The process of buying one company from another company is called mergers and acquisitions. It is a rather long and multi-step process that can often fail, but many companies worldwide still make M&A deals in record numbers. There can be a variety of reasons for making acquisitions, but in this article, we’ve highlighted the most common motives for this transaction. Find out what benefits business owners are looking for from an acquisition or merger with another business.
Economies of scale
Large companies can save significantly and gain a competitive advantage if they acquire economies of scale. This reason is most often relevant to the aviation industry, because by acquiring several smaller companies, large airlines will have more control over the skies, and consequently increase their profits.
Market share is one of the most common reasons companies merge and acquire. Increasing their market share allows organizations to become more competitive, but it is worth remembering that if you expand too much, it can cause resentment from antitrust organizations. So companies are always watching their status in their industries, and if they want to increase their market power, M&A is a great opportunity. A great example of acquisitions for this purpose is any major bank you know of. They have increased their influence so much by acquiring smaller regional banks that it is almost impossible for them to go bankrupt.
The acquisition of new technology or expertise
Everyone knows that you can’t survive in a competitive environment if you stand still while a business industry is growing. That’s why some companies decide to acquire other companies doing the same thing as them, but offer them new technology and expertise. For example, major oil and gas companies are predicted to start acquiring companies from the renewable energy industry.
Synergy is something that companies very often fail to do. It involves the complete integration of companies, and the precise operation of two business infrastructures to achieve increased profits, which would be much lower if the companies existed separately.
When a business wants to expand outside its home country, it has several options: create a company from scratch, or purchase an established business with current and cash-generating cash flow that can be used to further grow your company in that country. Usually, the second option is the choice, because it is much faster and more economical.
Cross-selling is an effective way to increase revenue synergies. So, for example, companies can make a connection to expand their assortment and combine their customer bases. The result is a win-win situation for everyone. For example, a company that sells coffee can merge with an establishment that sells tea. As a result, customers can buy their favorite beverages in one place and remain satisfied.
Taxation can be one of the hidden and additional motives of companies during a merger and acquisition deal, and usually, they don’t like to admit it. Merging with another company to avoid paying large taxes doesn’t sound good. Nevertheless, this is how it works: a company with a positive cash flow acquires a firm that has suffered tax losses. In this way, they reduce the tax bill for both organizations.
Vertical integration is a process during which a company acquires different parts of the value chain. In other words, a large company acquires its distribution, so it does not have to hire an outsider.