Why is a merger good for a company?
Companies merge to expand their market share, diversify products, reduce risk and competition and increase profits.
Diversification of the products, services and long-term prospects of your business. A target business may be able to offer you products or services which you can sell through your own distribution channels. Reducing your costs and overheads through shared marketing budgets, increased purchasing power and lower costs.
- To grow the business.
- To achieve revenue synergies.
- To achieve economies of scale.
- To diversify.
- To vertically integrate the business.
- To avail of tax benefits.
- For knowledge transfer.
By buying a competitor, a company can quickly gain competitive advantage. Often mergers and acquisitions result in greater financial strength for both companies. Having greater financial strength can lead to higher market share, reduce competitive threat and gain additional influence over customers.
Two reasons for mergers and acquisitions are to provide improved capacity utilization and to gain new technology. Engaging in the promotional activities, introducing new ways by which product value can be increased, which in turn increases the production rate which leads to maximum capacity utilization.
Conduct a valuation of all companies
In order to determine the terms of a successful merger, ascertain the value of each of the companies being merged. This is necessary to fairly allocate shares of the newly established company to the owners of the former companies.
Typically, mergers are friendlier than acquisitions. Both parties agree to combine together, and they both stand to benefit from the agreement.
Transaction values are given in the US dollar value for the year of the merger, adjusted for inflation. As of August 2022, the largest ever acquisition was the 1999 takeover of Mannesmann by Vodafone Airtouch plc at $183 billion ($321.5 billion adjusted for inflation).
The most crucial strategy of M&A is the hunting of the target company. Once the company has decided its target company for acquisition, it can plan further acquisition steps. The next step is a thorough study of the business of the company to be purchased.
According to most studies, between 70 and 90 percent of acquisitions fail.
Is merging with a another company a good idea?
Increased market share
The merging of two companies can often lead to increased market share. This is because the new company can grow and expand in new areas. Due to reduced costs, it can possibly offer a more competitive price.
If the company you've invested in isn't doing so well, a merger can still be good news. In this case, a merger often can provide a nice out for someone who is strapped with an under-performing stock. Knowing less obvious benefits to shareholders can allow you to make better investing decisions with regard to mergers.
As a rule, mergers should be seen as inherently good for employees. This is because they tend to create stronger companies that continue to stay operational, or in some cases become even more competitive, in their respective industries. After all, businesses need to be profitable to support their employees.
A merger occurs when two firms join together to form one. The new firm will have an increased market share, which helps the firm gain economies of scale and become more profitable. The merger will also reduce competition and could lead to higher prices for consumers.
The companies gain access to new resources and human capital previously held by their competitor. Brand visibility may increase. Stock prices may rise as a result of the combined assets and reduced costs. Incremental growth may come more easily as a result of the above benefits.
- Value creation. Two companies may undertake a merger to increase the wealth of their shareholders. ...
- Diversification. ...
- Acquisition of assets. ...
- Increase in financial capacity. ...
- Tax purposes. ...
- Incentives for managers.
Poor planning, culture clash, and unrealistic expectations are just some of the most common reasons. If these issues are not addressed before a merger occurs, it is likely that the merger will not be successful.
Epstein (2005) proposed six determinants of merger success: due diligence, strategic vision and fit, deal structure, pre-merger planning, external factors, and post-merger integration.
By buying out one of its suppliers or distributors, a business can eliminate an entire tier of costs. Specifically, buying out a supplier, which is known as a vertical merger, lets a company save on the margins the supplier was previously adding to its costs.
The uncertainty resulting from a merger or acquisition can increase stress levels and signal risk to target company employees. Mergers and acquisitions tend to result in job losses for employees in redundant areas in the combined company.
What happens when companies merge?
Mergers combine two separate businesses into a single new legal entity. True mergers are uncommon because it's rare for two equal companies to mutually benefit from combining resources and staff, including their CEOs. Unlike mergers, acquisitions do not result in the formation of a new company.
Joint ventures are created on a short-term basis and mostly for short projects. On the contrary, mergers and acquisitions are long-term strategies. Whereas mergers and acquisitions have no time limit, a joint venture partnership usually has a defined time horizon.
Tip. The three main types of merger are horizontal mergers which increase market share, vertical mergers which exploit existing synergies and concentric mergers which expand the product offering.
Successful merger: Exxon and Mobil
Exxon Corp. and Mobil Corp. - the first and second largest oil producers in the United States - made headlines when they announced their merger in 1998.
A horizontal merger occurs when two companies operating in the same market (and selling similar products or services) come together to dominate market share. This type is attractive for merging companies aiming to build economies of scale and decrease market competition.
Mergers and acquisitions (M&A) strategy refers to the driving idea behind a deal. Companies' and investors' motivations determine the types of deals they pursue. Broadly speaking, the most common objectives of M&A fall into two main categories: improving financial performance and reducing risk.
The common view of corporate mergers as an exercise in repetitive failure, then, does not stand up to the scrutiny of the data. The average merger creates value. The media may believe that most mergers fail. Investors, however, do not.
Companies often merge to boost shareholder value by entering new markets or gaining greater share in those where they already compete. Mergers are more likely than acquisitions to involve stock-for-stock deals rather than cash buyouts.
More Job Opportunities
New job opportunities loom in the distance, with a chance of promotions or different jobs to those employees who are skilled and take advantage of the change. This is especially true of the benefits of merging departments.
The results indicate that merged firms have significant improvements in asset productivity relative to their industries after the merger, leading to higher post-merger operating cash flow returns.
What happens when 2 companies merge?
Mergers combine two separate businesses into a single new legal entity. True mergers are uncommon because it's rare for two equal companies to mutually benefit from combining resources and staff, including their CEOs. Unlike mergers, acquisitions do not result in the formation of a new company.
As a rule, mergers should be seen as inherently good for employees. This is because they tend to create stronger companies that continue to stay operational, or in some cases become even more competitive, in their respective industries. After all, businesses need to be profitable to support their employees.
When companies merge, the combined entity is responsible for all benefit plans that were offered prior to the merger. The acquisition of a company is different. The type of transaction — whether it's an asset purchase or stock purchase — drives what happens to the plans.
Mergers involve two or more equals, while takeovers involve one larger company that takes over a smaller company. Mergers are always agreed upon using mutual consent, while acquisitions may or may not be friendly. Merged companies choose a new name, while acquired companies often use the parent company's name.
A merger tends to affect shareholders in the same way as an acquisition. In both mergers and acquisitions, the target company's shares typically rise after the deal announcement, while the purchasing company's shares temporarily slide.
Employees from the two organizations may compete instead of working together. Employee morale may suffer as a result of merging two corporate cultures. Employee motivation may drop as frustration with new roles and new co-workers or management increases.
They may not want to move or be able to envision their life in that particular place. And this is only one example. Everything from the acquiring company's views to business strategy to brand reputation may be out of alignment with what these employees want or the kind of company they wish to work for.
Shareholders of both merging companies receive the same value of shares in the new company that they owned in one of the older, pre-merger companies. If you own $50,000 worth of stock in Company A before the merger, you'll get $50,000 worth of shares in the entity created by Company A merging with Company B.
When two corporate cultures integrate, the responsibility of HR is to enable a smooth transition which covers multiple factors such as: Management trends of the two organizations. The growth rate of the merging companies. Cultural differences between organizations.
Sudden shifts in a company's culture bring disruption and unease and can impact morale, motivation and productivity. Another challenge merged companies can have is retaining employees. If organisational changes following a merger bring stress and uncertainty, employees may be more likely to jump ship.
What is a merger payout?
Whereas, in a cash merger: Shareholders are offered a cash payout in exchange for their shares. This type of merger then means that the shareholders of the company being acquired will no longer be shareholders in the new company, unless they then choose to buy shares on their own.
Overall, there are many reasons why mergers and acquisitions fail. Value destruction, poor communication and integration, and cultural differences are some of the most common reasons. If these issues are not addressed, it can be very difficult to make a merger or acquisition a success.
