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The phrase mergers and acquisitions (M&A) refers to the consolidation of several business entities and assets through a series of financial transactions. Earlier, Anand Jayapalan had spoken about how in a merger two companies tend to unite, while in case of acquisition one business obtains a majority stake in the target firm. There are several reasons why a company may merge with or acquire another business, including:
- Synergies: The combination of business activities results in enhanced overall performance efficiency and a reduction in across-the-board costs, as each company capitalizes on the strengths of the other.
- Growth: Mergers provide an opportunity for the acquiring company to expand its market share without significant effort. In the case of a horizontal merger, the acquiring company purchases the business of a competitor at a predetermined price, facilitating growth without the need for substantial additional investments. For instance, a fashion brand might acquire a smaller accessories business, allowing the latter to increase production and boost sales among loyal customers.
- Increase supply-chain pricing power: Acquiring the business of a supplier or distributor allows a company to eliminate an entire tier of costs. In a vertical merger with a supplier, a company can save on the margins previously added by the supplier. In a similar manner, acquiring a distributor often grants the ability to ship products at a lower cost.
- Eliminate competition: M&A transactions commonly enable the acquiring company to eliminate future competition and expand its market share. However, this may come at the expense of a significant premium required to persuade the target company’s shareholders to accept the offer. The acquisition’s success may be compromised if the acquiring company pays too much, leading its shareholders to sell their shares and depress the stock price.
Considerations for executing M&A
A number of considerations have to be taken into account when pursuing a merger or acquisition.
To effectively execute the deal, one must focus on:
- Financing the deal: Having the right financing in place is vital for executing any deal. In the case of mergers and acquisitions, one especially has to think about the tax implications, comparative ratios, replacement costs and capital expenditures.
- Rival bidders: As a buyer, one must never assume that they are the only ones interested in the target company. On the other hand, target companies must explore multiple bids instead of simply accepting the first option.
- Target closing date: It is vital to pay heed to the timeline. A deal may take much longer than one had expected in many situations. However, tracking against a general schedule can help expedite processes and limit stalling. Each and every party involved in the deal should be aware of the other’s timeline.
- Market conditions: Outside forces, like trends in the product marketplace or even the economy at large, can impact the success of a merger or an acquisition. Hence, it would be a good idea to spend time on product and market forecasting to improve the odds of executing a financially valuable deal.
Earlier, Anand Jayapalan had mentioned that M&A can be an extremely laborious and involved process. To make sure that such a deal is executed successful, adequate time and resources have to be put into the process.