M&A Investment as an Alternative to Starting a New Company

Entrepreneurship typically involves starting from scratch and incorporating a new company. However, many entrepreneurs prefer mergers and acquisitions (M&A) as a less risky alternative. This approach allows involved parties to reap benefits more quickly. With M&A, the current operations of a business are taken over, which eliminates the need to establish a customer base, build reputations, recruit new employees, and design new procedures, processes, systems, and infrastructure. M&A can take place in two forms: merger or acquisition.

a) Merger: A merger involves the economic and legal integration of two or more legally independent companies. In a merger, both the transferee and transferor companies lose their previous legal entities, becoming part of a new company.

b) Acquisition: In an acquisition, the acquiring company retains its title and legal identity while obtaining all the assets and resources of the acquired company, which is then legally terminated.

Types of M&A:??

Mergers can occur in three main ways based on the sectors in which the involved companies operate:

1. Horizontal Mergers: This type occurs when companies in the same sector engage in an M&A process. Horizontal mergers can accelerate monopolization in the market by reducing the number of competing firms in that sector. An example is the acquisition of 75.5% of Tekstilbank’s shares by the Industrial & Commercial Bank of China for USD 313.8 million in 2014.

2. Vertical Mergers: These mergers involve companies operating at different stages of the production process. They may occur when there is a buyer-seller relationship between the companies, such as when a company merges with its supplier. The primary aim of vertical mergers is to minimize potential disruptions in production and to reduce inventory costs and overall expenses. For example, in 2014, Toyota Tsusho acquired Plasmar Plastic Company.

3. Conglomerate Mergers: This type involves companies that operate in different sectors or geographical regions. Conglomerate mergers have become increasingly common over the past 50 years. A notable example is Fiba Group’s acquisition of 50% of Florence Nightingale Hospitals in 2014, marking a move into a different sector.

Conglomerate mergers can happen in three ways:

a) Market-Extension Merger: The merging of two companies that sell the same product in different markets.

b) Product-Extension Merger: The merging of two companies that sell different but related products in the same market.

c) Other Conglomerate Mergers.

Benefits of M&As for Involved Parties:??

Mergers and acquisitions offer numerous advantages to both transferee and transferor parties. Some of these benefits include:

- Acquiring technology and know-how

- Accessing new markets by completing product ranges and gaining industry experience

- Gaining working capital

- Accessing new distribution channels and expanding distribution networks

- Reducing competition in the market

- Providing a source of liquidity for investors and shareholders

- The potential for quick returns on investment

- Achieving economies of scale

- Quickly accessing a wider customer portfolio

- Attaining sustainable growth

- Increasing production capacity

- Guaranteeing raw material supply

- Raising earnings per share

When M&A decisions are well-founded and the processes are effectively managed, they can be faster, more effective, and more efficient investment methods compared to the uncertainties of starting a new company.