5 Key Reasons for Mergers and Acquisitions
- March 22, 2024
- hubdigit_hubnew
- 6:07 am
- No Comments
Mergers and acquisitions (M&A) happen on a daily basis. The year 2022 saw around 50,000 M&As around the globe on varying financial scales.
Due to this fact, a question arises in the minds of budding entrepreneurs: why are all these M&As happening, and what are we missing out on?
Before we dive head-first into explaining the benefits, here is a quick refresher on some relevant definitions.
Merger: When two companies join together to become one bigger company.
Accusation: When one company buys another company.
Takeover: When one company gains control of another company by purchasing its majority shares or assets.
There are a multitude of reasons to pursue M&As, but unsurprisingly, since we are talking about businesses, the main motive is more profit. But let’s look deeper at different aspects of this main motivation.
1. Growth:
More specifically, we are talking about inorganic growth, a type of business expansion that is attained specifically from M&A instead of expanding your current business operations.
Inorganic growth has many advantages, but the most important one is speed.
Using this strategy for growth, Businesses don’t need to rely on gradual or radical internal development. Instead, they simply expand their operations and market presence relatively quickly by acquiring other companies.
This kind of rapid growth comes with a few drawbacks, but the crucial time savings can position you for future market domination.
2.Access to Resources:
Sometimes, M&As happen solely because a company seeks valuable assets and capabilities that may not be readily available through internal development.
Post M&A, businesses gain access to a wide range of resources, including talented personnel, innovative technologies, established distribution channels, intellectual property rights, and financial assets.
Take the example of Facebook’s acquisition of Instagram in 2012.
Even back then, Instagram was emerging as a popular photo-sharing app with a rapidly growing user base.
However, Instagram needed resources and infrastructure to scale its operations effectively.
Facebook had those resources, and they saw Instagram as a potential complement to their existing social media platform.
Considering the mutual benefits, Facebook acquired Instagram for approximately $1 billion.
Since then, the integration of Instagram’s features into the Facebook ecosystem has contributed to both platforms’ overall success and growth.
3. Competitive Advantage:
M&As can place the companies involved in a better strategic position than the competition.
One way is by getting access to new markets, customers, and distribution channels.
Companies can obtain valuable intellectual property, technologies, and talent that may be difficult to develop internally.
Perhaps the best showcasing of this point is through the example of Disney’s acquisition of Pixar Animation Studios in 2006.
Before the accusation, Pixar had already established itself as a leader in the animation industry. On the other hand, Disney was struggling to maintain its dominance in the animation market.
With the acquisition, Disney gained access to Pixar’s innovative storytelling techniques, cutting-edge animation technology, and perhaps the best animation team led by legends such as John Lasseter and Edwin Catmull.
In one swift move, Disney revitalized its animation division and regained its competitive edge in the industry.
Taking it a step further, Disney used Pixar’s popular characters and franchises to create immersive theme park attractions, merchandise lines, and television specials, further solidifying its position as a global entertainment powerhouse.
4. Economies of Scale:
Achieving an economy of scale opens a whole new world of opportunities for expansion and reduced costs.
The effect is mostly seen in mergers on a massive scale, where the merged entities achieve higher efficiency in their production, leading to lower costs and better profit margins.
Additionally, economies of scale allow for expansion in new markets, mostly via geographic expansion and market segmentation.
Back in 1999, two of the largest oil and gas companies, Exxon and Mobil, achieved significant economies of scale through their successful merger.
The combined businesses, now called ExxonMobil, optimized their global supply chain, reduced redundant facilities, and streamlined administrative functions.
Eventually, they managed to lower production costs per barrel of oil.
ExxonMobil achieved these cost savings by leveraging its enhanced bargaining power to secure more favourable contracts.
They also maintained competitive pricing for the products and services to rapidly increase their market share.
5. Diversification:
Almost all M&As come with a certain level of diversification.
The new entity that emerges from M&As has a more stabilized revenue stream simply due to the lack of dependence on a single market.
Moreover, a reduction of risks is seen in your overall business as the risk is spread out through different business lines, industries, or geographic regions.
The company becomes more resilient in the face of ever-evolving economic ups and downs.
Apart from the financial security side, this newfound entry into different markets creates room for future growth in new segments.
Allowing companies to quickly capitalize on emerging trends, technological advancements, or demographic shifts in different industries or regions.
Diversification can also act as a barrier to entry for new competitors.
It makes it tough for others to replicate the businesses’ broad range of products or services.
Final Thoughts:
After crossing a certain threshold in the business world, Mergers and Acquisitions become necessary for companies to attain new heights. M&As offer companies new ways to increase profits by providing growth, access to resources, competitive advantage, economy of scale, and diversification. Companies can attain the aforementioned benefits with internal development, but internal development can’t hope to match the expansion speed achieved with M&As.