Top Reasons Why Merger and Acquisition (M&A) Take Place?

Top Reasons Why Merger and Acquisition (M&A) Take Place?
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In the highly competitive business landscape of today, the long-term survival of a company largely depends on its ability to demonstrate growth potential.  On the other hand, startup businesses or smaller companies may face dilution when competing against large companies or MNCs. Earlier, Anand Jayapalan had spoken about how companies consider Merger and Acquisition (M&A) to be a good strategy for building up their position in the market or industry.

Mergers involve the amalgamation of two separate entities into a unified, singular organisation. It occurs when two enterprises opt to pool their resources willingly, and try to establish a new corporate entity. On the other hand, in the case of an acquisition, the acquiring company purchases all of the assets and even debt of the target company, and the acquired company effectively becomes a part of a larger organisation.

Merger and Acquisition (M&A) initiatives can take place due to multiple reasons, including:

  • Market expansion and growth opportunities: Mergers and acquisitions can be important strategies for companies planning to expand their reach, and capitalize on brand new growth prospects.  Expanding market reach via M&A initiatives helps companies to effectively penetrate new geographical regions or demographics, ultimately facilitating better access to untapped consumer bases. A company, for instance, may decide to acquire a local business in a foreign market to establish its presence and gain a much-needed competitive advantage. M&A may provide a strategic entry into markets that would have been difficult to enter solely through organic expansion. By merging with or acquiring companies with complementary products or a major presence in specific markets, companies can swiftly expand their market share and broaden their customer base. Such strategic initiatives can help foster revenue growth and generate synergies.
  • Achieving economies of scale: Consolidating operations through M&A allows business to effectively achieve economies of scale, which is a major driver for lowering expenses and improving operational efficiency. Economies of scale occur due to increase in distribution, production, as well as operational efficiency achieved by combining resources and streamlining processes. For instance, a merger between two manufacturing companies, for instance, can result in the optimization of production facilities. It can lead to superior savings through bulk purchasing and ensure efficient utilization of resources. This improved efficiency helps the merged entity to produce goods at lower cost per unit, thereby elevating its overall competitiveness and potentially facilitating competitive pricing strategies. Economies of scale also allow companies to allocate their resources more efficiently towards innovation, research and expansion, therefore levelling up their ability to invest in future growth and development.
  • Diversification of products and services: Diversification through M&A initiatives can help companies to expand their portfolio of services or products, therefore lowering dependency on a single market or product line.  By opting to acquire companies in varied industries or with complementary offerings, enterprises would be able to spread risk and capitalize on multiple revenue streams.

Previously, Anand Jayapalan had pointed out that the motives of many M&A initiatives can be to eliminate competitors or consolidate market share.  With the help of strategic mergers or acquisitions, enterprises would be able to gain a larger market share and reduce competitive pressures

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