and are sometimes cloaked under the heading of merger in order to avoid negative publicity for the company that is being bought out.

Acquisition Types

Most acquisitions are done by one company buying another company with cash, with stock, or with a combination of the two. Smaller acquisition transactions usually involve one company buying another company’s assets while the company that has sold its assets is forced to liquidate or enter into another type of business. The shell of a company that is left behind after the selling of its assets can be used by smaller, privately owned companies who are quickly emerging and seeking to become publicly listed on the stock market. This type of acquisition is called a reverse merger. In a reverse merger the shell company’s stock market listing becomes its most valuable drawing card, allowing the private company to merge with it in order to become a new public corporation.

Valuation

The CEOs and upper management of companies typically try to effect mergers and acquisitions that will benefit a company and its stockholders. There are various tools and methods available to these company decision makers which allows them to better predict what mergers and acquisitions would be profitable, as well as provide them with a rough idea of the financial aspects involved. One such method that is used to determine what target companies are best suited for a merger or acquisition involves using comparative ratios. These ratios can be used to select the most suitable candidate from a host of choices.

Ratios

One such ratio comparison is called the price-to-earning (P/E) ratio. This ratio is calculated by dividing the target company’s market value per share by its earnings per share. A higher P/E represents the possibility of higher future earnings. The P/Es of various companies can be compared and the company with a highest P/E is generally selected as the preferred candidate for a merger or acquisition. Another ratio that can be used by deal makers is called the price-to-sales ratio (PSR). This ratio is calculated by dividing a stock's current price by its revenue per share.