Mergers and acquisitions (M&A) is the consolidation of companies or assets through various financial transactions.
In a merger, two or more companies merge their operations and become one entity. On the other hand, in an acquisition, one company acquires another company, and the acquired company becomes a subsidiary of the acquiring company.
Mergers and acquisitions are often pursued for various reasons. This could be for expanding market share, achieving economies of scale, diversifying operations, and gaining access to new technologies or markets.
These transactions can also be used to increase profits by eliminating redundancies, reducing costs, and increasing revenue streams.
Mergers and acquisitions can take many forms, including horizontal mergers where two companies in the same industry combine their operations, and vertical mergers where a company acquires a supplier or a customer, among others.
Reasons for Mergers and Acquisitions (M&A)
There are several reasons why companies engage in M&A:
Growth
One of the primary reasons companies pursue M&A is to achieve growth. Acquiring or merging with another company allows businesses to increase their size, market presence, and revenue streams. They can acquire established brands and distribution networks.
This can be particularly useful for companies that have reached a plateau in their growth trajectory or those looking to expand into new markets. M&A can provide a faster and more efficient path to growth than organic expansion, which can be slow and costly.
Diversification
Diversification permits a company in a different industry or product line to reduce its dependence on a single market or product, thereby spreading its risk and increasing its resilience to economic downturns.
Moreover, diversification can also provide companies with a competitive advantage. By offering a wider range of products or services, companies can differentiate themselves from competitors and build stronger customer relationships.
Synergy
When two companies merge, they can leverage their complementary strengths to create value that is greater than the sum of their parts. This can be achieved through cost savings, improved efficiency, and the ability to offer a wider range of products or services to customers.
Merging companies can eliminate redundant functions, consolidate operations, and reduce overhead costs. In addition, combining purchasing power and negotiating better deals with suppliers can lead to lower costs for raw materials, components, and other inputs.
Market Share
Acquiring a competitor is a common strategy for companies looking to increase their market share and gain a competitive advantage. This can be particularly beneficial in industries with high barriers to entry or limited growth prospects.
Companies can achieve economies of scale and improve their bargaining power with suppliers and customers. Eliminating a competitor increases a company’s share of the market and reduces competition, which can lead to higher pricing power and increased profitability.
Profitability
Companies can acquire a company that is more profitable or has higher margins to increase their earnings and improve their financial performance. This provides access to new markets, customers, and product lines, which can create new growth opportunities and increase revenue.
Lower costs, such as those resulting from higher productivity, can lead to an increase in profits. As a result, consumers may benefit from lower prices, leading to an overall improvement in economic welfare.
Types of Mergers and Acquisitions (M&A)
The following lists the different types of mergers and acquisitions:
Merger
In essence, other corporate entities are integrated into an existing entity. This can be beneficial for smaller companies that merge into larger companies with stronger brand recognition and greater market traction.
Acquisition
Acquisition is a type of business merger that takes place when one company purchases a majority or all of another company’s shares. When a company acquires more than 50% of the target company’s shares, it gains control of the company.
Consolidation
Consolidation involves merging the core businesses of two companies and forming a new one. The shareholders of both companies must give their approval. Once approved, they receive common equity shares in the new company, and the old corporate structures are abandoned.