Why business engages in mergers & acquisitions (M&A)?

Mergers and acquisitions have been ruling the business pages of newspapers since the recent past. The firms are increasingly signing M&A deals but earlier such deals were signed without much analysis with huge expecmergertations of mutual success, but now the cons are also considered before getting into this. The reason behind this change is the high rate of failure of M&A deals. In spite of the high failure rate what may be the reasons that firms still engage themselves in merger and acquisition? The globalization, increasing competition in both domestic and international markets, increased the dynamism of the economies, and the firms’ internal pressures from management are some of the motivating factors for M&A.  Let’s find out more specific reasons behind M&A.

Reasons behind Merger & Acquisition

Though there are heavy risks associated with M&A yet these deals offer a potential for huge rewards making them lucrative for the firms. M&A bring benefits of synergy and economies of scale for the firms involved. The expected benefits which motivate the firms to engage themselves in M&A include:

  1. Creating Value for Shareholders: The shareholders are called the ‘owners’ of the company. M&A deals lead to the combination of firms resulting in an overall increase in the company’s value thereby creating value for shareholders and maximizing shareholders wealth. However, value creation is a long-term phenomenon and results from the synergy generated in M&A.
  2. Bringing Efficiency in Operations: The combination of firms in M&A makes them enjoy the benefits of economies of scale which individual firms could not enjoy. There is a reduction in the overall costs especially in the functions of production, management, marketing, research and finance. M&A also helps to eliminate duplication of many processes making firms more efficient.
  3. Rapid Growth: The firms also resort to M&A with a view to expand and foster growth by means of acquiring a target firm’s technology, skills, resources and products, and an access to new markets. M&A deals offer a good opportunity for technology transfers, utilization of human resources, and making the products easily accessible to newer markets where the other firm has an edge.
  4. Transformation of the firm: Sometimes the firms engage in M&A with an objective to transform themselves. There may be a transformation of either or both the firms and involves redefining the firms’ mission, strategies, processes, portfolio and organization. This complete transformation is sometimes essential to survive.
  5. The target company is offered cheap: Though it happens rarely yet sometimes the target company is available at a price less than its intrinsic value. The reasons may be legal, financial or human issues in the target company making its survival difficult. This provides a good opportunity to buy cheap and enough reason to get into M&A.
  6. Strategic Reasons: Strategic reasons are most common for M&A deals. These deals are often realized with a view to minimizing competition in the marketplace. By merger, the firms become bigger and enjoy monopoly benefits exerting power on competitors. This also reduces the risk to be taken over by the competitors.
  7. Financial Benefits: A series of financial benefits are enjoyed by firms through M&A. Mergers many times offer tax benefits to the firm thereby reducing the financial burden. Moreover, M&A leads to diversification of risk because the investment lies in different classes of assets and the return from a total portfolio of assets gets stable. It also increases the firm’s debt building capacity because of more stable earnings act as an assurance to the lenders.

References

  • McGrath, M. (2011). Practical M&A Execution and Integration: A Step-by-Step Guide to Successful Strategy, Risk and Integration Management. UK: John Wiley & Sons Limited.
  • Sharan, V. 2nd Edition. (2006). International Business: Concept, Environment and Strategy. Dorling Kindersley (India) Pvt. Ltd.

Ankita Agarwal

Analyst at Project Guru
Ankita is working with the editorial board of Project Guru as a Research Analyst and Writer. With Masters in Commerce and Business Studies, Ankita learned much of what she knows about management through experience. She has previously worked in various financial institutions like Birla Global, HDFC Ltd. and Citi Financial. She is self-motivated and writes for the Knowledge Tank section of Project Guru. She has authored more than 80 articles so far in Human Resources Management, Strategic Management, Finance and Marketing. She likes to pen her thoughts about the latest issues gripping these areas across the world.

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