M&A is an important element of corporate strategy for expansion and growth for business.
Reasons for M&A
Every merger has its own reasons for combining of the two firms is good business decision. The underlying principle of mergers and acquisitions (M & A) is 2 plus 2 equals 5. The merger of two firms creates additional value which is called ‘Synergy’ value and can take three forms:
- Revenues: Realization of higher revenues than the two companies operate separately.
- Expenses: Realization of lower expenses than two companies operate separately.
- Cost of Capital: Experience a lower overall cost of capital.
Lowering expenses is generally the big reason of business mergers e.g. cost reduction in human resources, accounting, information technology etc. There are strategic reasons for best mergers that include:
- Positioning: Position to take maximum advantage of the new emerging trends in the market place.
- Gap Filling: Fill in strategic gaps due to weaknesses of one company by strengths of the other company for long-term survival in competitive market.
- Organizational Competencies: Improving human and intellectual resources within the company.
- Broader Market Access: Acquire broader market access in the emerging global market
Additional basic reasons for mergers:
- Bargain Purchase: Acquire another company with unused facilities than to invest internally to create new ones.
- Diversification: Diversify products/services through merger to stabilize earnings and growth.
- Short Term Growth: Action from management to improve poor performance through merger and acquisition.
- Undervalued Target: Make good investment by availing opportunity of undervaluing target company.
Five Phases of Merger & Acquisition (M&A):
- Pre Acquisition Review
- Search & Screen Target
- Investigate & Value the Target
- Acquire through Negotiation
- Post Merger Integration