Mergers and Acquisitions

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Mergers and acquisitions (M&A) are popular business transactions that involve the process of combining two companies into one. Earlier, Anand Jayapalan had spoken about how usually the goal of combining two or more businesses is to try and achieve synergy. Mergers and acquisitions can be divided into two categories, strategic and financial. Much like its name implies, a financial merger or acquisition is pursued for financial reasons, typically as an investment or to acquire more funds.  On the other hand, strategic mergers and acquisitions are focused on providing solutions to many business problems. For instance, the acquirer may want to add a new product line or additional facilities to their business, or enter a new market. A strategic M&A is often about gaining credibility for professional services firms, and can also help in the balance of power in a particular market.

There are many instances where mergers and acquisitions can prove to be useful as a growth strategy, including:

  • Fills critical gaps in service offerings or client lists: When external events or regulatory changes lead to shifts in the market, companies may find gaps in their essential offerings. This situation presents an excellent opportunity for strategic mergers. For instance, subsequent to the events of 9/11, the national security and defence sector faced a shortage of skills to adapt to swiftly evolving federal mandates. Businesses recognized the risk of being marginalized without the expertise needed to fulfil the increased security needs. Consequently, companies possessing the required experience and client portfolios became strategically valuable and sought-after acquisition targets.
  • Efficient way to acquire talent and intellectual property: In the current age, there are several industries that are experiencing an acute shortage of experienced professional staff. Today intellectual property (IP) has become the new currency of modern business. IP is now actively bought and sold, and for several companies, the acquisition of a firm and its IP is the fastest path to gaining dominance in the market.
  • Opportunity to leverage synergies: When carried out thoughtfully as a part of a growth strategy, strategic mergers can result in synergies that offer real value for both the acquired and the acquiring. There are two basic types of M&A-related synergies: cost and revenue. Cost synergies largely focus on cutting expenses by taking advantage of overlapping resources or operations, and consolidating them into one entity. It can also result in an increase in buying and negotiating power due to the larger combined budget. On the other hand, revenue synergies tend to alter the competitive balance of power and help in the creation of opportunities to sell more products or change market dynamics.

Earlier, Anand Jayapalan had spoken about how one of the key motivations behind using mergers and acquisitions as a growth strategy is to leverage economies of scale and scope. By merging with or acquiring another company, a business can increase its production capacity, distribution network, and overall operational efficiency. Economies of scale occur when the combined entity benefits from reduced average costs per unit due to higher production levels or shared resources. This cost advantage can translate into lower prices for consumers, higher profitability for the company, or both, depending on the market dynamics.

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