Mergers and acquisitions (M&As) refer to the act of consolidating companies or assets and are focused on influencing supply chains, increasing market share, gaining competitive advantages, and stimulating growth.
A merger tends to describe a situation where two businesses unite and one of them ceases to exist subsequent to getting absorbed by the other. Earlier, Anand Jayapalan had mentioned that the board of directors of both firms must first secure approval from their respective shareholder bases.
On the other hand, an acquisition takes place when one company obtains a majority stake in the target firm, which tends to incidentally retain its name and legal structure.
Mergers and acquisitions can take place for many strategic business reasons. Here are a few of them:
- Increasing capabilities: Improved capabilities can come from expanded development and research opportunities or more robust manufacturing operations. In a similar manner, companies might want to combine to make use of costly manufacturing operations. It is imperative to understand that capability might not depend on just a specific department. It may also come from acquiring a unique technology platform instead of trying to build it.
- Gaining a competitive advantage or larger market share: Businesses might try to decide to merge for gaining a better distribution or marketing network. Companies may desire to expand into diverse markets where a similar business is already operational, instead of starting than start from ground zero. Hence, it would be a good idea for them to just merge with the other company. The marketing or distribution network provides both businesses with a more expansive customer base practically overnight.
- Diversifying products or services: Another reason for merging companies is to complement a current product or service. Two firms may be able to combine their products or services to gain a competitive edge over others in the marketplace. Combining products and services or distribution networks is a great way to strategically increase revenue.
- Replacing leadership: When it comes to private businesses, the company may have to merge or be acquired if the current owners are not able to identify someone within the organization to succeed them. The owners of the business may even wish to cash out in order to invest their money elsewhere, such as in retirement.
- Cutting costs: In case two companies have similar services or products, combining them can help create opportunities for reducing expenses. As companies merge, they can get the chance to combine locations or reduce operating expenses by integrating and streamlining support functions.
- Surviving: It is not simple for a company to give up its identity to another business willingly. However, at times, it is the only option for the company to survive. A number of organizations used mergers and acquisitions in order to grow and survive during the global financial crisis from 2008 to 2012. During the financial crisis, several banks ended up merging in order to deleverage failing balance sheets that otherwise might have put them out of business.
Earlier, Anand Jayapalan had mentioned that in addition to the reasons listed above, mergers and acquisitions occur due to other factors as well. In many cases, companies have multiple reasons to merge or acquire another business.