Why companies do Mergers and Acquisitions? Reasons

Mergers and acquisitions (M&A) refer to the process of combining two or more companies into a single entity. The process has become popular in recent years as companies strive to: 

1. expand their market share, 
2. reduce competition, and 
3. increase profits. 

Ever thought why do companies engage in mergers and acquisitions in the first place? In this article, we will explore the main reasons behind M&A and discuss their benefits and risks.

Why companies merge and acquire

Companies merge and acquire for various different reasons, and a few of them are presented before you for a brief analysis.

Diversification:

M&A can provide companies with access to new markets, products, and technologies, allowing them to diversify their operations and reduce risk.

Increased market power: 

Combining forces can result for companies in an increased market share, reducing competition, and gaining a stronger foothold in their respective industries.

Cost savings: 

M&A can also result in significant cost savings through achieving economies of scale and an increase in operational efficiency.

Talent acquisition: 

Acquiring a company can provide access to more talented employees, executives, and other key personnel.

Synergies: 

M&A can create synergies between companies, allowing them to leverage their combined strengths and achieve greater and better results than they could have achieved  individually.

Main reasons for mergers and acquisitions

A summary for main reasons of Mergers and Acquisitions can be presented as follows:

Strategic alignment: 

Companies may generally merge or acquire other companies that share similar goals and objectives, and that complement their current operations.

Financial benefits: 

M&A may also provide companies with access to new sources of funding, reduce costs, increase profitability, and create additional value for shareholders.

Competitive advantage: 

M&A can help companies gain a competitive advantage by increasing their market share, reducing their competition, and increasing their bargaining power.

Risk reduction: 

M&A can further help companies reduce risk through diversifying their operations and reducing their reliance on one single product, market, or supplier.

Access to new markets: 

Mergers or Acquisitions may also provide companies with access to new markets, customers, and distribution channels. Which may help them in expanding their operations and increasing their revenue.

Why do companies engage in mergers and acquisitions

Companies mainly engage in mergers and acquisitions due to multiple reasons. A few companies may be looking to expand their market share or diversify their operations, while others may be seeking to save costs or go for talent acquisition. Additionally, M&A can be driven by external factors such as changes in the regulatory environment or industry consolidation. 

Ultimately, the decision to engage in M&A depends on a company’s strategic goals and objectives, as well as the specific opportunities and challenges presented by the market.

How many mergers fail

M&A is a risky and complex process, and not all mergers and acquisitions are successful. According to a study by Harvard Business Review, around 70-90% of M&A deals fail to achieve their intended objectives. The reasons for this vary, but a few common factors include poor strategic planning, cultural differences between companies, and failure to integrate operations and personnel effectively.

What are the risks of mergers and acquisitions

Several risks can be associated with M&A (Merger and Acquisition) activities, including:

Integration challenges: 

Merging two companies can be a much complex and challenging process, and integrating operations and/or personnel can be a difficult task.

Cultural differences: 

Companies may usually have different cultures and values, which can lead to conflicts and disagreements during the M&A process.

Financial risks: 

M&A can be costly, and companies may incur significant debt or face other financial risks as a result of the costs associated with it.

Regulatory risks: 

Mergers and Acquisitions may be subject to regulatory scrutiny and approval, and companies may face legal and compliance risks.

Reputation risks: 

M&A can impact a company’s reputation, and negative publicity or stakeholder opposition can affect the success of the deal.

Why merger is better than acquisition

In some cases, a merger might prove to be a better option than an acquisition. Here are a few of the reasons why:

Shared control: 

In a merger, both companies share control over the newly formed entity. This means that each company has an equal say in the direction of the business, which can help to prevent any one company from dominating the other.

Shared risk: 

With an acquisition, the acquiring company takes on all of the risk associated with the acquired company. In a merger, both companies share the risk. This can make it easier to weather any storms that may come along.

Cost savings: 

In some cases, a merger can result in significant cost savings. For example, if the two companies have similar operations, they may be able to consolidate their operations and eliminate redundant positions.

Increased market share: 

A merger can also result in increased market share. By combining their resources, the two companies may be able to reach new customers or expand their offerings, which may help in growing their market share.

Cultural fit: 

Finally, a merger can be a better option than an acquisition if the two companies have a good cultural fit. If the two companies share similar values and work well together, they may be able to achieve greater success by merging their operations.

Effects of mergers and acquisitions

Mergers and acquisitions may have a significant impact on both the companies involved; and their stakeholders. Here are a few of the effects that mergers and acquisitions can have:

Job losses: 

One of the most significant effects of mergers and acquisitions is job losses. When two companies merge or one company acquires another, there is often a duplication of roles; and this usually results in the consolidation of positions and, in some cases, layoffs.

Changes in company culture: 

Mergers and acquisitions can lead to changes in company culture. When two companies merge, there may be differences in the way they do things. This can lead to conflicts, and challenges as employees adjust to a newly introduced culture.

Increased market power: 

Also, mergers and acquisitions might lead to an increase in market power. By combining resources, the merging companies can gain the ability to dominate the target market and eliminate a significant portion of the competition.

Improved efficiency: 

Mergers and acquisitions can lead to an increase in efficiency. This can be achieved by consolidating operations and eliminating redundant positions. The newly formed entity may be able to operate more efficiently and effectively.

Changes in stock prices: 

Mergers and acquisitions can also have a significant impact on stock prices. If investors do anticipate the merger or acquisition as positive, the stock price may go up. But, if they perceive it as negative, the stock price may decline.

How much do mergers and acquisitions consultants make

Mergers and acquisitions’ consultants are professionals who assist companies in their planning and execution of mergers and acquisitions. Companies hire them to provide strategic advice, conduct due diligence, and assist with negotiations.

The amount that mergers and acquisitions consultants can make vary depending upon numerous factors, including the level of experience, the size and complexity of the deal, and the region in which they are working.

As per Glassdoor, the average salary for a mergers and acquisitions consultant in the United States is around $100,000 per year. Which can vary widely, with some consultants earning upwards of $200,000 or more per year.

How do mergers and acquisitions affect stock prices

Mergers and acquisitions can have a significant impact on the stock prices of companies involved. The market’s reaction to the announcement of a merger or acquisition can vary, depending on the perceived benefits and any risks associated with the deal. In general, when a merger or acquisition is expected to create value for shareholders, it elicits a positive reaction from the market and drives an increase in stock prices.

But, if the market perceives the deal as being too expensive or risky, it could result in an adverse  reaction and a decrease in stock prices. The market also tends to be more sensitive to the acquirer’s stock price movement rather than the target’s, especially in all-stock deals.

Another important factor to consider is the timing of the merger or acquisition announcement. The market’s reaction may be more extreme, If the announcement is made during a period of market uncertainty or volatility. It is not uncommon for stock prices to experience significant fluctuations in response to the news of a merger or acquisition.

The market’s reaction to a merger or acquisition can vary, based on the industry and the current market conditions as well. In a mature industry with slow growth, companies may perceive mergers and acquisitions as a means to consolidate and achieve cost synergies, rather than pursuing growth actively. However, in a high-growth industry, companies may consider mergers and acquisitions as an opportunity to access newer markets, technologies, and/or products.

Regulatory issues and antitrust concerns can also affect the market’s reaction to a merger or acquisition. If regulators perceive the deal as being anticompetitive, it could result in a negative reaction from the market and a decrease in stock prices.

Hence, the impact of a merger or acquisition over stock prices is a lot complex and depends on multiple factors. It is important for companies to carefully consider the potential impact of a merger or acquisition on their stock price and the market’s reaction before pursuing a deal. Investors should also carefully do their evaluation of the risks and benefits of investing in companies involved in mergers and acquisitions.

How long do mergers and acquisitions take

Mergers and acquisitions involve a lot of complex processes and legal procedures, and the timeline for completion can vary widely depending on the size and complexity of the deal. Companies can complete some mergers and acquisitions in just a few months, while others may require several years to finalize.

Generally, companies can break down the time required to complete a merger or acquisition into three phases: pre-merger, merger, and post-merger. During the pre-merger phase, companies engage in negotiations and due diligence, which can take several months to complete. During the merger phase, companies must obtain regulatory approval and finalize the terms of the deal, which can also take several months. Finally, during the post-merger phase, the two companies work to integrate their operations and realize the benefits of the merger, which can take several years.

The length of each phase can vary depending on the specific circumstances of the merger or acquisition. For example, if the companies involved operate in highly regulated industries, obtaining regulatory approval can take longer. Additionally, if the two companies have significantly different cultures or business models, integrating their operations can take longer and be more challenging.

It’s important to note that unexpected issues during the process can delay or even cancel mergers and acquisitions. For instance, if one of the companies involved faces financial difficulties or if regulators raise objections to the deal, it can significantly extend the timeline.

In conclusion, mergers and acquisitions can take anywhere from a few months to several years to complete, depending on the size and complexity of the deal, as well as the regulatory and cultural factors involved. It’s important for companies to carefully consider the timeline and potential risks before embarking on a merger or acquisition. Working with experienced advisors and consultants can help ensure a smoother process and increase the chances of a successful outcome.