A merger is a process where two firms combine to form a new company. An acquisition is a process where a company purchases another. Mergers and acquisitions are useful when a company needs to be recognized in the new market, when an organization needs to achieve administrative benefits or when the firm needs to introduce new products in the market.
Mergers and acquisitions are vital for a firm’s success. However, these firms need to employ professionals to identify potential acquisitions or mergers. These experts develop certain strategies to ensure the mergers and acquisitions processes in their firm are successful. Through M&A investment banking, firms can invest and reach the top. Below are some benefits of mergers and acquisitions.
Synergy refers to the effect that increases a merged firm’s value exceeding the two individual firms combined value. Synergies arising in mergers and acquisitions transactions can be hard or soft. Cost savings are hard synergies, and revenue increases are soft synergies. The benefits of synergies are that when two individual firms join together, they achieve a higher success level than if individual firms worked separately. When these firms work together, they generate better results hence achieving an increased value.
Economies of Scale
When two firms merge to form one, the new firm gets a better market share, gains economies of scale hence more profits. It also leads to less competition hence, higher prices for consumers. Mostly, consumers try to avoid getting into such a market. However, though they can avoid purchasing from small firms when two firms have merged to become one, they can enjoy the benefits because it’s a large firm.
Economies of Scope
When firms specialize in multiple products, they enjoy economies of scope instead of delivering a single product or service to consumers. Mergers and acquisitions enable firms’ products to get more demand because they have a larger client base. However, the firms have to enable the users to share the products’ photos with their friends and also through contact to increase the product’s demand.
Higher Levels of Competition
Higher levels of competition lead to the benefits of economies of scale. Again, large firms have more competition compared to smaller firms. Mergers and acquisitions enable larger firms to compete because there’s a variety of products available. However, if an established firm such as Nestle joins this market, even some large companies can’t keep the competition, and they can shrink. However, when two small firms merge to become one large firm, they get more demand, hence more profits.
Increased Market Share
Most companies agree to merger and acquisitions to increase market share. When two individual firms merge to become one, there’s an increased stock price compared to the price before the firms merged. Before merging, there are unfavorable market conditions. However, after merging, market conditions get better, and the merged firms enjoy long-term performance. Again, the merged firm attracts the right clients and also offers them the best services. A merged firm’s executives can also know the trends, opportunities, and when the market is growing or declining.
Opportunistic Value Generation
Most firms invest and create wealth through mergers and acquisitions. Opportunistic buyers benefit from the mergers and acquisitions transactions. When a firm is pursuing an acquisition, the target firm’s net assets are more compared to the purchase price. These companies have financial problems, but when buyers add value, they benefit directly. If the transaction was a good deal, the company would grow and adapt to the market trends.
When a country has an excellent tax regime or the target firm is in the right industry, acquisitions lead to tax benefits. If the taxes are high, the firms can’t get quick profits, and it could take longer to thrive. That’s why firms consider the tad regime and country before transacting. For instance, pharmaceutical companies in the US consider Ireland as their headquarters and move their headquarters to Ireland due to its low tax rate. The best merger documented is that between Allergan and Pfizer that was proposed for $160 million.
Diversification of Risks
Diversification of risks works together with economies of scope. Hence, a firm focuses on more than one revenue stream, spreading risks to various streams instead of just one stream. For instance, most young and potential consumers are turning away from Facebook. Hence, firms should consider alternative forms of social media, such as WhatsApp and Instagram. The presence of several streams enables companies to diversify risks.
Quick Strategy Implementation
A long-term strategy is converted to a mid-term strategy through mergers and acquisitions. For instance, if a firm needs to enter another country’s market, it begins building from the ground, hoping to achieve a certain but desirable scale in the next decade or less. Once the acquisition is closed, this company benefits. This also applies when a new product is being developed, and the firm can’t meet the speed offered by mergers and acquisitions.
Access to Talent
Sometimes, the main reason for an acquisition is to gain access to highly skilled and talented employees. Inexperienced employees can negatively impact the transaction. When organizations are merging, they need to retain employees who contribute highly to their better performance. Also, these firms should ensure that the employees don’t suffer from anxiety and disruption. Hence, when two small organizations are undergoing a merger, retaining talent is key. Again, large firms have access to better talents.
Merging with Another Company is Cheaper
It can be expensive to build, store and distribute facilities of a new firm. However, merging with another firm, even if it’s in another country, is cheaper if it has the needed facilities. Firms should consider the facilities the other firm has and which country it’s in. Some countries aren’t a good choice due to taxes and regulations. Merging with the right firm is cheap and has lots of advantages.
Above are several benefits of mergers and acquisitions. The better the deal, the more benefits a firm enjoys. Those intending to pursue a merger or an acquisition should consider which benefit they need after transacting. They should also consider their motive for the M & A transaction. Again, when merging companies retain good talent, they are assured of continued better performance.
Latest posts by George Meszaros (see all)
- How Unified Communications Could Elevate Your Organization’s Competitiveness - November 25, 2021
- Is Your Website Costing Your Business Money? - November 25, 2021
- How to Become a House Flipper: The Ultimate Guide to House Flipping Career - November 25, 2021