You must have come across various instances where two popular business companies formed into one or even when a major company bought another business venture. Ultimately, the main motive in any kind of business is to make money. Mergers and acquisitions are some of the most common strategies that businesses implement to generate high revenue and improve market reach. This helps companies expand their businesses and provides a shared room of creative freedom to design innovative products, which ensures strong stability in the marketplace.
This article discusses the common business strategy of mergers and acquisitions (M&A), the effectiveness of, and the reasons for mergers and acquisitions that make a business earn a fortune.
Understanding Mergers and Acquisitions (M&A)
Mergers and Acquisitions (M&A) are an important tool in business strategy that combines two business entities through financial transactions. This amalgamation strategy helps business ventures gain competitive advantages, expand market reach, and stimulate growth, which are the main reasons for mergers and acquisitions. Both the terms might look similar but hold a slight difference:
Merger: A merger is a financial transaction in which two functioning businesses combine and run their operations as one legal entity.
Acquisition: Acquisition is the financial transaction that happens when a major business entity buys a smaller business company. The majority of the stakes will be owned by the big company, and the company being bought will either be dissolved or a subsidiary.
Primary Reasons for Mergers and Acquisitions
Some of the main reasons for mergers and acquisitions strategy used by businesses include:
1. Market Expansion and Reach
The aim of any kind of company is to expand their business. This is among the primary reasons behind this amalgamation. Businesses merging with or acquiring a company in a different geographic market helps them expand their market reach by attracting new customers and generating more revenue. Establishing a strong base in different regions helps in building brand awareness. This expansion through mergers and acquisitions allows companies to be more open to global opportunities.
2. Diversification
One advantage of the mergers and acquisitions (M&A) strategy is that companies can diversify their product offerings across various industries and countries. This helps in reducing their reliance on a single market or industry. The market keeps fluctuating every few years, and some companies might undergo losses. M&A strategy is best to be implemented during those times. One of the main reasons for mergers and acquisitions is that they help reduce the risk factor associated with fluctuation, as the acquiring company will have access to other revenue sources.
3. Synergies
There are three types of synergies- cost, revenue, and financial. These synergies are one of the primary reasons for mergers and acquisitions, as they provide cost-saving methods and improve the financial growth of a company. When two companies combine, their expenses and debts are reduced, increasing market performance. Cost synergies are created to balance the economic limitations, while revenue synergies are created to increase market share and boost product sales.
4. Reduce Competition
Given the current market trends and competition, it has become challenging for companies to maintain stability. Merging with other companies through mergers and acquisitions helps companies gain an upper hand in the competitive market. When a business company merges with others, it will have access to prominent investors, a larger market share, and more control over the pricing and supply chain. This reduction of competition helps in maintaining stability.
5. Tax Benefits
Another prominent reason for mergers and acquisitions (M&A) is the potential tax benefits that companies gain. Companies might undergo losses and become more liable to taxation, due to the debts or low revenue. Companies can dodge the possible tax liabilities by acquiring companies undergoing losses. Other benefits include increased profits, cash flow, and a strong customer base.
6. Access To New Technology
The beneficial reasons for mergers and acquisitions include access to advanced technology. Some companies may not possess the technology, by merging with other major companies helps utilize the advanced technology. This can be beneficial in designing new-age products that drive more customers and revenue, eventually pushing the combined forces into a profit zone.
7. Brand Strengthening
Companies aim to increase their brand reputation through strategic mergers and acquisitions. When a prominent company is acquired, it increases the brand value and reputation and boosts profits for the acquiring company. This helps in the brand’s outreach and maintaining a strong base in the market.
Examples of Mergers and Acquisitions
- Google’s acquisition of android
- Disney’s acquisition of Pixar, 21st Century Fox, and Marvel
- The merging of Ole Smokey Distilleries with Tanteo spirits
- British American Tobacco’s acquisition of R.J Reynolds
Summing Up
Mergers and Acquisitions (M&A) are effective strategies that help businesses increase their financial performance and market share. Primary reasons for mergers and acquisitions include synergies, diversification, and market expansion. With a clear understanding and the right implementation of this strategy, businesses can transition into leading entities in the competitive market space.
