What are the financial benefits of merger and acquisition?

May 6, 2022

Merging two companies or acquiring a business can bring several benefits to those involved. However, it is crucial to note that certain drawbacks may arise with mergers and acquisitions that require careful consideration. This article discusses some of the advantages and disadvantages of mergers and acquisitions.

Mergers and acquisitions are two words that are usually used synonymously. However, these two words have different meanings. In a merger transaction, two separately owned companies become one jointly owned company. On the other hand, an acquisition happens when one company, usually a bigger company, takes over another company, usually a smaller company, and runs the establishment with its identity.

The following are a few of the advantages of mergers and acquisitions;

A new large business or a business that has acquired another company generally has increased needs in terms of materials and supplies. And when a business has high demands, it means it has a high purchasing power. A high purchasing power enables a company to negotiate bulk orders, and when a business is able to negotiate bulk orders, it results in cost efficiency. In other words, by purchasing supplies and materials at higher volumes, a company is able to improve its scale.

A merger or an acquisition may result in a business expanding geographically, which would, in turn, increase the business's ability to distribute goods or services to more people.

When two businesses operating in the same industry become one, or when a company acquires another company operating in the same industry, the new or larger company gets to enjoy a greater market share.

When two companies merge or when a company acquires another company, it results in two companies pooling their financial resources, and that can result in, among other things, a business being able to reach more customers because of a larger marketing budget.

The following are some of the disadvantages of mergers and acquisitions;

When two companies doing the same activities come together and become one company, it might mean duplication and over capability within the company, which might lead to retrenchments.

Sometimes mergers and acquisitions can result in diseconomies of scale. For example, this can happen if the owner of the new larger company lacks the control required to run a bigger company.

Although not something that affects the business, it is worth mentioning. A great market share is good for a business, but it can be bad for consumers. When a company has less competition and greater market share, consumers tend to pay more for products or services. 

Lastly, the process of merging two companies or acquiring a company takes time and requires energy and money. The energy, time, and funds that go into the merger or acquisition process could mean that the businesses involved give up other potential opportunities.

To learn more about the advantages and disadvantages of mergers and acquisitions so you can make an informed decision, contact our business law attorneys at SAC Attorneys LLP

Why do Mergers Happen?

• After the merger, companies will secure more resources and the scale of operations will increase.
• Companies may undergo a merger to benefit their shareholders. The existing shareholders of the original organizations receive shares in the new company after the merger.
• Companies may agree for a merger to enter new markets or diversify their offering of products and services, consequently increasing profits.
• Mergers also take place when companies want to acquire assets that would take time to develop internally.
• To lower the tax liability, a company generating substantial taxable income may look to merge with a company with significant tax loss carry forward.
• A merger between companies will eliminate competition among them, thus reducing the advertising price of the products. In addition, the reduction in prices will benefit customers and eventually increase sales.
• Mergers may result in better planning and utilization of financial resources.

Types of Merger

1. Congeneric/Product extension merger

Such mergers happen between companies operating in the same market. The merger results in the addition of a new product to the existing product line of one company. As a result of the union, companies can access a larger customer base and increase their market share.

2. Conglomerate merger

Conglomerate merger is a union of companies operating in unrelated activities. The union will take place only if it increases the wealth of the shareholders.

3. Market extension merger

Companies operating in different markets, but selling the same products, combine in order to access a larger market and larger customer base.

4. Horizontal merger

Companies operating in markets with fewer such businesses merge to gain a larger market. A horizontal merger is a type of consolidation of companies selling similar products or services. It results in the elimination of competition; hence, economies of scale can be achieved.

5. Vertical merger

A vertical merger occurs when companies operating in the same industry, but at different levels in the supply chain, merge. Such mergers happen to increase synergies, supply chain control, and efficiency.

Advantages of a Merger

1. Increases market share

When companies merge, the new company gains a larger market share and gets ahead in the competition.

2. Reduces the cost of operations

Companies can achieve economies of scale, such as bulk buying of raw materials, which can result in cost reductions. The investments on assets are now spread out over a larger output, which leads to technical economies.

3. Avoids replication

Some companies producing similar products may merge to avoid duplication and eliminate competition. It also results in reduced prices for the customers.

4. Expands business into new geographic areas

A company seeking to expand its business in a certain geographical area may merge with another similar company operating in the same area to get the business started.

5. Prevents closure of an unprofitable business

Mergers can save a company from going bankrupt and also save many jobs.

Disadvantages of a Merger

1. Raises prices of products or services

A merger results in reduced competition and a larger market share. Thus, the new company can gain a monopoly and increase the prices of its products or services.

2. Creates gaps in communication

The companies that have agreed to merge may have different cultures. It may result in a gap in communication and affect the performance of the employees.

3. Creates unemployment

In an aggressive merger, a company may opt to eliminate the underperforming assets of the other company. It may result in employees losing their jobs.

4. Prevents economies of scale

In cases where there is little in common between the companies, it may be difficult to gain synergies. Also, a bigger company may be unable to motivate employees and achieve the same degree of control. Thus, the new company may not be able to achieve economies of scale.

More Resources

Thank you for reading CFI’s guide to Mergers. To keep advancing your career, the additional resources below will be useful:

To gain an edge over their competition, organizations frequently merge and acquire each other, combining their assets and pooling their market shares. A recent EY survey revealed 56% of those asked admitted they’re planning to actively pursue a merger or acquisition in the next 12 months - even with the usual associated risks and the current uncertainty caused by the coronavirus pandemic.

In this blog, we’ll run through the main benefits of mergers and acquisitions (M&A) and why so many companies are eager to take that leap. 

1. A Larger Market Share

One of the most obvious benefits is the increased market share a merger or acquisition can bring. By hoovering up other organizations within your industry, you’re ensuring a greater slice of the total market is yours. 

Take the now-infamous merging of Exxon and Mobil in 1998. The two were already the first and second-largest oil producers in the United States before merging. Following the deal, the organization had a huge market share and saw shares increase by 293%.

2. Access to Industry-Leading Talent

The more niche a job market, the greater the lengths an organization will go to get the very best individuals. Sometimes, the only way to ensure the best talent works for you is by acquiring or merging with another company. 

This practice is particularly common when brand new technologies take markets by storm. If there’s only a short list of people who can utilize that tech, then you risk falling behind if they work for your competitors. 

3. Exploring New Markets

Despite the challenges of today’s landscape, growth remains the number one priority for CEOs in 2021. One of the fastest ways to grow is to enter a new market and reach customers who were previously inaccessible.

However, global expansion isn’t a simple process. Managing cultural differences, language barriers and international regulations can be problematic when establishing a new entity. To get around this, some organizations acquire a business already operating in their desired market. 

4. Lower Costs, Increased Profit

The hope for any M&A is it’ll lead to fewer costs and higher profits. By operating on a bigger scale, organizations can increase access to capital and reduce costs thanks to stronger bargaining positions with suppliers.

As operations grow exponentially, companies can also benefit from the higher volume of stock they’ll work with. By working with bigger volumes, organizations can negotiate better deals.

5. Favorable Taxes

Acquiring a company based in another country can result in a wide range of benefits, including lucrative markets and access to new talent. Plus, many governments offer tax reductions once M&A are complete. 

This means you can enjoy all of the benefits of entering a new market while simultaneously taking advantage of favorable tax rates. Certain countries are very popular with M&A thanks to the taxation laws in place there. 

6. Diversification 

It’s good business practice to have as diverse a portfolio as possible. A key benefit of an acquisition is to bring other tools, products and services under your organization's umbrella.

Take Facebook, for example. The social media behemoths have realized certain demographics weren’t engaging with their platform. So what did they do? They sought out those demographics and acquired the platforms they were engaged with (Instagram and WhatsApp). 

7. Cornering Future Value

Sometimes it’s difficult to see which companies will thrive and which will fail in the future. However, it’s often quite straightforward. Some of the biggest deals of all time were carried out because it was obvious what the future held. 

Take Disney’s acquisition of Marvel in 2009. Although no one could have predicted the scale of success that would follow, Marvel had just released Iron Man in 2008 which made half a billion dollars at the box office. 

8. Support During Tough Periods

Business is survival of the fittest and tough market conditions can bring even the biggest organizations down. During especially challenging periods, mergers and acquisitions often increase because pooling resources is an effective way of waiting out the storm. 

Take the 2008 financial crisis, for example. With conditions so poor, many banks merged to protect themselves over the next few years. Better to merge with another bank than fall into obscurity. 

9. Denying Your Rivals

Sometimes, an acquisition is carried out in part to prevent a competitor from doing the same thing. Huge organizations are always jostling for an edge over their rivals. Acquiring or merging with another company can boost their need to establish themselves as the leader within their industry.

With so many important benefits, it’s easy to see why M&A are so popular. If you’re thinking of following the same course of action, make sure to grab our free resource. 

Planning the Perfect Merger or Acquisition

To make sure your merger or acquisition is a successful one, download our free guide today. It’s packed with useful information that will ensure you avoid the common pitfalls that have caused many deals to fall at the final hurdle. Click the link below to get your copy now.