Mergers and Acquisitions
Mergers and acquisitions are often abbreviated as M&A, which is a corporate strategy for combining, selling or buying different corporations that could aid growth and finance of the company.
M&A is a process in which one company purchases another company to form one single entity; or merge together to increase their profit and productivity.
Difference between Mergers and Acquisitions:
Acquisition is a process when one company completely takes over another company and denotes itself as the new owner of that company. Technically, the purchaser swallows the purchased company and the shares of the purchaser company still continue trading.
Merger happens when two different companies combine together to form a new company. This merger is also referred as the merger of equals, because generally the firms are of equal sizes and the old stocks are surrendered, and new stocks has to be issued. Practically, mergers of equals does not happen frequently, but most times one company purchases another company as a deal and refer it as a merger of equals rather than referring it as an acquisition.
The purchase will be termed as merger when the CEO’s of both companies agree to join together to benefit from the merger. In case of unfriendly merger approach, where the target company does not want to be a part of another company but forcibly it has to join with another company; then that deal is called as acquisition.
Purpose behind Mergers and Acquisitions:
The following are the motives behind merger and acquisition of the companies:
- Economy of scale: When two companies are combined, the fixed costs are reduced and the profit is also increased. Duplicate department costs and operations costs are also reduced once they are single entity.
- Economy of scope: By increasing or decreasing the scope of distribution and marketing of products, finance can be managed in more efficient ways.
- Increase revenue: Market power can be increased by joining hands with major competitors which will result in greater profit as majority of market can be captured along with increased prices.
- Cross selling: Multiple products can be promoted in the market to increase productivity.
- Synergy: Bulk buying discounts can be promoted which could result in more productivity.
- Taxation: Tax can be reduced by joining hands with another company in which, the loss of the purchased company can be a tax saving advantage to the purchaser company.
- Diversification: Promotes the investors to invest in the progressive or developing company.
- Resource transfer: Resources of both the companies can be used efficiently which is useful to overcome worst scenarios.