Merger and Amalgamation of Company
What are 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.
Advantages of Mergers and Acquisitions
The following are a few of the advantages of mergers and acquisitions;
- Improved Economic Scale
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
- Enhanced Distribution Capacities
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.
- Increased Market Share
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.
- More Financial Resources
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.
Disadvantages of Mergers and Acquisitions
The following are some of the disadvantages of mergers and acquisitions;
- Job Losses
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.
- Diseconomies of Scale
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.
- Higher Prices
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.
- Lost Opportunities
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.
Reasons for Mergers & Acquisitions
Regardless of their category or structure, all mergers and acquisitions have one common goal: they are all meant to create synergy that makes the value of the combined companies greater than the sum of the two parts. The success of a merger or acquisition depends on whether this synergy is achieved. Synergy takes the form of revenue enhancement and cost savings. By merging, the companies hope to benefit from the following:
• Becoming bigger: Many companies use M&A to grow in size and leapfrog their rivals. While it can take years or decades to double the size of a company through organic growth, this can be achieved much more rapidly through mergers or acquisitions.
• Pre-empted competition: This is a very powerful motivation for mergers and acquisitions, and is the primary reason why M&A activity occurs in distinct cycles.
• Domination: Companies also engage in M&A to dominate their sector. However, since a combination of two behemoths would result in a potential monopoly, such a transaction would have to face regulatory authorities.
• Tax benefits: Companies also use M&A for tax purposes, although this may be an implicit rather than an explicit motive.
• Economies of scale: Mergers also translate into improved economies of scale which refers to reduced costs per unit that arise from increased total output of a product.
• Acquiring new technology: To stay competitive, companies need to stay on top of technological developments and their business applications. By buying a smaller company with unique technologies, a large company can maintain or develop a competitive edge.
• Improved market reach and industry visibility: Companies buy other companies to reach new markets and grow revenues and earnings. A merger may expand two companies’ marketing and distribution, giving them new sales opportunities. A merger can also improve a company’s standing in the investment community: bigger firms often have an easier time raising capital than smaller ones