Mergers and acquisitions are terms known very well to investors, business people, or those who follow corporate news. These are ways for companies to either amplify their reach and resources by combining those of the two or a means to diversify and grow by assimilating another firm into it.
Acquisition: An acquisition refers to the process wherein one firm buys out a portion of another firm. The end goal, however, can either be the acquisition of assets or a disparate section of a firm altogether i.e., A+B=A, therefore, often a hostile takeover by a larger firm with a larger resource pool.
Merger: It is a process wherein, there is complete assimilation of a target firm by the acquirer, resulting in the formation of one single entity while the other one ceases to exist.
i.e., A+B=C, therefore, a friendly deal, ideally between the firms of the same size.
Owing to the subtle difference between the two, the two terms are often used interchangeably by people in general. The two have their advantages; here is a list of benefits of Mergers and acquisitions In India.
- The process reinforces fiscal regularity and discipline among the two firms owing to the review of the entire process and its intricate details by the government and its designated authorities.
- It amplifies the power and thus the performance and cost efficiency of both the firms involved. When two or more companies work in sync in a goal-oriented fashion, it is bound to result in tremendous gains for the both in terms of financial gains and work performance.
- Cost efficiency is another crucial aspect of it, as it significantly improves the purchasing power as there is more room to wiggle in terms of negotiation with bulk orders. Additionally, staff reduction helps in cost-cutting and increasing profit margins.
- An increase in the volume of production leads to reduced production costs, eventually resulting in raised economies of scale.
- The process makes it easier to maintain a competitive edge, through a combination of strategies, resources, and talent pools of the two firms involved.
- The combination brings with itself a bigger network of people and business and expanded market reach. This offers an expanded sales outreach and new dimensions to explore for their business possibilities.
- Combine all the above factors, and it becomes evident that the mergers and acquisitions increase the market power of the company; therefore, in-turn providing cushion for the periods of turbulence, enabling them to gain from hi-tech advances against becoming obsolete in an era of cut-throat price wars.
However, there can be few disadvantages of Mergers and acquisitions as well, below are the points in favour of the same:
- Disadvantages for consumers: Mergers and acquisitions often eliminate competition from the market and therefore, giving higher pricing power to the new entity.
- Job Lay-Offs: Mergers and acquisitions may cause loss of jobs as the acquiring firm often lays-off the underperforming employees as well as underperforming segments of the company.
- Diseconomies of Scale: The acquiring company might not have the managing staff trained enough to handle a firm of the size of the larger new form, therefore incurring losses.
Notwithstanding how interchangeably the words mergers and acquisitions are used, both business plans are very disparate in their own capacities. A company, therefore, would do well to foresee the procedure involved and the resulting advantages and disadvantages to admire the convolutions involved.
