Mergers and acquisitions, more often known as "M&As," refer to the process of combining two or more businesses or assets with the intention of fostering economic expansion, achieving a competitive advantage, expanding market share, or exerting influence over supply chains.
One company may decide to purchase another or merge with another business for a wide variety of reasons; however, the most common reason is that one business recognises the value that exists in the other business and wishes to exploit this value for the purpose of enhancing its own position in the market.
In this article, mergers & acquisition consulting experts elaborate why companies merge or buy other businesses.
A merger is when two companies join forces and one of them goes out of business because it was taken over by the other. Before proceeding, the boards of directors of both firms must get authorization from their respective shareholders.
When one business (the acquirer) purchases the other (the target company), the latter keeps its existing name and legal status but is otherwise absorbed into the former. For instance, with Amazon's 2017 acquisition of Whole Foods, the latter firm did not change its brand or how it did business.
When two firms merge into one, its owners obtain common equity shares in the merged company. In 2018, for instance, the merger of Harris Corp. with L3 Technologies Inc. resulted in the formation of L3 Harris Technologies Inc., the sixth biggest military contractor in the United States.
Proposal to Sell
Tender offers are a kind of public takeover bid in which the acquiring business (the bidder) approaches the shareholders of a publicly listed company with an offer to buy their shares at a predetermined price and within a certain time frame. Since the target business's management and board of directors have no say in the matter, the acquiring corporation often operates in secret.
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The following are some of the reasons why mergers and acquisitions take place in the business world:
Value creation through synergies
When businesses work together, they may build on one other's strengths to boost overall performance efficiency and reduce expenses across the board.
If the merger is considered a growth merger, the acquiring company may be able to expand its market share with no additional work. Instead, acquirers engage in what is known as a horizontal merger, in which one company purchases another. A large brewery may decide to acquire a smaller rival in order to get into the market of beer drinkers who are loyal to certain brands.
Increase the supply chain's bargaining leverage
A company may save money by buying a supplier or distributor altogether. Vertical mergers, in which one company buys out another and merges its activities with those of the acquired one, are one strategy for cutting costs. When your company becomes a distributor, you might potentially save money on shipping charges for the products you sell.
Put an end to business rivalry
Many merger and acquisition transactions help the acquiring company reduce or eliminate future competitors, therefore increasing its market share. On the other hand, a high premium is often needed to win over the shareholders of the target firm. If the purchasing business pays too much for the target company, the shareholders of the acquiring company may sell their stake, causing a decline in the stock price.
If you want to get things rolling, all you have to do is get in touch with merger & acquisition consulting services.
Large scale of economies
As it is said, the bigger, the better. The idea behind buying more of anything is to save money by taking advantage of volume discounts. Cost reductions and competitive advantages are two things that larger organizations often have over their smaller rivals.
Obtain cutting-edge information and tools
Companies that fail to adapt to shifting market conditions tend to fail. That's why it's common practice for businesses to seek out acquisitions of other firms for the purpose of gaining access to cutting-edge technology and specialized knowledge.
It's possible that gaining market share is the driving force behind the vast majority of mergers and acquisitions (M&A) deals. CEOs are always thinking about their company's position in the market in relation to its competitors.
The concept that two businesses may give their consumers more by working together (cross selling) is fundamental to the concept of revenue synergy.
Also Read : Different types of Mergers- An Ultimate Guide
Companies are reluctant to confess that they have used M&A as a tax avoidance strategy. Amongst the most typical motivations for mergers and acquisitions is tax avoidance, which isn't popular with customers. However, it is seldom stated outright as the driving force. An organization with positive cash flow might benefit from buying another with tax losses it can use to offset future earnings.
When an acquisition opportunity presents itself, not all businesses jump at the chance. CEOs love the term "opportunistic" because it gives the impression that the deal is a once-in-a-lifetime opportunity.
Diversification by location
It makes sense that geographic diversity has been a significant value driver in M&A throughout the years. When expanding into a new market, it's not always necessary to start from scratch. Rather than wasting time and resources starting from scratch, you might buy an established business in the target market and utilize it for further expansion.
When a deal is announced, it is common for at least a single reason we listed above to be cited. However, keep in mind while considering the underlying motivations for M&A deals. If there is just one compelling reason for a business agreement, then there is a strong probability that it will be successful; on the other hand, if there are several reasons, then it is possible that the management is simply trying to persuade you that the deal is profitable.
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