Question

What are the advantages of M&A

Answer 1

Merger and Acquisition. (M&A)
A Merger involves the total absorption of a target firm by the acquirer while an acquisition involves one firm buying only a portion of another firm.

Advantages of M&A

The following are the advantages of the Mergers and Acquisitions:

(i) Competitive Edge: The combined talent and resources of the new company help it gain and maintain a competitive edge. An acquisition will quickly build market presence for your company, increasing market share while reducing the competition's stronghold. Where competition has been particularly challenging, growth through acquisition can reduce competitor capacity and level the playing field.

(ii)Opportunity to leverage Synergies: The synergy created by the merger of two companies is powerful enough to enhance business performance, financial gains and overall shareholders value in long-term. "Synergy" means the interaction or cooperation of two or more organizations to produce a combined effect greater than the sum of their separate effects. In short it means 1+1=3. For example, a single draft horse can pull 8000 pounds while 2 horses working together can pull 24000 pounds.

(iii) Cost Efficiency: The merger results in improving the purchasing power of the company which helps in negotiating the bulk orders and leads to cost efficiency. The increase in production volume causes the per unit production cost resulting in benefits from economies of scale.

(iv) New Markets: The market reach is improved by the merger due to the diversification or the combination of two businesses. Acquiring an existing entity can often overcome formerly challenging market entry barriers while reducing risks of adverse competitive reactions. Market entry can otherwise be a costly proposition, involving market research among other upfront expenses, and take years to build a significant client base.  

(v) Add a new business model: If you are considering a new business model, the easiest way to develop and test it out is to acquire a firm that is already using the model successfully. That way you avoid possible missteps from experience.

(vi) Save time and long learning curves:  Much like adding a new business model, a strategic M&A may help you save considerable time and expense in your growth strategy. For example, suppose you are considering a new service for your business. Your firm is fully capable of developing and delivering that service on its own, but it will take more time, money and resources than you are willing to devote. It might be easier and more cost-effective to simply acquire the capability.