Mergers and acquisitions are the combining of companies or assets using financial business or corporate transactions. Whether it is termed a merger, with two firms blending into a new whole, or acquisition, which describes one firm’s absorption into another through buying, it is often undertaken for strategic purposes. Such includes expansion of market share, diversification of product lines, and cost efficiencies. Mergers and acquisitions often create very far-reaching organizational changes that determine the mobilization of employees, changes in operations, and market dynamics.
Let us understand the types of mergers and acquisitions, their reasons and their benefits for organisations.
Types of Mergers and Acquisitions
Mergers and acquisitions involve different structures depending on the strategic goals for acquisition. There are different types of mergers, with each having its unique strategic intention and is mainly needed to gain cost efficiency and control, access to a new area of diversification, nevertheless, provide special strategic and financial merits.
Although there are many types of mergers, some frequent ones are listed below:
- Horizontal merger – When two or more companies belonging to the same industry and often compete with each other in the market merge together, it is called a horizontal merger. With the help of this type of merger. The merged entities can reduce their direct competition, increase the market share, enlarge the customer base and achieve cost efficiencies through collaboration and teamwork.
- Vertical merger – When two or more companies belonging to the same industry but undertake respective businesses on different levels of the supply chain merge together, it is known as a vertical merger. Companies generally opt for a vertical merger with the aim of lowering production costs, controlling supply chain betterly and reducing the dependency on supply vendors.
- Conglomerate merger – When two or more companies who belong to different or completely unrelated industries merge together, it is known as a conglomerate merger. This type of merger diversifies risks, expands the market, enhances the financial security and reduces the market risks exposure. Conglomerate mergers can be pure or mixed.
- Market extension merger – When a company desires to expand its presence geographically and increase its customer base, it opts for a market extension merger. In such a type of merger, two companies merge together that sell the same type of goods and services, but different markets.
- Product extension merger – Companies that offer or deal in related products or sell in related markets come together to increase their product lines, resulting in a product extension merger.
- Reverse merger – A reverse merger takes place when a private company merges with a public limited company by buying the ownership and control of the public company through its shares, but does so without following the traditional route of the listing process.
- Acquisition – An acquisition means when one company acquires or takes over the assets or shares of another company, either by mutual agreement (friendly) or without the consent or approval of the board of directors or the members (hostile). This benefits the acquiring company to eliminate competition, achieve immediate expansion and obtain technological upgradation.
- Other types – In addition to the above types, there are several other types like management buyout, leveraged buyout, takeover, consolidation, etc.
Reasons for Mergers and Acquisitions
To merge and acquire is a strategic business decision and a company decides to do so due to varied reasons. Mergers and acquisitions take place not only to increase the profits but also with a view to gain several advantages ranging from market expansion to achieving competitive growth.
The following is an elaborate analysis bringing out the prominent factors that affect mergers and acquisitions.
1. Tax Benefits
A very important consideration in mergers and acquisitions relates to tax implications. For instance, an entity that has significant aggregated tax losses will look for a merger with another company that has tax losses so that it can retain the losses to offset future tax liabilities and thereby save significantly. Once more, a corporation generating profits will look to merge with a concern that has been operating with loss. This would spread that loss over several years, thus reducing its future taxable income and decreasing tax liabilities for the acquiring company.
2. Synergies
The primary reason behind or rather the objective of mergers and acquisitions is mainly to achieve financial synergies in dominating an industry to enhance the performance of the entity in question. This improvement translates into better access to capital markets, more favourable financing, and reduced borrowing costs for the corporation due to mergers or acquisitions.
Also, cost synergies may relate to the capacity of the merged group, and in this respect, such synergies result from improved operational processes.
Revenue synergy, on the other hand, is a benefit which is achieved when two different companies come together such that there are set avenues for generating revenue that cannot be generated if the companies were separate; for instance, one company selling its products to existing clients of another company, different but complementary technologies coming together that neither can innovate on their own, etc.
3. Talent Acquisition
Acquisition of the right skilled man is very often a big reason for companies to merge or acquire other companies, especially when it is a field that requires special knowledge, experience and expertise to be ahead of others. A company may buy another company just to acquire its management team, research and development staff, or any other highly skilled employees to enhance their own research and development capabilities and unlock new market levels.
4. Market Expansion and Growth
Among the most significant drivers to attract companies into a merger or acquisition are efforts to expand market presence. Organic growth is a means by which an organisation grows its business through internal activities, often a slow and resource-consuming process. Mergers and acquisitions offer an expedient way of expanding in new markets. It allows them to open up the company to new customers, break the dependence on one particular market by diversifying revenue sources and broaden their customer bases.
Acquiring an established company in a new area allows the acquiring firm to bypass many of the headaches that starting a new business from scratch would entail, from local regulations to supply chains to brand recognition. For example, an enterprise in one business acquires another enterprise of a closely related industry to harness the pool of customers of the latter. Companies expand their customer access, thereby increasing their ability to generate revenue and increase their share in the market.
5. Eliminating Competition
Mergers and acquisitions provide a strategic approach through which one can eliminate competitors in an industry or market segment. Buying a competing company will not only reduce the threat of competition but also access other valuable assets, such as the competitor’s customer base, technology and share in the market. In this direction, the new entity would be able to gain more pricing power easily and also witness higher profit margins as it would have a larger hold over market dynamics. However, these mergers would also face the vigilant eye of scrutiny for possible regulations if their outcomes lead to decreased competition that allows for monopolistic environment harnessing.
Benefits of Mergers and Acquisitions
Mergers and acquisitions provide the grouped entities a competitive edge and offer several advantages varying on the nature of the merger or acquisition, the industries involved and the strategic goals of the companies.
Below are some key benefits:
1. Economies of scale
When two companies merge, they may realise economies of scale by consolidating available resources, removing redundancies and streamlining processes. Although these economies of scale seem to be due to increased units or volumes of specific products or services, decreasing the unit costs, hence profits rise to their highest levels.
Lowering the cost is one of the major advantages of mergers and acquisitions because of the integral operation in manufacture as well as the distribution or procurement, thereby increasing profitability and financial efficiency at large.
2. Increased Market Penetration
Through mergers and acquisitions, organizations can gain more strength on the competitive side by opening up more market share opportunities for themselves. This can be seen in horizontal mergers in which two firms in one industry come together to dominate a given market segment, giving them more price controls, a stronger brand and more power over competition that, eventually, will take a stronger position in the market.
3. Increased Net Worth
Improving shareholder value is the ultimate goal of mergers and acquisitions. An effective merger or acquisition yields better earnings as well as positive stock performance with improved returns for investors. Through better financial performance, shareholders’ wealth increases with better stock prices and more substantial dividends.
4. New and Additional Product Lines
Companies expand their business portfolio through mergers and acquisitions. They achieve this either by working in many industries or by increasing the variety of goods that are offered to customers in a bid to reduce threats associated with dependence on one product or industry. Diversification may encourage reduced business risk, as well as the marketing of complementary products and the exploitation of new sources of revenue.
5. Technology Upgradation
There are numerous reasons why technology has become the bedrock of many M&A transactions, especially in technology-driven industries. For example, acquiring a successfully operating enterprise with advanced technologies or owning a patent or multiple intellectual property rights can give the purchasing company a head start in the market as it facilitates the process and cuts the costs of development. Fast-track acquisition of cutting-edge technology and IP, which ensures the organization stays competitive, improves its products or increases its efficiency.
6. Innovation
Acquisitions facilitate corporate innovation and develop an environment to foster growth and competition where ideas can be shared and implemented. Innovative strategies help directors to decide how to use resources and achieve their optimum utilisation to develop new products and services. Mergers and acquisitions help in adding value to the corporate structure, innovation, and competitive opportunities.
7. Increase in Resources
When two or more companies come together, their resources get combined in the new entity, giving them additional access to the increased resources where the pooling of all resources enables a company to achieve greater financial stability. Resources include not only financial but also technical and human resources and with their increase, companies are in a better position to improve their market standing.
8. Improved Distribution Channels
Mergers and acquisitions allow companies to distribute their goods and services by exploring new routes and channels. For companies whose products and services overly depend on logistics and supply chain management, an increase in distribution and delivery channels is quite an essential benefit. This facilitates the dissemination of the business products and ultimately enhances customer satisfaction.
9. Team Spirit
When a company merges or acquires with another company, it obtains not only its share capital but also its human resources, thus building a unified team that increases the inflow of skills, knowledge, and talents. When all the employees strive together, common goals and objectives are better achieved, displaying team spirit and enthusiasm.
10. Risk Diversification
Mergers and acquisitions can be an effective strategic vehicle for managing business risk. Businesses that are also constrained to operate in only one industry or region have more precise risks to market fluctuation or regional economic downtrends. By acquiring other businesses to diversify their operations, a company can spread its risk over diverse industries or geographic regions, hence reducing market risks. Exposure to specific market-related risks is reduced and long-term stability increases as a result of diversification.
11. Entry into New Markets
Breaking into a new industry or market usually requires a huge investment of time and finances. Mergers and acquisitions allow organisations to avoid these long periods by acquiring an already dominant entity in the region that the organisation wants to penetrate, hence making it possible to realize its market entry goals instantly.
12. New Corporate Designs and Restructuring
Mergers and acquisitions are instruments of corporate restructuring and corporate strategy that help businesses achieve their organisational objectives with improved infrastructure. A merged entity always has more advantages and more market strength due to its new and enhanced corporate structure.
Conclusion
Mergers and acquisitions are strategic actions for companies for different reasons. The reasons include growth, market expansion, financial synergies, and the improvement of competitive advantages. Such effects are impressive across different industries and market contributions as well as direct company contributions. These allow businesses to achieve strategic goals, grow shareholder value and promote long-term security.
Mergers and takeovers are among the most complicated and diversified techniques companies try for all sorts of purposes. Such deals usually result in a market share increase, financial synergies to be harvested, and advantages to be gained from product diversification or the exploitation of technology, all of which present excellent opportunities for companies to grow and change with the market trends. The success of these activities, therefore, depends on how well-planned, executed and properly integrated a merger is.
