Mergers and Acquisitions (M&A) are business transactions that alter the structure of the ownership of a company and often happen through acquisition. The process can be a key way for companies to increase their market share and customer base as well as products. It can also reduce costs for businesses by leveraging economies of size and supply chain integration. Diversification can also be achieved by acquiring new markets or capabilities in the industry.
In a merger, companies of similar size merge into a new entity. In an acquisition, a major company buys a smaller company and integrates it with its operations. CVS Health purchased the healthcare giant Aetna for $70 billion in 2017. The merger of these two companies resulted in a new company that combined insurance and pharmacy services and provided a better customer experience.
M&A can be used to increase revenues by increasing a company’s market share, which in turn can increase profits. It is also an effective method to eliminate competitors, since companies can acquire smaller competitors who are struggling, and then close them down. Facebook’s dominance of the social media industry is a result of a series acquisitions designed to eliminate competition and ensure its continued growth.
Another reason to acquire an opponent is to gain technological advantages. For example, Google has acquired several companies that offered search engine technology and then integrated it into its own platform. In other cases companies make use of M&A to gain access to specific raw materials or production capabilities. For instance, a food company might acquire a bakery to gain access to its ingredients and increase its quality of products.
The cost savings that can be attained through M&A are often called synergies. They may take the form of lower costs as a result of economies of scale, lower operating expenses due to efficient processes, or lower employee salaries and benefit packages because of a decrease in duplication. They are difficult to quantify, but could be significant. For instance the buying power of two companies can be utilized to negotiate discounts with suppliers or to gain economies of scale in storage Data Room Features and shipping.
M&A can be used to enter the market more quickly than through organic growth. This can be done by buying an opponent in the market or by purchasing smaller companies with the necessary experience and expertise to serve that clientele. An example is the purchase of the mobile phone maker Nokia by Microsoft in 2013.
M&A can fail, though it is possible to fail because there are a myriad of ways that a deal could go wrong. For instance, a firm might not be aware of damaging information or be overly eager to make an agreement. It may underestimate the time it will take for the expected synergies to take effect. These issues can have an adverse impact on a company’s growth prospects and its stock price. These issues can be solved by M&A lawyers with years of experience in this field.
