Successful Mergers And Acquisitions Explained

Business mergers and acquisitions could be an effective strategy for growing the bottom line.

Organizations usually consolidate to increase market access, remove excess capacity, develop new businesses, acquire technology more quickly, and improve the target company’s performance.

Organizations usually acquire or merge because they want to grow to create new bottom-line or top-line lines. The company’s stock prices could be rewarded when the market perceives a merger and acquisition strategy as sound. Companies nowadays exist in a global marketplace and are not bound by country or region.

The key to sustaining the positive benefits of any acquisition or merger pursuit is ensuring successful post-merger integration. If this is the case, there can be profitable growth, and the deal valuation can be achieved.

Some acquisitions or mergers focus solely on obtaining a specific technology.

However, there are many other companies for which retaining the talent acquired is essential since the employees have critical skills, knowledge, and customer relationships that determine the value of the acquisition.

Why Merger and Acquisitions?

The main aim of any merger or acquisition aided by the Auctus Group is value enhancement or value creation.

Mergers and acquisitions are usually business combinations, and the reasons for their occurrence are typically based on some specific elements. Here are some of the reasons behind mergers.

1. Capacity Augmentation

One of the main reasons why organizations merge is for capacity augmentation by combining forces.

Typically, companies target this business move to leverage the expensive manufacturing processes. However, capacity will not just entail manufacturing processes; it could come from procuring a unique technology platform rather than having to build it afresh.

In most cases, capacity augmentation is usually the driving force in automobile and biopharmaceutical companies.

2. Achieving a Competitive Edge

Let us all face it; competition these days is cut-throat. Without sufficient strategies, companies will barely survive the current tide of innovations.

Most companies choose the merger route to expand their footprints in an entirely new market where the partnering company has a robust presence.

Suppose two companies operate in a landscape that provides similar services or products. In that case, the chances are that there will be a lot of competition, and consolidation of both companies could strengthen their position in the market for better returns. In other instances, an attractive brand portfolio usually lures organizations into mergers.

3. Getting Through the Tough Times

Tough times don’t last in the business world, but robust companies do. And with businesses now going global, the level of uncertainty in the worldwide market is just breathtaking.

The global economy goes through a phase of change every year, and during tough times, the combined strength is usually better.

When survival proves challenging, combining resources for the better is best. For instance, in the 2008-2011 crisis period, a majority of banks took the path of merging to protect themselves from the balance sheet risks.

4. Diversification

In the 21st-century business landscape, a sensible company should not believe in having all its eggs in a single basket.

Diversification is crucial, and it can be the difference between a successful company and one that struggles to make huge profits. By combining their services and products, companies could gain a competitive edge over others offering products in the same line.

Diversification means merely adding products to the portfolio that aren’t part of the current operations. An excellent example of this type of acquisition is when HPO acquired EDS in 2008 to add new service-oriented features to its existing technology offerings.

5. Cost Cutting

For a majority of businesses, economies of scale is their soul. When two companies produce similar services and goods or are in the same line of operations, it is entirely sensible for them to reduce operating costs or combine locations by streamlining and integrating their support functions. This then presents a tremendous opportunity to reduce operating costs. And the math is pretty simple here; when the overall cost of production is reduced with an increase in the production volume, then total profits are maximized.

6. To Improve Financial Positions

When mergers and acquisitions are successful, companies can improve their financial position in the market. With a more significant business, you might have better access to numerous financing sources in capital markets than when you have a smaller firm.

The expansion resulting from acquisitions and mergers could enable the enlarged company to access equity and debt financing previously beyond its reach.

Apple, one of the world’s largest corporations, successfully gave close to $17 billion in bonds in 2013 even though it already had significant capital disposals. The case would have been different if a smaller company had tried to perform a bond issue of this magnitude.

7. Tax Advantages

Mergers and acquisitions have been found to offer numerous tax advantages, like tax loss carry-forward.

If one of the organizations involved in the alliance had previously had net losses, the losses could be offset against the profits of the company it has acquired or merged with. This will provide considerable benefits to the combined entity. Still, it will only be valuable if the contracting company’s financial predictions indicate operational gains in the future. Otherwise, the tax shield will not be worthwhile.

Another commonly overlooked corporate acquisition or merger scheme involves an organization in a low-corporate-tax rate state with another company in a high-corporate tax-rate country. In some instances, the organization in the low-tax environment could be smaller and an ideal candidate for a massive corporate merger.

After the merger, the new corporation would be legally located in a low-tax jurisdiction and could eventually avoid billions in corporate taxes.

For mergers and acquisitions to be successful, there is a need to have a cultural blend between the companies and a perfect blend of union and individuality to retain an established market share.