Top-5 Benefits of Mergers and Acquisitions
Global M&A activity continues breaking dealmaking records. According to Refinitiv, the total value of pending and completed deals announced as of August 2021 has surpassed $3.6 trillion. In comparison, it took all of 2020 to reach the same number.
With that said, mergers and acquisitions are the way for companies to gain numerous advantages — from organizational to financial. In this article, we’ll take a closer look at five main benefits of mergers and acquisitions to see if they could help in your individual case.
1. Financial synergy
Financial synergy refers to the enhanced financial management of joined companies. If the synergy is positive, it leads to such benefits of mergers and acquisitions as taxes, debt capacity, and profits. However, in some cases, the synergy can be negative, which means that each company is valued more on its own.
Most importantly, the M&A process brings tax advantages that wouldn’t be accessible without them. For instance, when companies expand internationally, the tax laws of other countries can be more relaxed. Moreover, when a company with financial losses is acquired by a profitable company, the latter shares the tax burden and helps to reduce its tax burden.
The next financial benefit of mergers and acquisitions is increased profitability. As the ‘Financial Synergy in Mergers and Acquisition of Commercial Banks‘ study suggests, the composite mean of 4.33 revealed that the moderate extent of profitability in commercial banks M&A is a result of financial synergy.
Lower interest rates
Finally, larger companies pay lower interest rates when taking a loan from investment banks. This factor is caused by improved capital structure and cash flow of the joined companies. Additionally, the bigger the company is, the larger the debt it can acquire from lending institutions. This, in turn, leads to a reduction of the company’s cost of capital.
2. Access to better talent
According to the EY Global Capital Confidence Barometer, 67% of executives mentioned talent acquisition as the main driver for the M&A process. However, successful onboarding and employee retention remain among the biggest challenges of M&A. Despite this fact, proper talent acquiring strategy leads to numerous advantages.
Access to experts in new fields
For instance, when Disney acquired Pixar in 2006, it was driven by the desire to improve its waning animation popularity. But most importantly, what Disney gained from the deal was the talent of the most famous computer animation company. The talented employees of Pixar joined forces with Disney’s experience — and the rest is history.
Reduced labor cost
Another benefit of mergers and acquisitions is the reduced labor cost as a result of such transactions. A joined company doesn’t have to hire new employees and spend money on training them as it already has experienced professionals.
Moreover, after the merger, the company might find that they are overstaffed in some positions. By eliminating excess staff, the new corporation reduces overall labor costs while maintaining the most effective experts.
3. Reduced risk
In addition to all the benefits of mergers and acquisitions mentioned above, M&A deals are a way of protecting the business from any unexpected events. The ‘acts of God’ are unpredictable and uncontrollable, which makes them a huge risk for any company — small or big.
Despite big risks, M&A creates an opportunity for companies to expand their business.
For instance, such an ‘act of God’ as the global pandemic of COVID-19 has impacted the world economy. Some countries have managed to quickly restore their economy, while others have found themselves in financial crisis. Businesses based solely in the US are still recovering from the global crisis.
On the other hand, US corporations that had expanded to other markets, such as China, have begun to profit. This way, any losses that the company suffers in the US market are negated by profits from international branches.
Other points to consider as benefits of mergers and acquisitions is product diversity. One of the clearest examples of how this works is Unilever. It produces various products from food to personal care goods. This approach allows it to mitigate the risk of financial losses. If one of its market segments suffers losses, others areas may offset them with their profits.
4. Less competition
If you are a consumer, you enjoy having a wide variety of companies that make similar products. However, in the business world, having lots of competitors means fewer customers and, thus, lower market share. In this case, the benefits of mergers and acquisitions cover even the area of industry competition.
For instance, social media giant Facebook wouldn’t have grown to the size it is today without strategic M&A deals. In 2012, the company acquired Instagram and, thus, turned its biggest competitor into an ally.
Facebook went even further and signed a deal with Snapchat in the following years. This approach has turned Facebook into the most popular social media platform worldwide based on the size of its global audience.
One more example of how the benefits of mergers and acquisitions work is the M&A case of Coca-Cola that used its competitors to its advantage.
As there are so many industry rivals in the soft drinks market, Coca-Cola decided not to eliminate its closest competitor PepsiCo. Instead, it went beyond soft drinks and acquired the leader of the coffee industry — Costa Coffee. In this way, Coca-Cola has become a front runner in the market for coffee drinks.
5. Economies of scale
The laws of economics are simple: when the level of output increases, the cost per unit decreases. This effect is easily achievable through the process of M&A. When two companies combine their client base, the demand level allows them to use each company’s resources more efficiently.
For instance, if demand increases, a manufacturer can use existing machinery to meet production levels — instead of buying new equipment.
Another benefit of mergers and acquisitions in terms of economies of scale is even further reduction of expenses. If the merged companies have stores located too close to each other, they can combine their resources and pare down to one location. Moreover, logistical costs also decrease when the newly formed company has branch offices throughout a specific market area.
Finally, increased demand leads to an increased need for raw materials. When these inputs are purchased in large quantities from wholesalers, the cost per unit significantly decreases. Additionally, production in bulk also leads to efficient use of tools and energy required for manufacturing.
A well-constructed M&A deal is a great opportunity to benefit your company. Besides the ones described above, you could always attract many more. The way to be successful is to manage the deal from the very beginning.
Depending on your motives for completing the deal, you could diversify to experience the benefits of mergers and acquisitions. Therefore, before implementing the M&A strategy into reality, consider what exactly you’re looking for.