The concept behind mergers and acquisitions, M&A, is that two organisations together are more valuable than two separate organisations. Research and experience have shown that M&A can have profound effects on the growth of the involved companies in terms of long-term growth and outlook. However, just like the merging can have overnight transformation success on the organisations, it comes with significant risks.
If the risks can be managed, M&A can have the following transformational effects on the organisations:
One of the leading reasons why organisations might go into M&A is to achieve rapid growth. Basically, two organisations of equal or almost similar sizes come together and create a much bigger organisation. This growth is critical in that it expands a business instantly and leapfrogs the rivals.
M&A can help shorten the multiple years and decades required in organically growing standalone organizations or businesses.
Companies may also use mergers and acquisitions in taking advantage of synergies as well as economies of scale. A synergy occurs when two organizations with similar business ideas combine then consolidate or eliminate resources that are duplicated. These might include regional and branch offices, research projects and manufacturing facilities to mention but a few.
In the long run, more resources are saved and earnings per share can be boosted. This makes the M&A transaction “accretive.”
The third transformation that companies might pursue through M&A is restructuring of tax purposes. This motive might, however, be perceived as implicit rather than explicit. For example, an organization might decide that the US has the highest corporate tax rate worldwide. As such, they decide to merge or acquire smaller foreign competitors then move the tax entity of the merger overseas where the tax jurisdiction is lower.
In this way, businesses can reduce their tax bills.
Before a merger or acquisition, two companies exist as individual entities with distinct operational strategies. As such, they might take different approaches in management, operations and marketing. They might even be competitors. However, after M&A, the two become a single entity and need to combine their tactics so as to work together. Therefore, company A presents its know-how, same as B.
By combining ideas, they elevate their business know-how and competitive advantage in the market place. If applied appropriately, combined know-how can significantly boost the performance of the two companies.
Finally, M&A can reduce the completion faced by both organizations. This happens if they happened to be in similar lines of business then decide to work together. On the other hand, mergers can pool their resources together and gain competitive advantage over their rivals. This is made possible by the bigger size, shared resources and more dominance created by the M&A.
Evidently, mergers and acquisitions have more transformational effects than meets the eye. Unlike traditional beliefs that they only occur when a shrinking organization requires another company to salvage it, M&A have benefits for both parties. In fact, companies with good performance can merge aiming to perform even better.