Organizations usually consolidate to increase market access, remove excess capacity, develop new businesses, acquire technology more quickly, and improve the performance of the target company.
In most cases, organizations acquire or merge because they want to grow with a goal of creating new bottom line profitability or top line revenue.
When the market perceives a merger and acquisition strategy sound, the company’s stock prices could be rewarded. Companies nowadays exist in a global marketplace and are not bound to country or region.
The key to sustaining positive benefits of any acquisition or merger pursuit is making sure that the post-merger integration is successful. If this is the case, then there can be profitable growth, and the deal valuation can be achieved.
Some acquisitions or mergers focus solely on obtaining a specific technology.
However, there are many other companies for which retaining the talent acquired is essential since the employees have critical skills, knowledge, and customer relationships which determine the value of the acquisition.
Why Merger and Acquisitions?
The main aim of any merger or acquisition aided by the Auctus Group, is value enhancement or value creation.
Mergers and acquisitions are usually business combinations, and the reasons for their occurrence are typically based on some specific elements. Here are some of the reasons behind mergers.
1. Capacity Augmentation
One of the main reasons why organizations merge is for capacity augmentation by combining forces.
Normally, companies usually target this business move to leverage the expensive manufacturing processes. However, capacity will not just entail manufacturing processes, and it could come from procuring a unique technology platform rather than having to build it afresh.
In most cases, capacity augmentation is usually the driving force in automobile and biopharmaceutical companies.
2. Achieving a Competitive Edge
Let us all face it; competition these days is cut-throat. Without sufficient strategies at their disposal, companies will barely survive the current tide of innovations.
A majority of companies choose the merger route in order to expand their footprints in an entirely new market where the partnering company has a robust presence.
If two companies are operating in a landscape where they provide similar services or products, then the chances are that there will be a lot of competition and consolidation of both companies could strengthen their position in the market for better returns. In other instances, an attractive brand portfolio usually lures organizations into mergers.
3. Getting Through the Tough Times
In the business world, tough times don’t last, but robust companies do. And with businesses now going global, the level of uncertainty in the worldwide market is just breathtaking.
Every year, the global economy goes through a phase of change and during the tough times, combined strength is usually better.
When survival proves to be challenging, the best option is to combine resources for the better. For instance, in the 2008-2011 crisis period, a majority of banks took the path of merging to protect themselves from the balance sheet risks.
In the 21st-century business landscape, a sensible company should not believe in having all its eggs in a single basket.
Diversification is crucial, and it can be the difference between a successful company and once that struggles with making huge profits. By combining their services and products, companies could gain a competitive edge over others offering products in the same line.
Diversification means merely adding products in the portfolio which isn’t a part of the current operations. An excellent example of this type of acquisition is when HPO acquired EDS in the year 2008 to add some new service-oriented features in the technology offerings they already had.
5. Cost Cutting
For a majority of businesses, economies of scale is their soul. When two companies produce similar services and goods or are in the same line of operations, it is completely sensible for them to reduce operating costs or combine locations by streamlining and integrating their support functions. This then presents a tremendous opportunity to reduce operating costs. And the math is pretty simple here; when the overall cost of production is reduced with an increase in the production volume, then total profits are maximized.
6. To Improve Financial Positions
When mergers and acquisitions are successful, companies can improve their financial position in the market. With a larger business, you might have better access to numerous sources of financing in capital markets as compared to when you have a smaller firm.
The expansion which results from acquisitions and mergers could enable the enlarged company to access equity and debt financing which was previously beyond their reach.
Apple, one of the world’s largest corporations, successfully gave close to $17b billion in bonds in the year 2013 even though it already had large capital disposals. The case would have been different if a smaller company had tried to perform a bond issue of this magnitude.
7. Tax Advantages
Mergers and acquisitions have been found to offer numerous tax advantages, like tax loss carry-forward.
If one of the organizations involved in the alliance had previously had net losses, the losses could be offset against the profits of the company it has acquired or merged with. This will provide considerable benefits to the combined entity, but it will only be valuable if the financial predictions of the acquiring company indicate that there will be operational gains in the future. Otherwise, the tax shield will not be worthwhile.
Another commonly overlooked corporate acquisition or merger scheme involves an organization in a low-corporate-tax rate state with another company in a high-corporate tax-rate country. In some instances, the organization in the low tax environment could be smaller and would be an ideal candidate for a huge corporate merger.
After the merger, the new corporation would be legally located in a low-tax jurisdiction and could eventually avoid billions in corporate taxes.
For mergers and acquisitions to be successful, there is a need to have a cultural blend between the companies coming together as well as a perfect blend of union and individuality to retain an established market share.