Mergers and acquisitions (M&A) are a common way for businesses to grow and expand their operations. In a merger, two or more companies combine to form a new company. In an acquisition, one company takes control of another company.
M&A can be a complex process, but it can also be a very rewarding one. When done successfully, M&A can help businesses to:
- Expand their product or service offerings
- Enter new markets
- Gain economies of scale
- Eliminate competition
- Acquire new technologies or expertise
However, M&A also comes with risks. If not executed properly, M&A deals can lead to culture clashes, integration challenges, and financial losses.
A merger requires two companies to consolidate into a new entity with a new ownership and management structure (ostensibly with members of each firm). The more common distinction to differentiating a deal is whether the purchase is friendly (merger) or hostile (acquisition). Mergers require no cash to complete but dilute each company’s individual power.
In practice, friendly mergers of equals do not take place very frequently. It’s uncommon that two companies would benefit from combining forces with two different CEOs agreeing to give up some authority to realize those benefits. When this does happen, the stocks of both companies are surrendered, and new stocks are issued under the name of the new business identity.
Typically, mergers are done to reduce operational costs, expand into new markets, and boost revenue and profits. Mergers are usually voluntary and involve companies that are roughly the same size and scope.
In an acquisition, a new company does not emerge. Instead, the smaller company is often consumed and ceases to exist with its assets becoming part of the larger company.
Acquisitions, sometimes called takeovers, generally carry a more negative connotation than mergers. As a result, acquiring companies may refer to an acquisition as a merger even though it’s clearly a takeover. An acquisition takes place when one company takes over all of the operational management decisions of another company. Acquisitions require large amounts of cash, but the buyer’s power is absolute.
Companies may acquire another company to purchase their supplier and improve economies of scale–which lowers the costs per unit as production increases. Companies might look to improve their market share, reduce costs, and expand into new product lines. Companies engage in acquisitions to obtain the technologies of the target company, which can help save years of capital investment costs and research and development.
Types of mergers and acquisitions
There are many different types of mergers and acquisitions, but some of the most common include:
- Horizontal mergers: These mergers involve two companies that operate in the same industry and offer similar products or services.
- Vertical mergers: These mergers involve two companies that operate in different stages of the same supply chain.
- Congeneric mergers: These mergers involve two companies that operate in related industries and offer complementary products or services.
- Market-extension mergers: These mergers involve two companies that operate in the same industry but in different geographic markets.
- Product-extension mergers: These mergers involve two companies that operate in the same industry but offer different products or services.
Benefits of mergers and acquisitions
There are many potential benefits to mergers and acquisitions, including:
- Increased market share: By combining their operations, businesses can increase their market share and become more competitive.
- Expanded product or service offerings: Businesses can also expand their product or service offerings by merging with or acquiring other companies.
- Entry into new markets: Businesses can enter new markets by merging with or acquiring companies that already operate in those markets.
- Economies of scale: Businesses can achieve economies of scale by combining their operations and reducing costs.
- Elimination of competition: Businesses can also eliminate competition by merging with or acquiring their competitors.
- Acquisition of new technologies or expertise: Businesses can acquire new technologies or expertise by merging with or acquiring companies that have those technologies or expertise.
- Risks of mergers and acquisitions
There are also some risks associated with mergers and acquisitions, including:
- Culture clash: If the cultures of the two companies involved in a merger or acquisition are too different, it can lead to conflict and disruption.
- Integration challenges: It can be difficult to integrate the operations of two companies, especially if they are very different.
- Financial losses: Mergers and acquisitions can be expensive, and there is always the risk that the deal will not be successful and the acquiring company will lose money.
- How to execute a successful merger or acquisition
There are a few key things that businesses can do to increase their chances of success when executing a merger or acquisition:
- Choose the right target: It is important to choose a target company that is a good fit for your business in terms of its products or services, its markets, and its culture.
- Conduct thorough due diligence: It is important to conduct thorough due diligence on the target company before completing a merger or acquisition. This includes reviewing the company’s financial statements, its legal history, and its competitive landscape.
- Develop a detailed integration plan: It is important to develop a detailed integration plan that outlines how the two companies will be integrated. This plan should include specific goals, timelines, and budgets.
- Communicate with employees and other stakeholders: It is important to communicate with employees and other stakeholders about the merger or acquisition. This will help to minimize disruption and uncertainty.
Mergers and acquisitions can be a powerful tool for businesses to grow and expand. However, it is important to carefully consider the benefits and risks before engaging in a merger or acquisition. By following the tips above, businesses can increase their chances of success when executing a merger or acquisition.