One of the most important factors that entrepreneurs must consider when it comes to starting a new business is growth. It is through the acquisition of and merging with other companies that allows them to grow their businesses. It is no wonder that many successful companies have teams dedicated to finding beneficial acquisition opportunities.
Mergers and acquisitions (M&A) are a strategy companies use to develop new businesses and increase their market penetration. They also acquire new technology and improve their profitability. Most organizations try to retain the talent they have; the personnel of that company have the knowledge, skill base, and customer relations critical to maintaining the profitability of the acquired company. Stock markets favor these types of deals as they tend to reward those that have more shares and maintain profitability.
Economies of Scale
M&A allows companies to expand their reach and improve profitability by increasing their production volume and access to capital. It also lowers their costs and increases their bargaining power with their distributors.
One of the most common strategies companies use when establishing new businesses is to combine with other companies that produce similar products and services. This allows them to achieve economies of scale. They can lower their operating costs and increase their production volume.
Economies of Scope
One of the most advantageous factors that a company considers when it comes to acquiring a target company is the creation of a wider variety of products. This can be done through the manufacturing of multiple goods in tandem.
Although organic growth can’t always achieve economies of scope, mergers and acquisitions can provide companies with a significant advantage by allowing them to expand their reach. For instance, by acquiring Instagram and WhatsApp, Facebook was able to tap into the growing demand for its services.
Increased Strength to Weather Tough Times
Mergers and acquisitions can help companies endure tough times by strengthening their competitive advantage and improving their ability to operate in constantly changing global markets. For instance, many banks decided to go through with mergers and acquisitions during the Great Recession of 2008 to 2011. With the acquisition, they were able to improve their business and rid themselves of toxic assets.
As a rule of thumb, large companies are more likely to handle competition better than smaller ones due to their economies of scale, bargaining capabilities, and a wider pool of skilled workers. Due to the cutthroat nature of today’s competitive environment, many companies are looking to expand their reach and acquire technological innovations through mergers and acquisitions.
A merger or acquisition can help a company establish a stronger position in the market by bringing together two companies that are operating in the same niche. It can also help them grow their market share and improve their profitability. One of the most important factors that a company considers when it comes to choosing a merger partner is the availability of a compelling brand portfolio.
Diversification of Portfolio
Another benefit of a merger or acquisition is the opportunity to expand the company’s offerings. This allows it to compete against other companies that are also in the same niche. Diversification can provide a competitive advantage to a company over its competitors.
One of the most important factors a company considers when acquiring a target company is the country’s favorable tax environment. A merger or acquisition can provide a company with a significant advantage by allowing it to carry-forward the losses it previously recorded. However, this type of arrangement is only beneficial if the acquiring company’s financial projections show solid operational gains.
Compatibility between merging companies is critical for merger and acquisition strategies to succeed. The cultures of the companies that are merging are also important to ensure that the acquisition will be successful. This type of arrangement can help a company retain its market share and create a more competitive environment. Depending on the terms of the deal and the type of restructuring the company agrees to, the advantages of M&A could offer additional benefits for the company.