In 21st century businesses are the game of growth. Every business want the optimum market share (growth) over their competitors, so companies are trying to get optimum growth by using the most common shortcut i.e. Merger and Acquisition (M&A). The growth main motive is financial stability of a business and also the shareholders wealth maximization and main coalition’s personal motivations. Mergers and acquisitions (M&A) provides a business with a potentially bigger market share and it opens the business up to a more diversified market. In these days it is the most commonly use methods for the growth of companies. Merger and Acquisition (M&A) basically makes a business bigger, increase its production and gives it more financial strength to become stronger against their competitor on the same market. Mergers and acquisitions have obtained quality throughout the world within the current economic conditions attributable to globalization, advancements of new technology and augmented competitive business world. In the last decade, M&A are the dominant means of organization’s globalization.
The main idea behind mergers and acquisition is one plus one makes three. The two companies together are more worth full than two classified companies at least that’s the concluding behind mergers. Merger is the combination of two or more firms, generally by offering the shareholders of one firm’s securities in the acquiring firm in exchange for the acquiescence of their shares. Merger is the union of two or more firms in making of a new body or creation of a holding company. In other words when two firms combine to create a new firm with shared resources and corporate objectives, it is known as merger. It involves the mutual resolution of two firms to merge and become one entity and it may be seen as a choice created by two “equals”. The mutual business through structural and operational benefits secured by the merger will reduce cost and increase the profits, boosting stockholder values for each group of shareholders. In other words, it involves two or more comparatively equal firms, which merge to become one official entity with the goal of making that’s value over the sum of its components. During the merger of two firms, the stockholders sometimes have their shares within the previous company changed for an equal amount of shares within the integrated entity. The fundamental principle behind getting an organization is to form shareholders wealth over and higher than that of two firm’s wealth. The best example of merger is merger between AOL and Time Warner in the year 2000. In 2000 the merger between AOL and Time Warner is one of the biggest deal that later fails.
Advantages and Disadvantages of Mergers and Acquisitions (M&A)
The advantages and disadvantages of mergers and acquisitions are depending of the new companies short term and long term strategies and efforts. That is because of the factors likes’ market environment, variations in business culture, acquirement costs and changes to financial power surrounding the business captured.
Following are the some advantages of merger and acquisition (M&A) are:
- The most common reason for firms to enter into merger and acquisition is to merge their power and control over the markets.
- Another advantage is Synergy that is the magic power that allow for increased value efficiencies of the new entity and it takes the shape of returns enrichment and cost savings.
- Economies of scale is formed by sharing the resources and services. Union of two different firm’s leads in overall cost reduction giving a competitive advantage, that is feasible as a result of raised buying power and longer production runs.
- Decrease of risk using innovative techniques of managing financial risk.
- To become competitive, firms have to be compelled to be peak of technological developments and their dealing applications. By M&A of a small business with unique technologies, a large company will retain or grow a competitive edge.
- The biggest advantage is tax benefits. Financial advantages might instigate mergers and corporations will fully build use of tax- shields, increase monetary leverage and utilize alternative tax benefits.
Following are the some difficulties encountered with a merger:
- Loss of experienced workers aside from workers in leadership positions. This kind of loss inevitably involves loss of business understand and on the other hand that will be worrying to exchange or will exclusively get replaced at nice value.
- As a result of M&A, employees of the small merging firm may require exhaustive re-skilling.
- Company will face major difficulties thanks to frictions and internal competition that may occur among the staff of the united companies. There is conjointly risk of getting surplus employees in some departments.
- Merging two firms that are doing similar activities may mean duplication and over capability within the company that may need retrenchments.
- Increase in costs might result if the right management of modification and also the implementation of the merger and acquisition dealing are delayed.
- The uncertainty with respect to the approval of the merger by proper assurances.
- In many events, the return of the share of the company that caused buyouts of other company was less than the return of the sector as a whole.
The merger and acquisition (M&A) reduces flexibility. If a rival makes revolution and may currently market vital resources those are of superior quality, shift is tough. The change expense is the major distinction between the particular merger worth and also the merchandising value of the firm that can be of larger distinction.