Companies can get stronger through mergers and acquisitions if they can increase their customer base, lessen competition in the market, and provide value that exceeds what each firm could provide on its own.
It’s crucial to consider how a merger and acquisition would affect employee performance before you enter into any agreements. In the middle of what may be described as a turbulent transformation, leaders must find strategies to sustain employee engagement, motivation, and contentment.
Combining businesses involves more than just combining cash assets. Office complexes, factories, machinery, and workers all work together to form a whole that is apparently bigger than the sum of its parts.
Most significantly, businesses that merge profit from each other’s clients and distribution networks. For instance, if a corporation with headquarters in the Philippines buys a business in Tokyo, Japan, the larger company may gain access to supply chains and markets in a new area. It can now grow internationally without having to spend money on constructing new factories or even marketing to the new customer base.
Equal shares of the new firm are distributed to stockholders of the two companies. Stock values could increase since shareholders’ investments are backed by the assets of both companies. It stands to reason that by integrating operational costs, the new business’s overall costs will go down and its earnings will increase.
A larger corporation buys the assets of a smaller company in an acquisition. C-level executives from the smaller company may occasionally continue to work for the larger one, either as consultants or as members of the board of directors. If bigger firms recognize their expertise and experience, they might even keep their jobs in the C-suite.
Other instances, the executive of the smaller firm will leave the new company after assisting with the acquisition’s transition. Usually, this is specified in the acquisition’s terms.
Benefits of Merge and Acquisitions
Economies of Scope
The economies of scope that are brought about by mergers and acquisitions are often not achievable through organic growth. Facebook is a good example of how this is the case.
Even though its platform let users to send and receive messages from friends and share photographs, it nevertheless bought Instagram and WhatsApp. Therefore, economies of scope enable businesses to meet the needs of a much bigger customer base.
Synergies
Synergies are frequently defined as “one plus one equals three”: the value that results from two businesses collaborating to create something far more potent.
The acquisition of Lucasfilm by Disney serves as an illustration. Disney may expand the customer offering by including theme park attractions, merchandise, and other items. Lucasfilm was already a significant income source thanks to the Star Wars franchise.
Economies of Scale
The promise of economies of scale is the driving force behind every M&A activity. The advantages of growing larger include:
- Increased capital access,
- Increased volume results in cheaper costs,
- Greater negotiating power with distributors, among other things.
Although buyers should always resist the urge to engage in “empire building,” larger companies typically have benefits that smaller companies do not.
Increased Market Share
Increased market share is one of the more prevalent reasons for M&A.
There has always been significant industry consolidation in retail banking because historically, retail banks have considered their regional footprint to be essential to gaining market share (the majority of nations have a set of “Big Four” retail banks).
Santander, a Spanish retail bank, is a notable example because it actively pursues the purchase of smaller banks, which has helped it grow into one of the biggest retail banks in the world.
Opportunity-Driven Value Creation
Some of the best transactions take place when a business isn’t even actively looking to acquire another one.
The purchase price for these deals is typically lower than the net assets of the target company’s fair market value.
These businesses frequently have some financial difficulties, but deals can be negotiated to keep them operating while the buyer gains immediate value as a direct result of the purchase.
Higher Levels of Competition
Theoretically, a corporation grows more competitive as it grows in size.
Being bigger allows you to compete for more, which is basically one of the advantages of economies of scale. As an illustration, hundreds of new businesses are currently offering a variety of vegetable-based “meats” in the market for plant-based meat.
However, many of the start-ups will disappear when P&G or Nestle start to concentrate on this sector because they will be unable to compete with these behemoths.
Risk Diversification
Having numerous revenue sources enables a corporation to distribute risk among them rather than concentrating on just one, which goes hand in hand with economies of scope.
Returning to the Facebook example, some analysts claim that younger users are shifting their attention away from the social media behemoth and onto alternative platforms, such as Instagram and WhatsApp.
When one revenue stream declines, an other revenue stream may maintain or even increase, reducing the risk to the acquiring company.
Faster Implementation of the Strategy
The best way to transform a long-term strategy into a mid-term strategy may be through mergers and acquisitions. Consider a scenario in which a business wishes to enter the Canadian market. It may start from scratch and hope to achieve the desired scale in five to ten years.
Or it might be a company, its customer base, distribution, and brand value, and gain from them all after the acquisition is completed.
Additionally, an organic strategy may seldom ever match the pace offered by M&A in fields like new product development and R&D.
Tax Advantages
If the target firm is in a strategically important industry or a nation with a beneficial tax system, acquisitions may occasionally result in tax benefits.
A case in point is when pharmaceutical corporations looked at smaller Irish companies and moved their headquarters there to take advantage of the country’s lower tax base. This transaction is known as a “tax inversion.”
The most well-known version was a $160 billion merger between Pfizer and Allergan that was planned in 2016 but later quashed by the government.
Access to Talent
Anyone in the recruitment sector will respond with some variation of “people that can code” when asked where the biggest talent shortages currently exist.
Why is that so?
Because of the enormous demand for programmers during the so-called fourth industrial revolution, to start. Additionally, the top programmers are all employed by major Silicon Valley software firms.
The most talented people are always available to the biggest. That holds true for every sector of business, not just technology.
Conclusion
The advantages of making wise acquisitions are numerous, as this list demonstrates. Furthermore, these advantages are more likely to materialize the better the contract is crafted.
When thinking about their reasons for purchasing, anyone intending to implement an M&A strategy should take into account which of these benefits they are most interested in from the acquisition.
