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Mergers and acquisitions may seem like a far-fetched proposition for startups, but learning more about them and how they factor into your company's long-term strategy is important. It should be prepared in advance. Mergers and acquisitions (M&A) are used interchangeably but have two different meanings.
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Mergers and acquisitions may seem like a far-fetched proposition for startups, but learning more about them and how they factor into your company's long-term strategy is important. It should be prepared in advance. Mergers and acquisitions (M&A) are used interchangeably but have two different meanings. A corporate merger occurs when two companies combine to form a new entity with a new ownership and management structure. On the other hand, buying a company does not create a new business. Conversely, a small company ceases to exist and becomes part of a larger company. Ten Benefits and Drawbacks of Mergers and Acquisitions 1. Financial systems Underpinning all M&A activity is a commitment to economies of scale. Benefits of leveling up: better access to capital; Cost savings due to higher volumes; Improving negotiation power with distributors etc. Buyers should always avoid the temptation to indulge in 'empire building', but in general, large companies often enjoy advantages that smaller companies do not. Contact expert Financial Accountants & Tax Advisors For more information 2. Economies of scope
Mergers and acquisitions bring economies of scope not always possible through organic growth. To know if this is true or not, you have to look at Facebook. While the platform gives users the ability to share photos and connect with friends, it's on Instagram and WhatsApp. Economies of scope allow companies to tap into the demands of a much larger customer base. 3. Synergy effect Synergy is commonly described as 'one plus one equals three'. The value comes from two companies working together to create something more powerful. 4. Opportunistic value creation Some of the best deals happen when companies aren't actively pursuing acquisitions. A characteristic of these acquisitions is that the purchase price is less than the fair market value of the net assets of the target company. Often these companies face financial difficulties, but deals can be made to keep the company afloat while the buyer benefits from adding immediate value as a direct result of the transaction. 5. Increase market share One of the most common motivations for conducting M&A is to increase market share. Historically, retail banks have seen geographic presence as key to achieving market share, and as a result there has always been a high degree of industry consolidation in retail banking (most countries have a "big four" retail banking group). 6. High level of competition In theory, the bigger the company, the more competitive it becomes. Again, this is essentially one of the benefits of economies of scale. As you grow, you can compete more. For example, dozens of startups are currently entering the plant-based meat market, offering a variety of vegetable-based 'meats'. However, if P&G or Nestle start focusing on this market, many new companies will be left behind, unable to compete with these giants. 7. Access to talent If you ask the recruiting industry where the current talent shortage is, the answer is invariably 'people who can code'. Why is this? First, because of the enormous demand for coders during the so-called 4th Industrial Revolution. But it's also because all the best coders work at big Silicon Valley tech companies.
The biggest companies always have access to the best talent. This is as true in technology as in any other industry. 8. Diversification of risks It is closely related to economies of scope. By having multiple revenue streams, a company can spread the risk across those revenue streams instead of focusing on just one. Going back to the Facebook example: some analysts say young people are moving away from the social media giant to other forms of social media. Among them are Instagram and Whatsapp. If one revenue stream declines, alternative revenue streams may be diversified away, or the acquiring firm's loss may be absorbed in the process. 9. Implement your strategy fast M&A consulting in Chicago is the best way to transform a long-term strategy into a medium-term one. Let's say a business wishes to tap into the Canadian market. We hope to build from scratch and reach the desired level in 5-10 years. Or it could be the business, customer base, distribution, brand value etc. and all these can benefit once the purchase is complete. The same applies to areas such as new product development and R&D, where organic strategies cannot keep up with the momentum provided by M&A. 10. Tax benefits An acquisition may offer tax advantages if the target company is in a strategic industry or located in a country with a favorable tax regime. A good example is US pharmaceutical companies looking at Irish small Business Accountants and moving their headquarters to Ireland to take advantage of the country's low tax base. This is called a 'tax inversion' transaction. Conclusion For a merger or acquisition strategy to be successful, the combined company needs a culture conducive to maintaining established market share through the perfect combination of integration and individuality. Depending on the terms of the restructuring and the type of company agreeing to the merger, M&A may also provide additional benefits.
