Advantageous and Disadvantageous Conditions of Mergers and Acquisitions

Among the popular strategies adopted by firms is through mergers and acquisitions, extensive exploitation of the market, and also a higher margin of profit. The class comes under the category of business transactions where two firms are involved and one will be buying the other or vice versa; the two firms merge together. However, mergers and acquisitions are extremely profitable but come with a percentage of risk that is linked with them. Let's see the merits and demerits of mergers and acquisitions, so you would have an idea about the opportunities and challenges available in such deals.

A merger is a process whereby two companies agree to pool all their operations into one entity. This is always a mutual arrangement wherein the entities agree to combine their resources, assets, and liabilities. In most cases, mergers are seen as one of the avenues for the creation of synergy and general improvement in performance.

What's an Acquisition?

In an acquisition, one firm acquires another. In this regard, an acquisition can be in the form of a majority or all the shares it owns. Compared to mergers, acquisitions are generally more one-sided, that is, where one company takes charge of the other. Acquisitions can be friendly or hostile.

Also Read: Mergers and Acquisitions (M&A) Understanding

There are several advantages of mergers and acquisitions:

Some strategic advantages make mergers and acquisitions a very feasible path for businesses that want to expand. Some of the benefits are as follows:

• Market Share Expansion: Merging or acquiring businesses is one way to easily enhance the market share by combining the customers. More sales and more power in the market are likely outcomes of expanded market presence.

• Cost Synergies: Merger companies reduce cost on economies of scale. They share resources including marketing, research, and technology. The result is reduced operating costs. For instance, there should be departments that exist in duplicate to merge, such as HR and finance functions, in order to streamline these operations and cut costs.

• Financial Stability is Improved: Companies can be merged or acquired, combining all their assets and giving them the strength of power to have even better capital access with improved credit ratings and increased investment in growth opportunities.

• Diversification: M&A allows companies to diversify their product offerings, services, and geographical reach. For example, a technology company can acquire a healthcare business and enter a completely new market, thus reducing the risks of being overly dependent on one sector.

• Access to New Technology and Expertise: The acquisition of a firm is in pursuit of its innovative technologies or special expertise for a firm to innovate and take a leading position in the marketplace. Acquisition is highly fulfilling to high-velocity industries such as technology and pharmaceutical.

• Tax benefits: Tax benefits are the other reason for M&A. If one company has a lot of tax losses, then by merging with a profit-making company, it can equalize those losses and reduce the overall tax burden.

• Global Expansion: International acquisitions can help companies expand their activities in new regions or geographies. This is a convenient entry mode into a host country with a local partner who understands the complexities of the market, culture, and consumer behavior.

Also Read: Advantages of Mergers and Acquisitions

Demerits of Mergers and Acquisitions:

M&A has advantages, but there are disadvantages of the transaction. Some of these disadvantages include:

• Cultural Conflicts: It has been argued that M&A is challenging in numerous ways, most especially in merging two separate corporate cultures. Most employees that are working for the two firms always find new methods hard to embrace because they will be experiencing confusion, poor moods, and low productivity levels. The aspect of cultural integration is mostly undervalued; however, it is one critical component that is responsible for making the deal work.
• High Costs and Expenses: The costs of M&A deals are usually huge, ranging from lawyers' fees, advisory fees, due diligence, and restructuring. The integration cost after the closure of the deal is high, and the synergies take more time than one would expect to be realized.
• Overvaluation Risk: Sometimes, while buying the target, the companies feel that they are paying more for the same. Poor financials or market not responding as expected can make an acquiring company receive a poor investment that will result in great loss to the shareholders.
• Loss of Key Talent: M&A often triggers restructuring, leading to layoffs or a change in management. Core employees may exit the organization in uncertainty or unhappiness with the new corporate framework, resulting in the loss of precious talent.
• Antitrust and Regulatory Issues: Such huge mergers or acquisitions attract a great deal of interest from the antitrust authorities. Where the combination results in monopoly, the enterprises can attract quite significant reductions in competition. In some cases, it can stall the merger or force them to sell some of the businesses to be in sync with the antitrust law.
• Distraction from core business: Merger and acquisition involves highly time-consuming planning and implementation to the management of the target corporation. Its diversion of management attention away from its own core business often affects current operations and future growth prospects as well.
• Integration Problems: The integration phase would be the most complicated part of an M&A transaction. This is a tiresome process requiring meticulous planning and execution to get two organizations which have a system, technology, and process difference within them on board. Loss of value or missed opportunities result from failure in integration.
• Debt and Financial Burden: The increase in debt puts the acquiring firm under more pressure in terms of finance. With increased debt, flexibility associated with debt is diminished, and its credit ratings will be affected; it also enhances the risk of instability in firm finances.

Table: Advantages and Disadvantages of Mergers and Acquisitions:

Best Practices for an Effective Mergers and Acquisitions:

To make an M&A effective, a few best practices need to be followed

• In-depth Due Diligence: Due diligence will consist of detailed analyses of the financials, operations, legal position, and all the potential risks associated with the target company. This would eliminate surprises after closing and ensure the acquisition aligns with business objectives.
• Effective Communication: Communicate with the affected parties-the employees, the customers, and the shareholders-in regard to changes that will occur. It can clear communication to diminish uncertainty and orient people towards an optimistic viewpoint.
• Plan Cultural Integration: Develop a work plan that takes into consideration the integration of cultures between the two firms. Areas to include are differences in work style, values, and approaches to managing the organization and providing for employee training or support to face the new environment.
• Post-Merger Integration Strategy: The integration process should start early and be well planned. Aligning operations, technologies, and customer service protocols as soon as possible maximize efficiency and synergies.
• Long-term Goals: Immediate results may be important, but M&A is often a long-term strategy. Companies must make sure they do not focus on quick wins, but instead, on long-term growth.
• Financial Planning: Sufficient funds and correct debt management should be ensured. Then, good financial planning reduces risks and gives space for flexibility during the transition period.

Conclusion

Mergers and acquisitions can be a powerful tool to consider in expansion through market opportunities, yet it comes with both opportunities and challenges. These, though leading to an increase in market share, cost savings, and global expansion, carry the risk of cultural clashes, high costs, and integration difficulties. Successful M&A calls for careful planning, comprehensive due diligence, and effective integration of operations and cultures. It thus helps the companies in best utilization of possible benefits and avoidance of risks.

Also Read: Process of Mergers and Acquisitions