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Businesses use the mergers and acquisitions (M&A) strategy as a way of diversifying and growing their businesses. M&A is a complex business process that involves combinations of one business with another to form one big business. The acquisition involves buying out of another business or a portion of it.
When looking at mergers and acquisitions you should be very careful to avoid choosing a firm that brings more challenges than benefits. Let’s look at the pros and cons of M&A.
Pros:
1. Increase performance: The synergy created through the merger of two or more businesses is very powerful and it results in increased business performance and a lot of financial gains.
2. Competitive edge: Businesses combine their resources and talents to enable them to have a competitive edge in the market.
3. Cost efficiency: Mergers result in increasing the purchasing power of companies. Raw materials are purchased in bulk at reduced cost and discounts.
4. Enjoy economies of scale: M&A enables the firms to share resources and services. This leads to a reduction in the overall cost of production, increases the buying power, and increases production.
5. Tax benefits: Production of goods and services in large quantities results in financial advantages, use of tax shields by utilizing alternative tax benefits.
6. New markets: The diversification plans resulting from the merger and acquisition of the business result in increased sales. Business looks for new markets for products and services.
7. Risk management: Businesses go through various business cycles and risks. One way to manage the risk associated with the business is to merge with another firm in order to share the risk involved and save the firm from the bad effects of depression.
8. Control of markets: Businesses combine in order to maintain control of the market and have more power in the market.
9. Research and development: Mergers require firms to invest in research and development to look for new products and technologies that will enable the firms to remain innovative and profitable.
10. Eliminate competition and duplication: Firms combine with each other to eliminate competition among the firms and reduce the duplication of resources and manpower.
Cons:
1. Cultural clash: Different firms have different cultures which may lead to culture clash. If not careful, a culture clash may result in the failure of the business.
2. Less choice for consumers: Merging of firms will lead to less choice of industries for the consumers. They will have to deal with one big store with no any other firm to compare products with.
3. Higher prices: Merging companies may lead to monopoly and the combined firms can increase the prices of commodities for consumers.
4. Reduce jobs: M&A results in job loss, employees in the company are bought out to lose their positions. Under-performing segments of the company may be shut down resulting in a loss of jobs.
5. Diseconomies of scale: The M&A firms experience diseconomies of scale due to the big size of the combined business. The firm may not have the same degree of control and workers may feel demotivated.
6. Market confusion: Combination of the firms that deal with different types of products will result in market confusion especially if the merger is for growth sake.
7. Loss of brand strength: If the merger results in market confusion then it will affect the brand strength. The company’s reputation and visibility determine the brand strength. If the reputation is affected then your brand will be affected.
8. Increase debt: If one company has debts, then the M&A process will increase the debt balance sheet of the two firms and this may affect the firms’ credit line.
9. Time-consuming: It takes a lot of time for both teams to sit down and agree on the mergers an acquisition terms.
10. Poorly matched partners: When implementing acquisition as the growth strategy, the business owner should seek professional advice on managing the target firm, otherwise it will result in failure affecting your initial healthy firm.
