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19A7510025
Topic: A summary about mergers and acquisitions. Reasons. Advantages and
disadvantages

Mergers and acquisitions (M&A) are defined as consolidation of companies.

Differentiating the two terms, Mergers is the combination of two companies to form one,
while Acquisitions is one company taken over by the other. M&A is one of the major
aspects of corporate finance world. In this essay, we will discuss about the reason,
advantages and disadvantages of M&A.
Mergers and acquisitions take place for many strategic business reasons, but the most
common reasons for any business combination are economic at their core. Following are
some of the various economic reasons. The first reason is to increase capabilities.
Increase capabilities may come from expanded research and development opportunities
or more robust manufacturing operations. Similarly, companies may want to combine to
leverage costly manufacturing operations. Capability may not just be a particular
department; the capability may come from acquiring a unique technology platform rather
than trying to build it. Biopharmaceutical companies are a hotbed for M&A activities due
to the extreme investment necessary for successful R&D in the market. In 2011 alone, the
four biggest mergers or acquisitions in biopharmaceutical industry were valued at over
US$75 billion. The second reason is to gain a competitive advantage or larger market
share. Companies may decide to merge into order to gain a better distribution or
marketing network. A company may want to expand into different markets where a
similar company is already operating rather than start from ground zero, and so the
company may just merge with the other company. This distribution or marketing network
gives both companies a wider customer base practically overnight. One such acquisition
was Japan-based Takeda Pharmaceutical Company’s purchase of Nycomed, a
Switzerland-based pharmaceutical company, in order to speed market growth in Europe.
Another reason for merging companies is to complement a current product or service.
Two firms may be able to combine their products or services to gain a competitive edge
over others in the marketplace. For example, in 2008, HP bought EDS to strengthen the
services side of their technology offerings. The next reason is to replace leadership. In a
private company, the company may need to merge or be acquired if the current owners
can’t identify someone within the company to succeed them. The owners may also wish
to cash out to invest their money in something else, such as retirement. Another reason is
to cut cost. When two companies have similar products or services, combining can create
a large opportunity to reduce costs. When companies merge, frequently they have an
opportunity to combine locations or reduce operating costs by integrating and
streamlining support functions. The last reason is to survive. It’s never easy for a
company to willingly give up its identity to another company, but sometimes it is the only
option in order for the company to survive. A number of companies used mergers and
acquisitions to grow and survive during the global financial crisis from 2008 to 2012.
The advantages of Mergers and Acquisitions. It adds more value to the combined entity
than either individual company can produce on its own. At its heart, the M&A process is
all about reducing duplication so that more efficiencies can be achieved. The end result is
typically an enhance level of overall revenue because there aren’t costly redundancies
that occur through the product chain. It opens up new markets for both companies. Once
an organization has merged with another, it instantly gains a new market share that it may
not have had before. Many people within an industry are brand loyal and the M&A
process allows people to maintain that loyalty while potentially transitioning to new
goods or services. The customer base may even be encouraged to experiment with new
goods or services after the merger or acquisition is complete because they have access to
more resources through their preferred brand. It is a cost-effective method to fuel
expansion. If a business has to upgrade their internal processes or their existing
technologies on their own, then this can create a massive charge on several budget lines
that can be difficult, if not impossible, to absorb. The M&A process allows businesses to
come together so that their specific needs can be met by another in a more affordable
manner. This includes employees as a resource as well since some organizations have
talented employees in position already so that additional training costs are not required. It
can create multiple growth opportunities. Two businesses that may have been competing
against each other now work together as one entity in the completion of the M&A
process. This means they are more effective on a local level at providing economic
benefits because there isn’t a “race to the bottom” occurring. Consumer prices on goods
or service may or may not rise because of this, but overall a more effective company is
one that create more economic opportunities. The disadvantages of Mergers and
Acquisitions. It creates distress within the employee base of each organization. The M&A
process invariably consolidates positions within the companies that are duplicated. This
often means that there is a chance layoff could occur, which would place people out of
work for an indefinite period of time. It may increase the amount of debt that is owed.
There can be differences in corporate culture that are not easy to consolidate. It isn’t a
person decision most of the time. Many mergers and acquisitions require numerous
people on both sides of the aisle to be on the same page. When that doesn’t happen, the
amount of time it takes to complete the M&A process can be extended. This creates
added costs to the process which may cause the risks of a merger or acquisition to be
greater than the benefits that could be experienced by the deal.
In conclusion, M&A’s are considered as important change agents and are a critical
component of any business strategy.