Mergers and acquisitions (M&A) is a activity between two companies combining their entities in a single form. Although mergers and acquisitions (M&A) are used interchangeably, they come with different legal meanings. In a merger, two companies of similar size combine to form a new single entity. On the other hand, when one company takes over another and establishes itself as the new owner, the purchase is called an acquisition.
When companies come together they can achieve cost efficiencies in the delivery of goods and services, sales and marketing, and the administration of the business. In a nutshell, they can take advantage of synergistic opportunities in the following four domains:
Economies of scale – size matters.
A large company placing large orders has the leverage of negotiating large discounts from its suppliers. This will affect every department of the company and may include everything from electricity bills to marketing and advertising.
While some mergers and acquisitions may lead to retrenchment, they can ensure better staff utilization, thus improving the company’s productivity. The new company is able to have a healthy-looking balance sheet with all the money saved due to enhanced efficiency in selected departments.
Expanding the market reach
Mergers and acquisitions is a very effective tool when a company wishes to penetrate new markets and grow its revenues. It expands the newly-formed company’s distribution and marketing channels while presenting new sales opportunities at the same time. Acquiring a company that already serves the geographical area you want to reach, is a far better option than trying to grab a foothold in that market through aggressive marketing.
Accessing new technology
Google acquired YouTube, or Facebook acquiring WhatsApp, are classic examples of this. Instead of spending millions of dollars on research and development, and that too in a field where you have already lost the first-mover advantage, large companies prefer to buy-out the proven technology. This way, they get to stay on top of technological developments and maintain their competitive edge.