Hey there! Welcome back again. Mergers and Acquisition sound quite familiar right? But ever wondered why are Mergers and Acquisitions required? Let us quickly find out the reasons behind Mergers and Acquisitions and what benefits it reaps. Let’s find out.
In simple words, Merger and Acquisition is the processes of combining two companies into one. Both words, Mergers & Acquisition, have their meaning but are often used together. Both processes are the same, but the relationship differs based on whether a merger or acquisition occurred.
Did you know that during the lifetime of a business, businesses may experience various stages such as the introduction stage, growth stage, maturity stage, and decline stage?
A business in its all-growth probability needs to expand at multiple levels. Hence because of this reason, it may also start growing from inorganic processes, i.e., by absorbing similar businesses in the same industry. Inorganic growth can be symbolized by an expansion in the workforce, satisfied customers, infrastructure, and thereby leading to an overall increase in the revenues and profits of the entity.
Mergers can be defined as the unification of two players into a single entity. Such transactions typically happen between two businesses that are the same size, which recognizes the advantages that the other offer in terms of increasing sales, efficiencies, and capabilities.
Acquisitions, on the other hand, refer to situations where one player purchases the other to combine the bought entity with itself. It may be in the form of a purchase, where one business buys another, or management altogether. The ultimate goal is to combine two or more businesses for advantage, leveraging, and developing synergy where the whole (new company) is greater than the sum of its parts.
Mergers and Acquisitions are instruments of momentous growth and are increasing as they are widely accepted by businesses as a strategic tool to join forces. They are mainly seen in information technology, telecommunications, business process outsourcing as well as in traditional businesses to achieve strength, or to enter a new market, or a particular product segment.
There are many reasons for which Mergers and Acquisitions may be undertaken. These reasons are as follows:
- To access the market through an established brand: The common rationale for Mergers and Acquisitions (M&A) is to gain access into the product & services market with the advantage of an established brand, thereby penetrating the market with more assurance of positive customer buying choice. It creates an opportunity in which the combined company is worth more than the two companies individually.
- To get a market share: The second reason can be to achieve inorganic growth. Inorganic growth through mergers and acquisitions (M&A) is usually way faster for a company to achieve higher market share or revenues as compared to growing organically. A company can gain more market share by acquiring or merging with a company with the latest capabilities without having to take the risk of developing the same internally.
- To eliminate competition: The third very important reason for mergers and acquisitions is to eliminate competition. Mergers and acquisitions often represent financial growth for both the parties involved in the particular transaction. In simple terms, it means more financial power as the revenues are generated by pooling the income streams of both businesses. As a chain reaction, having greater financial power will also mean acquiring a larger share of the market and having direct influence over the customers, which in turn helps in reducing the competition.
- To Acquire competence: Another major reason why mergers and acquisitions take place is that various tax advantages could be claimed. Yes, many government offices offer reductions when a merger or acquisition is completed successfully. Out of these, Singapore is one of the best Asian countries where a merger or acquisition could take place. Merging or acquiring a smaller existing company would attract substantial tax advantages in this country.
- To reduce Tax Liabilities: As discussed in the above point as well, tax benefits can be realized when one company with significant taxable income transfers its tax liability to another company with tax loss as carrying forwards. Acquiring any company with tax losses enables the acquirer to make use of the tax losses to lower its tax liability. In other words, to set off accumulated losses of one entity against the profits of another entity. On a lighter note, mergers are not usually done just to avoid taxes.
To summarize, cost synergies are also created due to economies of scale that can be easily quantified and calculated. Whereas revenue synergies are typically created by cross-selling, increasing market share, or by charging higher prices.
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