11 Reasons for Merger and Acquisition

Reasons for Merger and Acquisition

          Today let us try to understand why do merger and acquisition take place? Why companies merger and acquire other companies and what their objectives or motives or intentions behind the merger and acquisition? These kind of questions appear to be simple but are highly complicated and complex.

          Today I am going to I am going to tell you 11 reasons why companies go for merger and acquisitions. Here are the few reasons below

§  Strategic Benefit

When firms decide to expand in new markets or acquire new market they can do so by either acquiring or merger with the existing firms or can set up new branches in that market/internal expansion. But if firm opts for acquisition or merger then this benefits will come into picture which is called as strategic benefit.

1.     It will help preventive a competitor from establishing similar position in industry  as it is a pro-active move by one firm.

2.     It gives the acquiring/merger firm a timing advantage because of which the firm can skip several process of expansion.

3.     It may sometimes even cost less and even less risk associated with it.

4.     When the market is saturated it is better to replace the existing company by acquiring it  rather than adding additional production unit and trying to sell the goods or services

§  Economies of Scale

When to companies come together or one is acquired by other then due  to large scale of production the cost of operations, distribution, research and development and many other cost comes down as a result the cost per unit as comes down which results in high profit and cost advantage in the industry. Horizontal merger or acquisition is the most prominent in achieving Economies of Scale.  In vertical inventory levels the source of benefits are improved coordination, lower of inventory and high market power of the combined entity. Even in conglomerate mergers there is scope for the reduction of the expenses such as overhead expense. In some cases there are chances that diseconomies of scale take place. We had heard that at certain point which is known as optimal point the cost will be minimum but beyond that point the cost tend to increase which may create diseconomies in operations

§  Economies of Scope

A company in order to acquire a specific skills set or assets possessed by other company in order to enhance economies of scope may acquire or merger with other company. For instance X company may acquire or merger with Y company which is into similar business which will be benefited by marketing skills of Y company.

§  Economies of Vertical Integration

Economies of Vertical Integration comes into picture when the a company either acquires or merges with its supplier or distributors network in order to bring  down the cost and also add value in the chain. Usually the vertical integration takes place with suppliers because it helps to lower the cost and again the strategic benefit of supplies. Vertical Integration is not advised to those companies who does everything in-house, it only benefits those companies who have independent suppliers who are more efficient in their operations.

§  Complementary Resources

When two company have complementary products it is best advised to come together and carryout the future operations as it benefits both the companies. For Instance a company having an innovative product but doesn’t have good marketing team and other company has a excellent marketing team but has a decent product. If these two companies come together then creates a synergic effect which will lead to high profits to both the companies.

§  Tax Shields

In some cases companies acquire those companies which is making losses this is done to obtain tax benefits. The company which is making losses and unabsorbed the depreciation may not be able to get tax benefits for long time so it is better advised for the sick firm to merge with a profit making company and set off the losses by profits and provide tax shield to the profit making company. If a profit making company acquires loss making company a tax shield can be utilized.

§  Utilization of Surplus funds

Many firms which are generate high cash flow but doesn’t have opportunities to reinvest in their  own business because market is already matured enough. Such firm don’t like to payout complete profits in the form of dividends rather they will buy back extra shares or will try to make investment. In many cases of merger firm compensate the by cash for those business which are not so profitable which shows the surplus cash in the being effectively utilized.

§  Managerial Effectiveness

One of the most important aspect that is kept in mind will acquiring or considering a merger is to have managerial effectiveness. If a firms current managerial effectiveness is poorly the acquisition or merger should bring a sound effective managerial skills with the merger or acquisition. In few cases we may have heard or seen that after merger or acquisition the that existing managerial effectiveness comes down which result in negative impact to both the companies as a result if time required steps are not taken then there are many chances that both the firms will become inefficient and their profits will start declining. In many cases the most effective and efficient management takes over the other company’s management.

§  Synergies

In many acquisitions or mergers we see that synergic effect comes into picture. Synergic effect or Synergic is nothing but if 1+1 = 11 which is the whole is greater than the sum of the two which gives rise to a unique competitive advantages to both the firm after merger or acquisition. Synergies may come into existence in the form of financial synergy, marketing synergy, managerial synergies or any other synergy.

§  Acquisition of Specific Assets

In some cases companies do acquire those companies which has specific assets like patents, copyrights, trademarks or even few set of plant and machineries which are of latest technology and will cost heavy for their acquisition of individual machinery or plant.

§  Diversification

The common most thing found in merger and acquisition is reduction of risk through diversification. The extent to which the risk is reduced will always depend on correlation of both the firms. From an investors prospective merger or acquisition of two firms doesn’t diversify the risk of the investor.

          Usually in merger or acquisition multiple objectives or motives will be behind the merger or acquisition not a single one. Merger and Acquisition takes a huge lot of time as it requires a lengthy process to be completed by both the firms. I hope that you have now understood why mergers and acquisition takes place. What are the objectives or motives behind a merger and acquisition.