Mergers and Acquisitions are a financial reality in the corporate world. However, it is an often quoted statistic that roughly half of all M&A ventures fail. Given that risk, why do so many mergers happen?
Ultimately, there are two major reasons which act as primary motivators for companies to make an acquisitions. The first is to fulfill a strategic gap in the company. This gap is often found in the company product or its human resources. M&A tend to happen between companies which have a natural synergy between eachother. In combining their complementary strengths and weaknesses, they can lower costs while increasing performance, improving their capabilities.
On the other hand, if the company does not produce the revenue it should, or does not have a deep enough market penetration, a merger may happen where the lead company acquires the other in order to diversify. In this situation, the merger offsets the overall company performance with that of the other to increase the overall profitability.
This also works in conjunction with increasing the power of the company to dictate the terms of pricing within the supply chain. For example, if a company buys one of its distributors or suppliers, they can eliminate a number of additional costs, while also making a saving on any potential costs that could be incurred. This can be done by taking advantage of cheap production, and cheap distribution.
The second major reason for M&As is to breach an existing market with a new product, while maintaining an existing revenue stream. This links with the above reason where, through merging with a company in an entirely different industry, improvments can be made to the total profitability. The newly acquired company can also benefit similarly, as this gives the aquirer a great opportunity to grow their market share in the new industry with relatively little effort.
Similarly, this can also take place in their own industry. By aquiring and merging with a company in your own industry, you can produce more product while also satisfying brand-loyal consumers. These types of 'horizontal mergers' are some of the most common. It eliminates the potential competition by increasing their overall market share. However, this can have significant backlash on share prices, as shareholders sell their shares before the merger both in case the merger fails and because the premium usually required to convince the target company to agree with the merger will be large.
These are the most important reasons why M&As occur. While reducing taxation, or making more use of economies of scale are important reasons to make a merger happen, these come secondary to reasons listed above. Though, it is always crucial to maintain that, while these are strategic reasons for M&As, the financial viability still holds a large precedent in terms of undergoing the financial deal.
By: Alexander Morrison