Mergers and acquisitions (M&A) are effective techniques in corporate finance, and management to maximize wealth. When two firms merge, it helps in financial strength, growth as well as competitive position. Mergers refer to combining two firms with a comparable financial position to establish a single company, even if the terms are used interchangeably. In addition, when a more prominent firm buys a smaller one, it is known as an acquisition. When two businesses in the same industry merge, it is called an M&A (horizontal). Firms in the same sector but different supply chains might join to boost sufficiency (vertical) or a merger of companies involved in various economic activities to increase shareholder revenue (conglomerate) (Jedin, 2016). The M&A business strategy approach has both advantages and downsides in the market.
Advantages of M&A
A merger with an established company is typically the easiest and less expensive option for a company looking to expand. This method can save time and money by avoiding identifying retail sites, negotiating leases, and recruiting additional employees (The reasons for mergers and acquisitions, 2016). An excellent example of this is Amazon’s 2017 purchase of Whole Foods. To enter the grocery retail market, the corporation would have to buy property, establish new shops, hire new employees, and do several other necessary tasks. Opening a brand-new business is no small feat; it has a foothold with a well-established and financially sound company now that it has acquired Whole Foods.
Combining two businesses helps to save money because of the combined purchasing power. Unit costs may be reduced, which might contribute to a reduction in fixed costs. If the stores are close to one another, having fewer of them open may be better. Even if it is more efficient, it will still benefit from this efficiency. Providing demand for the combined goods of the two companies is substantial, and they can keep the plant working continuously, making better use of the equipment and available space all at the same time (Benefits of a merger or acquisition, 2018). Synergies are frequently cited as a reason for mergers and acquisitions, as a result, the same individual does the same responsibilities for all businesses. When these responsibilities are combined, only one is needed, saving the business money on human resources.
M&A may provide financial heft in various ways. To begin, if the merged company successfully leverages synergies, it will reap significant financial rewards. The merger will also enhance the merged company’s revenue and asset value, which is a positive outcome. Borrowing from the banking sector and using that debt as leverage may help it increase its investment capacity (Benefits of a merger or acquisition, 2018). Larger firms are less likely to default since investors are less worried about losing money, additionally, an integrated business minimizes the number of competitors. Higher pricing and more significant influence over client purchase decisions are possible with increased market power for the company.
Customers consider less competition to be a drawback, weaker competitive pressure means lower pricing and a more significant proportion of the market for the company (Benefits of a merger or acquisition, 2018). Facebook made a smart move in 2012 when it bought Instagram before it had a chance to flourish. The acquisition of a competitor that offers a somewhat different service has decreased competition while also broadening the organization’s variety of products and services.
Business diversification is important and made possible via mergers and acquisitions (The reasons for mergers and acquisitions, 2016). Relocating may be accomplished in some ways, such as visiting a market in a different country or traveling a short distance. The merged company will be able to share in the risk as a result of the merger. Laundry detergent, ice cream, and shower soap are just a few of the numerous Unilever trademarks. It implies that the company’s more profitable division may be supporting a less profitable one. Diversification away from local risk can be achieved through international mergers and acquisitions. If the US economy is weak, for example, earnings may be impacted. Because of its presence in China, the firm has seen a growth in earnings. A company’s loss in one area can therefore be used to offset a loss in another.
Disadvantages of M&A
When two businesses come together, their cultures are brought together as well. Using a firm as an example, employees may be required to work standard 9-5 hours and overtime since the company is highly regulated. Other businesses may be more flexible, allowing employees to set their work schedules. A firm may also offer benefits to its employees that a different one does not. Employees accustomed to a more employee-friendly atmosphere may become considerably demotivated if the merged firm tries to standardize working procedures (The reasons for mergers and acquisitions, 2016). It can be done by shortening the length of maternity leave or reducing the amount of money one puts into their pension plan.
Mergers are regularly assumed to take benefit of synergies and economies of scale, though, in practical matter, this is not always true. If a company becomes too big, it may become cumbersome and inefficient (Kumar & Sharma, 2019). For instance, in 2005, K-Mart and Sears combined for $11 billion in the United States. However, Sears suffered losses of nearly $7 billion after the acquisition, which finally contributed to its collapse in 2018. No synergies were produced when a distribution network, administrative expenditures, and a product line were combined.
Consolidation by acquisition may result in a significant increase in debt. There are a few reasons for this: either the buying business has a large amount of debt, or the merging company has a large amount of debt (Jedin, 2016). When Vodafone acquired Mannesmann in 1999, it paid an all-time high of $183 billion, which was primarily focused on telecommunications. During the height of the IT boom, it established several records and continues to do so now. With this achievement, Vodafone had to write off more than £23 billion in losses in 2013.
Mergers and acquisitions wreak havoc on employee conditions; therefore, they can remove overlapping administrative services to maximize synergy (Kumar & Sharma, 2019). Employees may be worried because they fear losing their jobs. Economies of scale typically drive corporate mergers, and this goal can be achieved by merging departments. After the merger, there may be just one HR and one finance department—fewer people working means more minor jobs created.
In conclusion, businesses are forced to develop tactics to survive, boost efficiency, and maximize profits in competitive market conditions. Merger and acquisitions (M&A) are critical elements of a company’s business strategy in finance. Furthermore, M&A encourages the exchange and transfer of knowledge, technology, and innovation to boost the company’s overall capabilities (Kumar & Sharma, 2019). Mergers also assist in complementing existing products and services, extending market networks, and building a competitive edge. Indeed, mergers and acquisitions offered various benefits and drawbacks to the newly formed firm, mainly intending to gain a competitive edge, increase market shares, and generate the overall revenues required to ensure future sustainability.
Benefits of a merger or acquisition. (2018). Minority Business Development Agency.
Jedin, M. H. (2016). Relationship engagement in mergers and acquisition through collegial leadership.
Kumar, V., & Sharma, P. (2019). Accounting for mergers and acquisition. An Insight into Mergers and Acquisitions, 107-121.
The reasons for mergers and acquisitions. (2016). Dummies.