To create a single structure and merge several companies into one business, legislative acts provide for a reorganization procedure, which is carried out in the form of a merger or acquisition. On the international market, such transactions are called M&A transactions.
What Does the Merger and Acquisition Process Mean?
Currently, many companies cannot compete with large entrepreneurs. Everything arises for many reasons, and then there are several options for continuing activities. One of them is when companies go through the merger procedure. There is also such a thing as absorption, but it is used less often. What is a merger, how does it happen, and what are the advantages and disadvantages of the procedure.
A merger or acquisition is one of the forms of business reorganization. During the merger, a new company is formed from the other two. There are two options: the companies are merged into one new one and completely cease to exist, or the assets of two different companies merge, and the firms themselves are not liquidated after the procedure.
It should be noted that mergers and acquisitions of companies have their own characteristics in different countries/regions of the world. For example, in contrast to Europe, where there are acquisitions of small and medium-sized companies, small joint-stock companies of related industries, and family firms, in the United States, mergers or acquisitions of large firms occur to a greater extent.
The main point of mergers and acquisitions is synergy. Synergy is the benefit of working together. After all, this is obvious: when two companies turn into one, you need one accounting department, not two, one advertising department, not two, and so on. When two companies become one, the benefits can be as follows:
- Downsizing, rightsizing: as mentioned above, the number of employees from such support departments as finance, accounting, marketing, etc., is decreasing. Also, one of the manuals becomes unnecessary.
- Economies of scale: by quantifying purchases, transportation, etc., the new company saves on bulk terms. You also need to remember everything that you need, one piece per company: for example, server protection systems, a program for accounting for goods and personnel, etc.
- Increase in market share: when companies merge, the new company has more market share, and brand awareness also grows.
What Are the Main Advantages and Disadvantages of the M&A Deals?
Let’s highlight the main advantages of mergers and acquisitions of companies:
- The ability to quickly achieve better results.
- Such a strategy weakens competition.
- Bringing the company to new geographic markets.
- An already well-established marketing infrastructure is being acquired.
- Instant purchase of a market share.
- There is an opportunity to acquire undervalued assets.
There are some disadvantages of such processes:
- High financial costs since, as a rule, bonuses to shareholders and waste to personnel are paid.
- Big risk if the company is valued incorrectly.
- The process of integration becomes more complicated if companies operate in different areas.
- After the end of the transaction, there may be problems with the personnel of the company that was bought.
- With a cross-border merger, incompatibility of cultures is possible.
Besides, mergers and acquisitions of companies can be aimed at improving performance due to the presence of complementary resources in two or more companies. Together, these companies are worth more than individuals, and after the merger, each of them receives the missing resources.