The term mergers and acquisitions (M&A) implies the consolidation of companies or their important business assets through certain financial transactions. A company may buy and absorb another business outright or just merge with it to create a new company. Earlier, Anand Jayapalan spoke about how an active mergers and acquisitions strategy can prove to be fruitful for any company if the process is implemented well.
The advantages of mergers and acquisitions are many, such as:
- Economies of scale: Economies of scale are ensured by distinctive M&A activities. It allows for increased access to capital, lower costs as a result of higher volume, as well as improved bargaining power with distributors. Even though buyers must always steer clear of the temptation of indulging in the process of “empire building” as a general rule, larger companies do enjoy certain privileges that smaller ventures don’t.
- Economies of scope: Mergers and acquisitions bring economies that are not always possible through organic growth. It helps companies to effectively tap into the demand of a much larger client base.
- Synergies: Synergies involve the ‘one plus one equals three’ approach. Here, the value that comes from two different companies working together in tandem results in something more powerful
- Opportunistic value generation: Businesses may end up making some of the best deals when they are not even actively pursuing an acquisition. The hallmark of such acquisitions is that the purchase price is lower than the fair market valuation of the net assets belonging to the targeted companies. It is possible for these companies to be in some kind of financial distress. Therefore, a deal can be made to keep it afloat while the buyer benefits from adding immediate value as a direct result of the transaction.
- Increased market share: Better market share is among the most common motives for undertaking M&A. Traditionally, retail banks have looked at geographical footprint as being key to achieving market share. Therefore there has always been a high level of industry consolidation in retail banking. In fact, many nations have a group of “Big Four” retail banks.
- Superior levels of competition: In theory, the larger a company is, the more competitive it is likely to become. This feature is often the result of economies of scale.
- Diversification of risk: This aspect also goes hand-in-hand with economies of scope: A company with varied revenue streams is able to spread risk across those streams instead of having it focus on just one. If one of the revenue streams fails, an alternative one may pick up, thereby diversifying the acquiring company’s risk in the process.
Earlier, Anand Jayapalan also spoke about how Mergers and Acquisitions would be among the most effective ways to make a long-term strategy become a mid-term strategy. For example, if a company wants to enter the American market; it may build its presence in the country from the ground up and try to reach the desired scale in five to ten years. Or, it can benefit from the acquisition and leverage the brand value and client base of an already established business. Such an approach also goes for areas like new product development and R&D, wherein an organic strategy is hardly able to match the speed provided by M&A.
