To merge or to acquire, that is the question.
Mergers and acquisitions have become a popular business growth strategy for companies looking to expand into new markets
A merger occurs when two separate companies join forces to create a new, joint business. An acquisition, on the other hand, is the takeover of one company by another.
So what are the pros and cons of both mergers and acquisitions? Let’s take a closer look.
One of the most obvious pros of a merger is the increased revenue a business can experience. This generally occurs when a company acquires a subsidiary that operates in a different market or creates a different product or service.
Increased market impact
With a successful merger comes market penetration and core competencies that your business may not have had access to previously. It also means competition in the market is reduced overall and the company generally acquires a portion of the market the business had.
Protects industries from closing
Mergers can be extremely beneficial in a declining industry where firms are struggling to survive. A good example of this is when the UK government approved a merger between Lloyds TSB and Bank of Scotland solely because the banking industry was at crisis point.
One of the most obvious cons of a merger is job losses. Most mergers lay off employees because of smaller and combined workflow requirements. It is also important to note that mergers can lead to restructuring the work environment, which can lead to demotions or pay changes.
In some cases, a merger leads to a monopoly of the service. This can result in higher prices for the customer due to reduced or lack of competition.
A culture clash can kill a merger. When two companies merge, it is the joining of two groups who already have corporate cultures in place. In 2014, U.S. based advertising giant Omnicom attributed their merger collapse with French counterpart, Publicis, due to cultural clashes.
Acquiring a company is a time-efficient growth strategy because it allows you to quickly acquire the resources and expertise your company does not maintain. You also have quick entry into new product lines and markets.
There is no denying that an acquisition leads to a greater market presence. An acquisition can also help reduce your competition’s stronghold.
Economies of scale
Acquisitions can create cost efficiency through the implementation of what is called, economies of scale. Whether it is purchasing stationary or a new range of computing software, a bigger company, placing a large order, can save big.
Acquisitions can come with financial repercussions. Returns may not benefit stakeholders to the extent forecast or the acquisition process may have taken longer to materialise than initially anticipated.
Acquiring the wrong type of business can do more harm to your brand than good. Ultimately, this could result in damage to your company’s image in the marketplace.
A lot of companies that are acquired have money issues. Hence, if you borrow money to acquire a company, the debt goes on the books of the old company. This in turn means the financial problems of the acquired company may hinder your chance of generating the income you need to pay the new debt.
The pros and cons of mergers and acquisitions show this business transaction should not be something that is rushed into without thought. At BDH Leaders, we advise you on whether a merger or acquisition is right for you. View more information on our business services here.