The Process of Value Creation Through Mergers & Acquisitions

Most businesses are meant to run on profits. And as a rule, profit-oriented organizations will always be on the lookout for opportunities to increase their efficiency and improve their economic standing. Although most businesses start as stand-alone businesses, inorganic growth through mergers and acquisitions are part of organizational expansion. Companies consider mergers and acquisitions as an effective way to increase efficiency and performance without inflicting an increase in their overall costs.

In this blog, we will discuss how mergers and acquisitions pave way for value generation for different businesses.

Advisors at integra

Understanding Merger and Acquisition

Modern business has always looked at ways to increase their business holdings through expansion. According to textbook definitions, merger and acquisition are where the ownership of the entire business or part of it is transferred or consolidated with another business entity. In a strategic sense, this allows the target company(s) to expand or downsize, and effectively improve their performance margin.

While mergers and acquisitions are often used interchangeably, they are essentially different processes. A merger usually occurs between two business entities of more or less equal size and financial standing. This can be considered as a joining of forces, where both the companies take a new name and start to exist as a new and bigger company. In this case, both companies surrender their stocks and new company stock is issued in its place by merger specialists. For a merger to complete, the board of directors of the two companies have to approve of the consolidation and seek the shareholders’ approval for finalizing the move. Mergers are often considered as an inevitable procedure to raise an existing business into the next level. Even the Big 4 companies like EY and PwC have undergone a series of recorded mergers, which had lead to their growth and expansion as some of the biggest business organizations in the world.

On the other hand, an acquisition is a procedure where a ‘target company ceases to exist post-acquisition by the buyer organization. There the buyer firm completely absorbs the target company, where the buyer’s stock prices rise while the target’s stocks cease to exist. Often, unfriendly deals are considered as an acquisition where the target company goes for the move as their last resort.

Value Generation Through M&A

While there is a stigma associated with the process of merger and acquisition, it is one of the most important strategic moves necessary for any business. An M&A can generate a lot of value if done right. Our merger specialists have noted several different ways in which better business value and profit has been created for companies involved in the procedure.

Most mergers and acquisitions take place a way to combine existing business activities to decrease overhead costs and improve the overall performance. Often termed as synergy, this practice will help both the businesses to support and complement their strengths and weaknesses while retaining most of their assets.

Sometimes a merger can occur as a means to expand or diversify the focus of a business. When an organization merges or acquires another company from a superficially unrelated domain, it helps in improving the performance of both the businesses, in the long run, thereby boosting the profit margins. Similarly, companies looking to sharpen their focus try for mergers with organizations that have a deeper penetration into markets in their area of interest.

Bigger manufacturing firms often try to buy out supplier companies, which reduces their production costs by saving on supply margins. While the buyer has cost savings, the target companies essentially become part of the mother firm. Hostile takeovers eliminate market competition, gaining a much larger market share in the process. While this practice is costly, as the target company’s shareholders usually ask for a high premium, the result is a market monopoly in the long run.

Interested to learn more about the potential of mergers and acquisitions? Contact us today for more information.