10 Benefits and Advantages of Mergers and Acquisitions
Few companies ascend to the pinnacle of success without engaging in a few mergers and acquisitions (M&A) transactions. It's telling that the most prosperous firms in the world have dedicated teams focused solely on identifying appealing potential acquisitions.
When executed effectively, an active M&A strategy can yield significant rewards for any company. We collaborate with numerous companies to streamline their M&A processes and develop strategies for success. Below, we examine the ten most prominent benefits of such a strategy:
10 Benefits and Advantages of Mergers and Acquisitions
Economies of Scale:
M&A activities promise increased access to capital, reduced costs due to higher volume, enhanced bargaining power with distributors, and more. Bigger companies typically enjoy advantages that smaller ones do not.
Economies of Scope:
Mergers and acquisitions offer economies of scope that may not be achievable through organic growth alone. For instance, despite providing similar services, Facebook acquired Instagram and WhatsApp to tap into a broader client base.
Synergies:
Synergies in M&A are often described as 'one plus one equals three,' where the combined entities create something more powerful. For instance, Disney's acquisition of Lucasfilm enabled the company to expand the Star Wars franchise into various avenues such as theme park rides and merchandise.
Opportunistic Value Generation:
Some of the best deals occur when a company isn't actively seeking an acquisition. These acquisitions, often made at a price lower than the fair market value of the target company's net assets, can bring immediate value to the buyer.
Increased Market Share:
M&A is a common strategy for gaining a larger market share. For example, Santander's acquisition of smaller banks has enabled it to become one of the largest retail banks globally.
Higher Levels of Competition:
Larger companies tend to be more competitive due to economies of scale, allowing them to compete in more markets effectively. Upstart companies may struggle to compete with industry giants like P&G or Nestle.
Larger companies often have access to the best talent in the industry. This is crucial in industries with high demand for skilled professionals, such as technology.
Diversification of Risk:
By diversifying revenue streams, companies can spread risk across various areas rather than relying on one source of income. For instance, Facebook's acquisition of Instagram and WhatsApp diversified its revenue streams.
M&A can accelerate long-term strategies into mid-term plans. Companies can quickly expand into new markets or develop new products by acquiring existing businesses rather than starting from scratch.
Acquisitions can sometimes offer tax advantages, especially if the target company operates in a strategic industry or country with favorable tax regulations. The concept of 'tax inversion' deals, like Pfizer's proposed merger with Allergan, exemplifies this.
As demonstrated, there are numerous benefits to well-executed acquisitions. The more carefully constructed the deal, the greater the potential benefits. When devising an M&A strategy, it's essential to consider which benefits are most desirable and align with the company's objectives.
If you would like to discuss M&A strategy or your company's path to it's own success we would love to schedule a strategy call and serve you. Work with 3rd Party People.