In the contemporary, fiercely competitive world of business, the long term survival of a company often hinges on its ability to demonstrate growth potential. Previously, Anand Jayapalan had mentioned that in this fast paced business landscape, many smaller companies and startups may face dilution when competing against multinational or large enterprises. In this situation, various companies see mergers and Acquisitions as an efficient strategy for building up their position in the market.
The term merger implies to the amalgamation of two separate entities into a unified, singular organization. Basically, mergers take place when two businesses willingly opt to pool in their resources, with the aim of establishing a new corporate entity. On the other hand, in the case of acquisition, the acquiring company buys off all of the assets of the target company. Hence, the acquired firm becomes part of the acquiring brand, effectively joining a larger organization.
There are many reasons due to which mergers and acquisition (M&A) may take place, here are a few of them:
- Acquire new technology/expertise: With time, industries keep evolving. But if companies do not evolve accordingly, they aren’t able to survive and thrive. Hence, many companies are often on the lookout to acquire other businesses that give them new technologies and expertise. They seek access to proprietary technology, patents, or intellectual property that can provide a competitive edge. This access can be helpful in expediting product development cycles, improving existing products/services, or pave the way for innovative solutions.
- Economies of scale: Bigger is often better. This is the thinking behind merging or acquiring a business to benefit from economies of scale. Larger businesses can typically enjoy high cost savings and competitive advantages that smaller companies usually are unable to.
- Strategic expansion: One of the prime motivations for M&A is strategic expansion. With time, many businesses seek ways to expand their market presence, diversify their product/service offerings or enter new geographic locations. Through mergers and acquisitions, businesses can swiftly gain access to new markets or customer segments that would have otherwise taken significant time and resources to penetrate in an independent manner.
- Synergy creation: By combining complementary capabilities, technologies and resources, businesses can improve their overall performance efficiency. Moreover, across-the-board costs tend to drop, as a business can leverage off of the other company’s strengths. Synergies like revenue enhancements and cost savings are often a major drivers behind M&A.
- Market positioning and competitive advantage: M&A may help in strengthening the competitive position of a business within an industry. By acquiring competitors or complementary companies, businesses can consolidate market share, increase bargaining power with suppliers, as well as create barriers to entry for potential new entrants.
- Increase supply-chain pricing power: By buying out one of its distributors or suppliers, a company may eliminate an entire tier of costs. Buying out a supplier is considered to be a vertical merger, and helps companies to save on the margins the supplier was previously adding to its costs. On the other hand, by buying out a distributor, a company often gains the ability to ship out products at a lower cost.
Earlier, Anand Jayapalan had mentioned that M&As are majorly focused on stimulating growth, gaining competitive advantages, improving market share, and/or influencing supply chains.