Mergers and acquisitions are business words that describe scenarios in which two or more businesses merge or purchase one another. Companies may finish this procedure for a variety of reasons, including financial gains and competitive advantages in their industry. It is vital to work to achieve a smooth transition in order to minimise merger and acquisition issues. Here, we’ll discuss what a merger is, including the advantages and disadvantages.
What Is a Merger?
A merger is an arrangement that combines two current businesses into one new one. There are various sorts of mergers, as well as various reasons why firms accomplish mergers. Mergers and acquisitions (M&A) are frequently used to broaden a company’s reach, grow into new markets, or increase market share. All of this is done to boost shareholder value. During a merger, corporations frequently have a no-shop provision in place to prevent further companies from purchasing or merging.
Types Of Mergers
Depending on the goals of the companies involved, there are numerous sorts of mergers. Some of the most typical types of mergers are listed below.
#1. Conglomerate
This is a merger of two or more companies that are involved in unrelated business activity. The companies may operate in different industries or geographical regions. A pure conglomerate is made up of two companies that have nothing in common. A mixed conglomerate, on the other hand, occurs when organisations that are engaged in unrelated business activities unite in order to obtain product or market extensions.
Companies with no overlapping variables will merge only if it makes sense from the standpoint of shareholder wealth, that is, if the companies can produce synergy, which includes boosting value, performance, and cost savings. When The Walt Disney Company joined with the American Broadcasting Company (ABC) in 1995, a conglomerate was formed.
#2. Congeneric
A Product Extension merger is another name for a congeneric merger. It is a merger of two or more companies that operate in the same industry or sector and have overlapping features such as technology, marketing, manufacturing processes, and research and development (R&D). A product extension merger occurs when a new product line from one company is combined with an established product line from another. When two companies merge as part of a product extension, they get access to a wider range of consumers and, as a result, a larger market share. Citigroup’s 1998 merger with Travellers Insurance, two companies with complementary goods, is an example of a congeneric merger.
#3. Market Extension
This sort of merger occurs when two companies sell similar items but compete in separate markets. Companies that engage in market extension mergers hope to obtain access to a larger market and, as a result, a larger client base. Eagle Bancshares and RBC Centura combined in 2002 to expand their markets.
#4. Horizontal Merger
A horizontal merger occurs when two companies in the same industry merge. Typically, the merger is part of a consolidation between two or more competitors who offer the same products or services. Because rivalry among fewer companies is intense, such mergers are typical in industries with fewer firms. The goal is to establish a larger business with greater market share and economies of scale. A horizontal merger is the 1998 combination of Daimler-Benz and Chrysler.
#5. Vertical
A vertical merger occurs when two companies that produce parts or services for a product unite. A vertical merger occurs when two companies operating at various levels of a supply chain in the same industry consolidate their operations. Such mergers are done to increase synergies obtained through cost reductions resulting from a merger with one or more supply firms. One of the most well-known vertical mergers occurred in 2000 when internet service provider America Online (AOL) merged with media powerhouse Time Warner.
The Benefits Of Mergers
Merging or acquiring another company can provide various advantages to people engaged in the business. Some benefits relate to how the company interacts with and serves its consumers, while others increase personnel efficiencies. Here are some of the benefits of mergers and acquisitions:
#1. Improved economic scale
A larger organisation, particularly one that has merged with another, often has greater material and supply requirements. The business can improve its scale by obtaining the essential raw materials and/or suppliers in larger quantities at lower costs. This can also benefit customers because the corporation may be able to pass on cheaper prices to them.
#2. Reduced labour cost
A merger or acquisition may result in several employees doing the same function at each company. A business can cut its overall labour expenditures while keeping a stronger, more effective labour force by banding together and reducing unnecessary staff. Those involved in the merger and acquisition process may examine the performance of persons in similar roles and select the best personnel for each position in the new firm.
When two companies that operate in the same industry or supply similar goods or services join forces, the newly formed company can gain a larger market share by leveraging the resources that both bring to the business arrangement. This can help businesses provide more things to customers. It may also assist a brand in gaining product recognition. For example, a corporation with a big makeup market share may be recognized for its diverse range of cosmetics.
#4. Additional financial resources
All companies involved in a merger or acquisition pool their financial resources, improving the new company’s overall financial capacity. New investment opportunities may present themselves, or the company may be able to reach a broader audience with a larger marketing budget or greater inventory capacity. This is especially advantageous for a company whose owners may choose to merge or consolidate owing to debt.
#5. Increased distribution capabilities
A merger or acquisition may allow a corporation to grow geographically, increasing its ability to provide goods or services on a larger scale. This can help a company access a larger consumer base. This can help to enhance brand recognition and sales.
Drawbacks of Mergers
While mergers can be helpful to the firms involved, there may be some downsides that all parties involved should be aware of. The following are some instances of potential downsides linked with mergers:
#1. Increasing legal fees
Merging two businesses is a legal commercial operation that frequently necessitates the participation of numerous important specialists. Those involved will almost always need to bring in lawyers who specialise in this type of transaction, as well as financial professionals to help with assets and other financial matters. The legal expenditures of merging and acquiring can be significant.
#2. Expenses associated with the transaction
The company that acquires the other is responsible for paying a variety of costs, including the legal fees of the consultants helping with the merger’s logistics. They also pay a monetary sum for the business and its assets. Before committing to a merger or acquisition, corporate accountants and other finance professionals typically analyse the firm’s assets and financial status.
#3. Potentially squandered opportunities
Because of the time, work, and money invested in a merger or acquisition, the businesses involved may have to forego other possible prospects. However, if a corporation appropriately distributes its resources, it can assign one team of employees and specialists to manage the merger while other employees inside the company focus on other prospects. A company may also consider the benefits of this business move to be more valuable than other potential chances it may lose.
Tips for Companies Going Through Mergers
#1. Important aspects must be negotiated.
The conditions of a business contract are always flexible, so make sure to carefully analyse all of the facts to make the best option for your company. If you want to negotiate, collaborate with your legal counsel or financial advisor to give data to support your revised offer or request. The following are some of the important factors that influence the terms of a commercial transaction:
- Actual or projected growth
- Prices paid for the company’s stock
- What kind of buyer you have (private equity firm vs. strategic buyer)
- The most recent fair market value
- Financial results
- Company’s business sector
- The company’s private technology or information
- The company’s potential legal, financial, or business risks
#2. Exercise patience
Any legal transaction can take time to complete, and mergers and acquisitions are among the most time-consuming operations in business. Some take four to six months to finish, while others take years. The scale of the firms involved, as well as the acquiring company’s urgency, can all have an impact on the timetable.
#3. Invest in your own professional development.
When adding new team members as a result of a merger or acquisition, engage in professional training and development to ensure that all employees feel prepared to fulfil their responsibilities. Training on new technology and business processes, communication, team building, and adjusting to change are some of the main areas for development. This can help manage the merger’s transition period and ensure staff remain productive during this time.
#4. Improve the company culture
Those who join a new organization may be uncertain about the situation, so creating a strong culture is critical to sustaining a healthy work environment. All organizations concerned may choose to collaborate in order to discover the strengths of their own company cultures. This can aid in the development of a new, cohesive culture in which all employees of the newly created organisation can thrive.
#5. Rely on professionals.
Working with seasoned consultants or specialists in their fields might help to streamline the merger or acquisition process. Finding professionals who can give financial, legal, and/or regulatory support might help you avoid any mistakes or legal difficulties. There are professionals who specialise in the subject of mergers and acquisitions. Having some of these professionals on the team can make the process go more smoothly.
#6. Communicate
Maintaining open lines of communication during the M&A process extends from employees to the board of directors. To alleviate anxiety, make sure everyone involved understands what to expect and provides timetables wherever possible. You may also wish to establish a dedicated communication channel for questions, such as an email inbox or a person appointed to respond to M&A-related inquiries.
What Is A Merger In Business?
Mergers bring together two different firms to form a single new legal entity. True mergers are uncommon since it is uncommon for two equal organisations to benefit mutually by integrating resources and personnel, including their CEOs. Acquisitions, unlike mergers, do not result in the foundation of a new corporation.
What Is The Meaning Of Merger And Amalgamation?
Amalgamation is a form of consolidation technique done in conjunction with a merger. The upshot of amalgamation is the development of a completely new company. A merger, on the other hand, is a consolidation process in which the resultant firm might be either new or existing. A merger involves a minimum of two companies.
What Is The Difference Between A Merger And A Subsidiary?
Purchasing a stake in a subsidiary usually necessitates a smaller investment on the part of the parent firm than a merger. In addition, unlike a merger, the purchase or sale of a subsidiary does not require shareholder approval.
- MERGERS: Types and Examples of Business Mergers
- Reverse Merger Stocks: Overview & Examples
- Mergers and Acquisitions 2023: Differences and Examples
- Present Value Formula: Definitions, Examples, Formula & Calculations
References
