Since 2000, over 790,000 mergers and acquisitions (M&A) have been announced globally, totalling trillions in value. These deals span industries such as healthcare, technology, financial services, food, and retail. Despite the complexity and challenges inherent in the M&A process, companies continue to invest significant financial resources in them. But why? The answer lies in the remarkable benefits these transactions can bring.
In this blog, we’ll explore how M&As offer strategic, financial, and competitive advantages, and dive into the key benefits that make them so attractive.
Major benefits of mergers and acquisitions include:
1. Market expansion
When two established companies consolidate, they combine their expertise, brand value, and loyal customer bases, resulting in a significantly larger market share than either had individually. This effect is especially pronounced when the companies operate in the same industry and serve similar customers. While the total customer base may not be the simple sum of both, as some customers may shift to competitors, a well-planned M&A strategy can effectively minimise these losses.
Furthermore, M&A deals facilitate entry into new markets and geographic regions. Such expansion is often complex and challenging, requiring extensive groundwork, including market research, setting up operations, hiring talent, acquiring licenses, establishing distribution channels, and marketing —similar to starting a new company from scratch.
Language barriers, cultural differences, international laws and regulations, and local resistance can intensify these challenges. Acquiring an established company in the target region helps eliminate many of these hurdles and entry barriers. It provides a solid foundation to begin operations, offering immediate access to resources like talent, infrastructure, brand credibility, and a loyal customer base. This approach saves considerable time, effort, and investment that would otherwise be required.
2. Economies of scale
Economies of scale refer to the cost advantages a company gains by scaling up and becoming a larger entity. For instance, consider two companies producing the same or complementary products with overlapping raw materials and processes. After an M&A, the combined company can integrate production processes and increase the purchase volume of raw materials, gaining leverage to negotiate better terms and prices with suppliers. This purchasing power can also be applied to procuring services in bulk.
By leveraging its greater purchasing power, pooling resources, eliminating redundancies, and enhancing efficiency across various areas, the post-M&A entity can reduce fixed costs, which can then be spread over a larger volume of products and services, ultimately lowering per-unit manufacturing costs.
3. Economies of scope
Economies of scope refer to the cost advantages and financial benefits a business can achieve by producing different products together. An M&A creates an opportunity to apply this strategy. For example, when a company producing snacks merges with one producing soft drinks, they can unify their operations and streamline overlapping processes. They can leverage existing distribution channels and share resources, such as storage, transportation, and other production facilities, across multiple products. This reduces the average production cost per unit.
A notable example is PepsiCo’s acquisition of Frito-Lay, where PepsiCo integrated Frito-Lay’s snacks into its existing distribution network, lowering logistics and transportation costs for both product lines.
Combining operations like production, marketing, and research and development can maximise resource utilisation, while shared advertising campaigns, joint promotions, and cross-selling opportunities can lower the overall cost of customer acquisition.
4. Diversification
By acquiring or merging with other companies, businesses can quickly integrate fresh products and services into their portfolio, bypassing the lengthy stages of development and market testing. Expanding its offerings allows a company to target a larger and more diverse audience. By diversifying revenue streams and customer segments, a company can spread its risk. This means that if one area is adversely affected, other segments can support the company’s overall financial health.
Alongside this, an M&A provides opportunities to diversify assets and investments, improving overall risk management and securing stronger financial foundations for the future.
5. Enhanced talent and expertise
An M&A leads to the integration of workforces of companies involved, bringing talented individuals and new expertise to the merged entity. This can quickly fill skill gaps and build a robust talent pool with minimal effort, especially when the acquired company specialises in areas where the acquirer lacks experience. This is particularly beneficial in fast-evolving industries like technology, where skilled professionals in emerging fields are scarce. Additionally, the M&A can bring in experienced leaders from the acquired company, enhancing strategy and decision-making.
The combined entity also gains a more diverse workforce, blending varied backgrounds and experiences. This diversity fosters fresh perspectives, innovative ideas, and creative approaches to problem-solving, driving growth and efficiency.
6. Financial gains
The motivation behind an M&A deal often stems from the potential financial gains, whether immediate or long-term. M&A offers several financial benefits, including:
- Increased revenue through acquired business, product diversification, or market expansion.
- Cost savings through economies of scale and scope, including reductions in capital expenditure and operational expenses by cutting down redundancies and optimising available resources.
- Gaining new technologies, intellectual property, and other valuable assets.
- Financial stability is enhanced through diversification, ensuring stable cash flow and reducing financial risk.
- A larger, more valuable combined company is viewed as more stable, improving access to capital on more favourable terms, such as lower interest rates or easier access to equity markets. This enhanced financial standing can also boost credit ratings, reducing the cost of capital and making financing for expansion more affordable.
- Opportunities to divest non-core assets, generating cash to reinvest in more profitable ventures and further improving financial performance.
7. Tax benefits
Some countries offer tax benefits to foster economic growth, making it easier for businesses to operate in those regions. Merging with or acquiring companies in these countries allows businesses to capitalise on these incentives.
Similarly, within a single country, different regions may have tax policies that offer better advantages. In these cases, an M&A can help businesses benefit from favourable tax rates by acquiring or merging with companies domiciled in these regions.
Another benefit of an M&A is the ability to offset the acquired company’s losses against the acquirer’s taxable income, lowering the overall tax burden. This “tax shield” approach allows businesses to turn the target’s losses into financial advantage.
8. Increased valuation
M&A deals are driven by the potential to generate a combined valuation greater than the pre-merger sum of the companies involved. While not always achieved, this outcome is common for promising deals with strong success prospects. For example, Disney’s 2006 acquisition of Pixar combined Pixar’s $7.4 billion valuation with Disney’s $60 billion, ultimately increasing Disney’s market value as investors saw potential in Pixar’s creative assets and intellectual property.
In some cases, acquiring smaller high-potential companies helps secure future value as they expand and contribute to the overall market capitalisation.
9. Synergies
Synergies refer to the benefits achieved by consolidating two companies, producing results greater than the sum of their individual outcomes. M&A synergies lead to cost savings, operational efficiencies, resource optimisation, and strategic advantages.
Mergers enable companies to streamline operations by removing redundant roles, facilities, and processes, while also sharing resources like production facilities, distribution channels, and IT systems. This results in significant savings in areas such as labour, rent, utilities, and other operational costs.
Beyond financial savings, synergies can also be realised in expertise, talent, assets, and technology, allowing the combined entity to leverage complementary strengths and fill capability gaps. For example, combining research and development teams can not only reduce the capital required but also unlock additional resources to accelerate innovation and drive greater impact.
Synergies foster knowledge-sharing and collaboration, creating a more agile and opportunity-driven organisation.
10. Expedited growth
An M&A enables organisations to grow at an unprecedented rate, achieving key business objectives much faster than through organic growth alone. This includes scaling operations, building brand recognition, expanding customer bases, broadening product portfolios, gaining access to global markets, and acquiring talent, technology, infrastructure, and expertise, all without starting from ground zero. These developments, which would otherwise take years to achieve, are accelerated through mergers and acquisitions, leading to faster revenue and profit growth, as well as enhanced market value.
11. Adaptability
An M&A enhances a company’s ability to adapt to changing market conditions, customer demands, and emerging opportunities. By optimising resources, acquiring new skills and technology, and strengthening their financial positions, companies become better equipped to tackle challenges and seize opportunities. Through pooling resources and diversifying as a risk mitigation strategy, M&A helps stabilise operations and maintain cash flow, ensuring resilience during economic downturns. Combining complementary capabilities and business cycles further enhances flexibility, enabling organisations to stay agile and pivot effectively to sustain growth amidst shifting market dynamics.
12. Competitive edge
Acquiring a competitor can eliminate direct competition, while merging with another company in the same market can secure a larger market share and establish a stronger market position. Thus, an M&A significantly enhances a company’s competitive advantage, sometimes to the extent that antitrust laws and other regulations are implemented to prevent monopolies and ensure fair competition. Beyond gaining a larger market share, the additional resources, talent, technology, diversified revenue streams, greater access to capital, and various synergies gained through the M&A further strengthen the company’s competitive edge.
Maximise M&A benefits with OneAdvanced’s financial management solution
OneAdvanced’s Financials is a scalable cloud-based solution designed to grow with your business and adapt to the needs of a larger post-M&A entity. Its open architecture seamlessly integrates with ERP systems, CRM tools, and other business software, centralising data and automating workflows to improve efficiency and minimise manual integration efforts.
Financials delivers real-time insights into cash flow, expenses, and assets, enabling you to assess the financial health of the combined company and track progress towards achieving projected synergies. With advanced tools for purchasing, asset and inventory management, project management, budgeting, and forecasting, Financials empowers you to streamline operations, optimise resource utilisation, and fully realise the benefits of your M&A strategy.
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