Why Companies Do Mergers and Acquisitions (M&A)?

Posted by InCorp Global on November 8th, 2021

Mergers and acquisitions are both terms you usually encounter in business scene.

A merger occurs when individual organizations decide to join their forces and give rise to a new business entity. On the other hand, an acquisition is a situation wherein a larger, financially stronger organization takes over a smaller one. The latter ceases to exist, and all of its operations and assets are acquired by the larger business enterprise.

Unlike mergers, acquisitions do not result in the formation of a new company. Instead, the purchased company gets fully absorbed by the acquiring company. Sometimes this means the acquired company gets liquidated. Acquiring a business is similar to buying an existing business or franchise.

An acquisition entails one organization acquiring the business of another. The acquirer must purchase at least 51% of the target company’s stock in order to gain absolute control over it. It usually occurs between two companies that are not equal in stature: a financially stronger entity generally acquires a smaller, relatively weaker one. It is not necessary for the decision to be a mutual one; when a company takes over the operations of another without the latter’s consent, it is termed as a hostile takeover.

Why Companies Do Mergers and Acquisitions (M&A)?

When companies come together they can achieve cost efficiencies in the delivery of goods and services, sales and marketing, and the administration of the business. 

In a nutshell, they can take advantage of synergistic opportunities in the following four domains:

• Economies of scale – size matters.

  A large company placing large orders has the leverage of negotiating large discounts from its suppliers. This will affect every department of the company and may include everything from electricity bills to marketing and advertising.

• Staffing efficiencies

  While some mergers and acquisitions may lead to retrenchment, they can ensure better staff utilization, thus improving the company’s productivity. The new company is able to have a healthy-looking balance sheet with all the money saved due to enhanced efficiency in selected departments.

• Expanding the market reach

  Mergers and acquisitions is a very effective tool when a company wishes to penetrate new markets and grow its revenues. It expands the newly-formed company’s distribution and marketing channels while presenting new sales opportunities at the same time. Acquiring a company that already serves the geographical area you want to reach, is a far better option than trying to grab a foothold in that market through aggressive marketing.

• Accessing new technology

  Google acquired YouTube, or Facebook acquiring WhatsApp, are classic examples of this. Instead of spending millions of dollars on research and development, and that too in a field where you have already lost the first-mover advantage, large companies prefer to buy-out the proven technology. This way, they get to stay on top of technological developments and maintain their competitive edge.

Read more about Singapore Business Mergers and Acquisitions at InCorp Global.