Mergers and acquisitions refer to the process of amalgamating two companies to form a single entity. Of course, this includes its assets and brand image. Because of that, it is usually seen to produce financial benefits as the merged company becomes more efficient.
While many people usually think that these two terms can be used the same way, there is a slight difference. A merger simply means the joining of two companies by mutual consent. It often involves some form of share allocation in which the instigating company offers shares in exchange for merging firm’s shares, therefore, creating one entity.
On the other hand, acquisition slightly differs from a merger because money is usually exchanged in return for controlling stake in the company. This may be through purchasing 50% of the company’s shares to give it full control over the company’s decisions. Or it can buy the whole company upfront. This is an ideal option for small companies that want to become larger.
With that said, let’s take a look at some of the incredible benefits of mergers and acquisitions.
Access to talent
In industries, such as construction, engineering, programming, and software engineering, there are shortages of workers. It is quite difficult for these industries to find new, talented, and trained workers to fill vacant positions. This makes a merger and acquisition more attractive since it retains previous employees. If one of the companies did not have access to highly trained and talented employees, it can now access them easily.
Mergers & acquisitions firm can significantly benefit from economies of scale. This may be in the form of lower unit costs, brought by lower fixed costs. For example, there may be no need to have many stores open, especially if they are closer to each other. It may also benefit from efficiencies it can attain.
Reduced competition
From a customer’s perspective, a reduction in competition may not be of a huge benefit. But from a business’s perspective, it is a huge bonus. That’s because lower levels of competition put less pressure on the company to reduce prices as well as help it maintain its market position.
A bigger market shares
Another advantage of mergers and acquisitions is that they can lead to a bigger market share. All companies, regardless of their background and size, want to maximize their profits. One of the best ways they can achieve this is by expanding their market share. This is where mergers and acquisitions come in. If a company wants to become larger, it can acquire assets of a small business.
Reduced risk
Mergers and acquisitions generally allow the company to diversify. By having more streams of revenue, mergers and acquisitions firms are able to spread risk across those revenue streams, instead of having to focus on just one.
Tax advantages
There are numerous tax advantages facilitated by mergers and acquisitions. First, companies with cash on hand may opt to integrate rather than issuing dividends. Dividends are generally taxable, but increasing shareholders’ value isn’t. Even if a shareholder shares his or her shares at a higher price, they will still have to pay capital gains, which is a lower tax compared to income tax.
