A business merger or acquisition presents an effective strategy for company expansion and new revenue streams that can improve bottom-line profitability. From increasing market access and reducing market competition to improving performance and bringing down production costs, several mergers and acquisitions benefits make consolidation a lucrative and attractive opportunity for companies.
Mergers and Acquisitions Benefits
Here are the top ten mergers and acquisitions benefits that you should know.
1. Economies of Scale
Often, the end goal of a merger and acquisition is to realize economic gains and economies of scale. This becomes possible when the two firms involved in the merger and acquisition are stronger, more productive, and more efficient together than apart. Businesses consolidate to reap benefits like increased access to capital, better bargaining power in the market, lower costs resulting from high volume production, and more.
2. Economies of Scope
Mergers and acquisitions benefits include economy of scope, which refers to the reduction in production cost of one product due to the production of another related product. In other words, one product supports another to reduce the overall costs. Economies of scope typically occur when producing more products is more feasible and economical than making a single or fewer products. Mergers and acquisitions can sometimes lead to economies of scope that may be impossible to achieve through organic growth.
3. Competitive Edge in the Market
Mergers and acquisitions mean greater financial strength for both companies involved in the transaction. Having greater economic power can lead to higher market share, more influence over customers, and reduced competitive threat. In most cases, bigger companies are harder to compete against.
4. Access to the Best Talent
Talent acquisition is one of the biggest concerns for companies that wish to excel in the market. The recruitment industry knows that talented employees are attracted to big names. Consequently, the bigger the company, the better access it enjoys to the best available talent. This trend is evident across industries from manufacturing to technology and services.
5. Access to Resources
Businesses in the same sector can sometimes improve access to materials, suppliers, and tangible resources through acquisition. For example, one business may acquire or merge with one of its suppliers to improve production cycles and guarantee access to critical materials.
6. Diversification of Risk through Portfolio Divergence
Mergers and acquisitions allow companies to spread risk across different revenue streams by the diversification of the products, services, and prospects for the business. If one revenue stream falls short, the business will still have several other income streams to fall back on and continue operation. By diversification of risk, the company can ensure sustainability for the long run.
7. Cost-Effective Alternatives for Facilities
Mergers and acquisitions present a cost-effective alternative to starting from scratch. Setting up production centers, buying machinery and equipment, building storage places, and initiating distribution channels are costly. It is more cost-effective to merge with another company already equipped with the facilities you require. Furthermore, the transaction will also bring all the other merger and acquisition benefits that will contribute to business success.
8. Access to New Markets
Breaking into a new market can be challenging, even for established businesses. While setting up a subsidiary or branch is always an option, a merger or acquisition can save companies a significant amount of time, effort, and money compared to starting from scratch.
This is especially true for businesses ready to move into a foreign geographical market. International markets can be exceedingly difficult to penetrate. Therefore, it is more feasible for most companies to merge with or acquire an established local business that already has a loyal customer base.
9. Opportunist Value Generation
Larger organizations are often on the lookout for acquisition opportunities where the purchase price is valued at less than the fair market value of the target’s net assets. Such financial positioning indicates that the target company is experiencing financial distress. In such cases, a merger or acquisition can allow the acquired company to stay afloat, and the acquiring company to reap benefits such as proprietary rights to products, increased market growth, penetration in new geographic regions, and more.
10. Enterprise Continuation
Some small businesses are family or privately owned. Once the founder retires, there is a risk of business failure because there may not be a clear succession plan for the business. This can put employees out of work and impact suppliers to the business. A merger or acquisition is one strategy to help ensure business continuity, reduce interruptions in the operation, and provide job security for employees.
The Bottom Line
Merger and acquisition benefits are clear. However, to sustain the positive benefits of any acquisition or merger pursuit, businesses need to implement the right mergers and acquisitions strategy crafted to meet the company’s unique circumstances and goals. It is also essential to ensure a successful post-merger integration, which is fundamental to capturing synergies, profitable growth, and deal valuation.
While mergers and acquisitions can be highly beneficial, working out the details can be complicated. Contact Windes to learn more about mergers and acquisitions and to explore your options.
