M&A deals are a very efficient way of gaining synergies and helping businesses achieve their goals. However, not all corporate mergers and acquisitions turn out to be successful. According to studies, the percentage of successful mergers and acquisitions lies between 10%-30%. Besides, these types of transactions always come with some pitfalls.
Therefore, knowing the benefits, disadvantages, and risks of mergers and acquisitions is crucial for businesses looking forward to consolidating.
Here is a detailed guide on mergers and acquisitions, their benefits, and their drawbacks.
What are mergers and acquisitions deals?
An acquisition and a merger are two different business processes, but the term is often used collectively. Here is how we can define mergers and acquisitions.
Mergers
A merger is a corporate transaction in which two different companies merge and form a new business entity. A famous example of successful mergers is the $75 billion consolidation of Exxon and Mobil. It is important to understand that mergers often result in new business entities.
Acquisitions
As the name suggests, it is a process in which one business is acquired by another business. After the acquisition, the acquired or target company loses its name and legal status. The acquiring company absorbs the target company. Also, if the target company holds or trades stocks, the acquiring company gets the right over the stocks.
Types and reasons for mergers and acquisitions
There can be one or multiple reasons for mergers and acquisitions depending on companies’ objectives. Some businesses consolidate to increase their market share, while others may do it by combining financial resources or human talent.
Common types of mergers and acquisitions include:
- Market extension merger
- Conglomerate merger
- Reverse mergers
- Horizontal and vertical mergers
- Cogeneric acquisitions
- Consolidations
- Diversification
- Tender offers
- Concentric mergers
Benefits of mergers and acquisitions
Improved economies of scale
A larger business unit that forms after a merger has higher needs related to raw materials to fulfill its production capacity. This situation puts these companies in a better negotiation place because suppliers prefer high-quantity orders. Thus, the overall costs of production decrease allowing the company to achieve economies of scale. The company can also pass on that benefit to customers by lowering prices.
Access to more financial resources
Companies involved in a merger have access to better financial resources. That is because when two or more companies merge, they can utilize each other’s financial resources. It not only allows businesses to explore new opportunities but also optimize their production costs. They can buy inventory or raw material in bulk quantities at a lower cost.
Reduced labor costs
When two companies (working in the same industry) merge, they can reduce their labor costs. That is because it is easy to lay off employees doing the same job in two different companies. Mergers allow businesses to utilize the best human talent and save costs by reducing the workforce.
Access to new markets
When two similar business entities operating in different regions merge, they can access new markets. For example, if one FMCG company operates in Florida and the other one operates in California, the merger will allow them to target both markets. The bigger the market access, the higher the customer base and, thus higher the profits.
Disadvantages of mergers and acquisitions
M&As may have their perks, but they also bring challenges and risks for the companies. Here are the potential drawbacks and risks involved in M&As.
Insufficient due diligence
Mergers and acquisitions process is lengthy and complex. An average M&A transaction takes up to six months. The most challenging process is the due diligence in mergers and acquisitions. It is a fundamental section of any M&A transaction in which the buyer company examines the target company from all aspects.
The seller company has to present its important data such as financial statements, human resource details, financial models, etc. Many M&A deals fail because of a poorly managed due diligence process.
Deal expenses
Mergers and acquisitions process is not only lengthy, but it is expensive as well. Both sides have to hire professional M&A experts, legal advisors, etc. Second, data management and sharing also need financial resources. Third, there are various legal fees involved in mergers and acquisitions.
Cyber threats
As the technology progressed, M&A deal-makers have moved to digital routes for due diligence in mergers and acquisitions. However, the biggest problem with online channels is to ensure platform security. M&As include data sharing in large volumes, and it becomes hard to ensure the complete security of that data. Data losses can lead to financial, reputational, and legal crises.
Diseconomies of scale
We mentioned earlier that M&As help achieve economies of scale. However, it can be the other way around. If two smaller units merge to make a bigger unit, their management may not be trained to handle large-scale operations. This can ultimately backfire and cause a loss of resources.
Summing it up
Mergers and acquisitions help achieve synergies, improve economies of scale, reduce labor costs, and give access to new markets.
On the other hand, there are challenges like ensuring smooth due diligence, data security, and managing expenses incurred on the transactions.
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