The benefits and shortcomings of a large business taking over another business in the same field

What is Mergers and Acquisitions (M&A)?

Mergers and acquisitions, or M&A for short, involves the process of combining two companies into one. The goal of combining two or more businesses is to try and achieve synergy – where the whole (new company) is greater than the sum of its parts (the former two separate entities).

Mergers occur when two companies join forces. Such transactions typically happen between two businesses that are about the same size and which recognize advantages the other offers in terms of increasing sales, efficiencies, and capabilities. The terms of the merger are often fairly friendly and mutually agreed to and the two companies become equal partners in the new venture.

Acquisitions occur when one company buys another company and folds it into its operations. Sometimes the purchase is friendly and sometimes it is hostile, depending on whether the company being acquired believes it is better off as an operating unit of a larger venture.

The end result of both processes is the same, but the relationship between the two companies differs based on whether a merger or acquisition occurred.

Benefits of Combining Forces

Some of the benefits of M&A deals have to do with efficiencies and others have to do with capabilities, such as:

• Improved economies of scale. By being able to purchase raw materials in greater quantities, for example, costs can be reduced.
• Increased market share. Assuming the two companies are in the same industry, bringing their resources together may result in larger market share.
• Increased distribution capabilities. By expanding geographically, companies may be able to add to their distribution network or expand its geographic service area.
• Reduced labor costs. Eliminating staffing redundancies can help reduce costs.
• Improved labor talent. Expanding the labor pool from which the new, larger company can draw can aid in growth and development.
• Enhanced financial resources. The financial wherewithal of two companies is generally greater than one alone, making new investments possible.

Potential Drawbacks

Although mergers and acquisitions are expensive undertakings, there are potential rewards. And there are disadvantages, or reasons not to purchase an acquisition, including:

• Large expenses associated with buying a company, especially if it does not want to be acquired. (If an investor has a controlling interest in another company, however, it may not have a choice regarding whether it is acquired.)
• Higher legal costs, which can be exorbitant if a company does not want to be acquired.
• The opportunity cost of having to forego other deals in order to focus on bringing two companies together.
• The possibility of a negative reaction to a merger or acquisition, which drives the company’s stock price lower.

M&A is a growth strategy corporations often use to quickly increase its size, service area, talent pool, customer base, and resources in one fell swoop. The process is costly, however, so the businesses need to be sure the advantage to be gained is substantial.