Incorporate finance, mergers and acquisitions is a common term that refers to the consolidation of assets or companies through different financial transactions. Financial transactions include asset purchase, consolidation, tender offers, mergers, management acquisitions, and acquisitions. Therefore, mergers and acquisitions are frequently used interchangeably though they have distinct meanings. A merger refers to a legal combination of two companies giving rise to a new legal entity. The two merging entities are approximately equal or similar in size and join forces to operate as one rather than separately operated and owned. Chrysler and Daimler-Benz are good examples of companies that ceased to operate separately and merged to form a new entity, DaimlerChrysler company.
On the other hand, the acquisition is when a larger and financially giant entity buys or takes over another smaller entity. The acquirer must buy at least 51 percent of a smaller entity’s stock to acquire complete control over the entity. In acquisition, the two entities are different in terms of financial strength and stature. A good example of the acquisition was observed in 2017 when Amazon purchased the American supermarket chain Whole Foods Inc. Despite their main aim to acquire better synergies within them to increase efficiency and competence; mergers has the following advantages;
Mergers result in increased market share of the newly created company enabling it to acquire larger shares in the marketplace and be more competitive. The merging companies restructure their corporate order to establish a competitive advantage strategy, enabling the new company to be ahead of the competition. Additionally, the company attains economies of scale, which enables the company to reduce operating costs. Economies of scale enable the company to increase its production at reduced costs of production. Therefore, the created company under mergers can purchase raw materials in bulky and spread out its investment on assets over increased output levels. In turn, economies of scale enable the company to generate higher profits and increase return on investment.
Merging also helps the company eradicate replication of products, thus; successfully eliminating competition and offering products at affordable prices to their loyal customers. Replication of products creates substitutes, which negatively affects sales since customers can easily switch to the company selling at a cheaper price. Therefore, the mergers can achieve an absolute advantage enabling the company to produce high-quality goods and gain more profit than its rivals. Consequently, companies have the opportunity to expand their businesses to new geographical locations. A company with an urge to expand its business to a certain location can successfully achieve this by merging with a similar company operating in that location. Mergers play an essential role in preventing the closure of a business due to bankruptcy and saving job opportunities for many people.
However, mergers increase the price levels of goods and services due to an uncompetitive market. After merging, the companies gain greater market shares, and competition reduces, contributing to the emergence of a monopoly market structure. As a result, the companies will exploit the customers by raising the price levels of goods and services they offer to the market. Communication gaps emerge as a result of cultural differences among the merging companies. Cultural differences have detrimental impacts on employees’ performance as well as on the company as a whole. Cultural diversity increases the tendency of employees to give way to interpersonal conflicts due to differences in opinions, beliefs, values, and norms.
Moreover, aggressive mergers cause unemployment, especially when a company opts to eradicate underachieving assets of the merging company. The situation may, in turn, lead to employees’ layoff thus losing their jobs, which also affect the performance of the company in terms of productivity. Unemployment causes labour immobility, social conflicts and unrest giving ways for emergence of poverty among the employees. In long-run increasing unemployment has negative impact to the company and economic growth as a well. Additionally, lack or little commonality among the merging companies can lead to prevention of economies of scale as it will be hard for companies to gain synergies. It would be difficult to attain the desired control and employees’ motivation, making it impossible for the new company to gain economies of scale.
In the case of acquisition, the acquiring company enjoys the merit of free entry to untapped markets due to the elimination of entry barriers. The acquisition enables the acquiring company to overcome barriers to the marketplace that were hindrances before the acquisition. The company can freely enter an untapped market with a strong customer base, good reputation, and highly recognizable products. Therefore, the company acquires market power to expand market shares, generate more profit, and return on investment (ROI). The acquisition plays an essential role in enabling the company to gain market synergies and a competitive edge in the market despite the level of competition. Furthermore, the acquirer enjoys the advantages of economies of scale as the company continues to implement similar sales and marketing strategies for the created company. It, therefore, enables the new company to operate at lower costs and improves productivity.
The acquiring company gains new resources and competencies after taking over the operations of the other company. The acquisition enables the company to acquire assets it did not own hence obtaining numerous benefits from the activity. The company experiences benefits such as increased revenue growth and enhancement of financial position in the long run. Diversity and expansion of the business enable the company to endure an economic slump. Moreover, capital accessibility by the acquiring company is greatly enhanced, thus; easing operations and long-run survival of the company. Availability of more capital ensures the smooth running of the business without the owners getting back into their pockets to fund the operations. In most cases, after the acquisition, the smaller companies continue to operate but under the control of the larger company. In this case, the smaller company has better access to specialists and experts in various perspectives, such as human resources and financial experts.
However, acquisition faces the challenge of brand-damaging or dilution; hence, a critical evaluation is required on which brand to drop or continue with different brands. Brand damage has a negative impact on the company since it causes loss of brand trust and loyalty; thus, the company loses market shares. Additionally, conflicting objectives are experienced among the companies because the companies have been running separately before. Conflicting objectives causes resistance hence discouraging the efforts employed in acquisition. For instance, it would be difficult for two entities to gain better synergy if the objectives of one of the companies are to expand its business and the other is to cut production costs.
As observed in mergers, the acquisition also encounters challenges of cultural diversity undermining the efforts of acquisition. Since commencement, each company has been operating under different business culture thus;, it would be difficult to acquire a company with conflicting cultures. It might be difficult for managers, employees, and activities from both entities to integrate and anticipate. Unlike in mergers, acquisition can lead to duplication of duties among the employees hence increasing the costs. When a company acquires another similar company, two people or departments may be performing similar tasks, thus; increasing the operational costs. Job cuts and restructuring of companies to increase efficiency demoralizes employees and result in reduced productivity.
In conclusion, it’s observed that mergers and acquisitions are related transactions, but they slightly differ in legal constructs. Mergers and acquisitions help businesses achieve better synergies, which is vital in gaining large market shares. They share some merits, such as expanding their business to an untapped market, achieving economies of scale, research and development, improving revenue, and eliminating market entry barriers and competition. However, M&A can lead to the creation of some demerits and complications to companies; hence before merging or acquiring, potential implications should be considered. Hitches such as unemployment, increasing-price levels, cultural clashes, and brand-damaging should be considered before pursuing any transaction.
