If you pay even passing attention to the business news, you will have heard many times about companies becoming involved in “M&As.” If you aren’t sure what an M&A is or why companies might want to take part, read on to learn more.
What is an M&A?
M&A refers to “mergers” and “acquisitions” and as industry expert John Kleinheinz Fort Worth could tell you, they are actually quite common in the business world. The general idea of a merger is that two or more companies combine to form a single company, whereas an acquisition is more along the lines of one company taking over another. As you can already see, the distinction between mergers and acquisitions is fairly fuzzy. For some people, the distinction is that acquisitions are more like take-overs in which one company is bought out against its will by another. However, while this is a common theme in movies about Wall St. bankers, the reality is quite different. Most often, the deal whereby one company takes another over is negotiated by both sides – they may not be equally happy about the deal, but an acquired company is rarely taken over “by force.”
What do Companies Gain Through M&As?
There are many potential reasons that companies may decide to merge or to buy (acquire) or sell (be acquired by) another. Here are a few of the most common.
To Retire or Change Careers – the most obvious reason that a business owner might decide to sell his or her company is simply that they are ready to retire and either don’t have business partners or family to transfer the business to, or their family isn’t interested in taking it on. In this circumstance, an obvious option is to sell it to a competitor who seeks to integrate it in their own business (if it is complementary) or to shut it down completely (if it is directly competitive).
To Increase Market Share or Eliminate the Competition – the previous point can be turned on its head to consider why a business owner might want to purchase another business. Sometimes, a business owner may want to expand their share of the market, and one way to do this is to take over a business which provides complementary services or products. In this way, the buyer is basically purchasing a wide segment of the market by diversifying its offerings. A buyer may also want to eliminate the competition posed by a company with the same services or products, or perhaps also gain control of the competitor’s proprietary processes or technologies.
To Achieve Economies of Scale – companies may decide to join forces through a merger in order to achieve what is referred to as “economies of scale.” This refers to the fact that, in the same way as two people can live together more affordably than they can live apart, a large company is able to produce more efficiently than two smaller companies. This is because it avoids the duplication of costly production components. Savings can be generated in any area where more than one company is duplicating the efforts or processes of another.
These are just some of the many reasons that one business may be motivated to merge with or acquire another.