Mergers and acquisitions (M&A) are common occurrences in the business world. Different business entities join or merge to gain various competitive advantages; all aimed at maximizing profit generation in the long run. Contemporary business practices like production specialization have spurred M&A activity across most industries. Mergers and acquisitions are especially common between companies that produce similar and/or complementary products and/or services. The overreliance on superior technology and a competent workforce in modern production has also caused a huge number of corporate M&A. Although the two words are usually used interchangeably, mergers refer to the mutual integration of two firms to create a single conglomerate. But acquisitions are mostly buyouts and takeovers of one or more businesses by a larger company with full transfer of ownership. Most of these business unions require massive financial resources. Target firms are bought with stocks, assets, cash, or a combination of any of these financing options. M&A are mainly classified according to the purpose of the merger, such as strategic, vertical, conglomerate, front and reverse mergers. And also according to the nature of the acquisition, such as merger under equals, takeovers, low-touch, and arm’s length management control. Explained below are 4 main reasons why mergers and acquisitions enjoy ever-soaring popularity in the business world.
Improving The Value Of The Target Company
One of the most popular ways of making a quick buck from an existing firm is to buy it out, improve its performance, and then sell it off for a nice profit. Many private equity companies live for this. They scour the business world looking for quick buyouts with potentially high resale value. After hiring a Clifton NJ business valuation professional firm to calculate the market value of a target company, the buyer closes the purchase deal. The newly acquired company is then improved value-wise by trimming its production costs and streamlining its production processes to enhance cash flow and optimize profit margins. The valuable firm is then sold off at a price, which is higher than the acquisition cost. Hiring a firm with industry expertise to advise can be very helpful, bringing specialized knowledge to better navigate obstacles specific to the industry.
Monopoly And Economies Of Scale
Large companies in established industries merge and absorb competitive entities in order to remove excess production or market supply capacity. This practice is quite common in the chemical and pharmaceutical industries, such as the Glaxo Wellcome merger with SmithKline Beecham. Companies in the tech world are also very territorial and they mostly resort to M&A to create monopolistic business environments. This competitive approach creates huge conglomerates that benefit from economies of scale, such as reduced production and marketing costs, combined business resources, brand domination, and extended customer reach.
Promote The Young Brand
Accomplished business players identify and acquire young up-and-coming companies for their high value production potential. After acquisition, these resourceful conglomerates use their existing production systems and marketing tools to optimize the operations of the younger firm. Some of these companies, especially the tech-oriented firms, maintain the brand and management team of the newly acquired company to ensure independent growth and development of the new investment. Consider the real world acquisition of social media companies like Instagram and WhatsApp by Facebook and the subsequent preservation of all their business attributes including their brand names, workforce, and management and operational structures.
Resource Acquisition
Rapid technological evolution has caused companies to resort to some ingenious methods of catching up with the ever-changing production environment. Instead of spending lots of time and money developing their own technologies and training their workforce, big tech-centric firms are opting to buy younger more tech-savvy startups to furnish their IT and personnel needs. Companies like Microsoft and eBay have acquired tech-centric firms like Skype and PayPal respectively to furnish their workforce and IT needs in their respective industries.