In fact, this is likely, because the two companies have been operating independently up until the acquisition. In addition, the risks and costs typically associated with new product development can drop dramatically. For example, laying off excess production staff may cause remaining production personnel to fear they will lose their jobs. The potential for distraction is greatest—and most profound—after the deal is done and the focus moves to integration. Synergies occur when two companies who deal with the similar type of business combine with each other, as they can then consolidate or eliminate duplicate resources like a branch and regional offices, manufacturing facilities, research projects etc. Here are five situations in which mergers and acquisitions have proven useful as a : 1.
The shares of both companies tanked while they scrambled to raise money to cover the huge acquisition debt. In short, they believed the long-term value for the acquiring firm was much greater than the inflated purchase price. These might include a higher-than-anticipated price of acquisition, an unusually long timeframe for , lost of key management personnel, lost of key customers, fewer synergies than projected and other unforeseen circumstances. This can cause excessive payroll expenditures where you pay for two employees to do the work of one. Need essay sample on About Advantages and Disadvantages of Mergers. Like Tata Steel buying Corus or Tata Motors buying Jaguar-Land Rover. Demergers or spin-offs are value accretive.
Sometimes a gradual transition to a new brand is the right answer. Strategic mergers and acquisitions offer a solution to a different business problem. So what is the impact of all these mergers? The usual motivations are economies of scale, killing a competitor, gaining market share and reach. What are the major advantages and disadvantages of mergers and acquisitions? It was a smaller firm that specialized in top-secret work and had deep experience and contacts in one of the intelligence agencies. If you get rid of excess employees, you may cause resentment among the workforce.
But the difference in cultures can be problematic. For customers, it will mean bigger network and better coverage, while reducing the number of stations and sites — which is good for cost reduction as well as being good for the environment. In some industries, firms need to provide a national network. Nate works works with middle-market corporate clients looking to acquire, sell, divest or raise growth capital from qualified buyers and institutional investors. This merger would give British Airways an even higher percentage of flights leaving Heathrow and therefore much scope for setting higher prices. Mergers and acquisitions are the lifeline of any industry because there is no industry except some industries where the government itself has monopoly powers where mergers and acquisitions do not happen and that is the reason why it is important to know both advantages as well as disadvantages of mergers and acquisitions. They may be performed either to benefit the public or just top-level executives and shareholders: The underlying motive ultimately determines the success of the merger and the overall reputation of the resulting organization.
Profitability and share prices of both companies increased significantly. For example, two bus companies may be competing over the same stretch of roads. The usual motivations are economies of scale, killing a competitor, gaining market share and reach. The Cons of Mergers and Acquisitions 1. This is why evaluating the numerous pros and cons of mergers and acquisitions that are transaction specific is so important. Cultural clash Different firms have different cultures.
But cost synergies can also result in an increase in buying and negotiating power thanks to the larger combined budget. Cons of Mergers and Acquisitions Substantial Increase in Prices A merger reduces competition and thus can give the acquiring company the monopoly power in the market. Loss in productivity In cases where the small companies are being merged or acquired by big companies, the employees of the small companies may require exhaustive re-skilling. Therefore, there is more justification for a merger in oil exploration than in supermarkets. It has following effect on employees Integration of culture: It is very difficult to integrate the culture of two organization. Since many companies become the target of acquisitions because they are struggling financially, you may find that the financial problems of the acquired company prevent you from generating the income you need to pay the new debt.
Reverse takeovers, when a smaller company acquires a larger one, are even worse. Mergers and acquisitions have become a popular business strategy for companies looking to expand into new markets or territories, gain a competitive edge, or acquire new technologies and skill sets. For instance, countries like U. You can guard against this by being clear about the culture you want and using all tools at your disposal to ensure you achieve it. Cybersecurity, accounting, and engineering are just a few examples that immediately come to mind. However, they carry significant risks too.
For example, if an environmentally friendly soap company were to merge with an industrial detergent manufacturer with a poor environmental track record, it may alienate the customers of the environmentally friendly soap company who don't want to support a company that is not environmentally responsible. Businesses may choose acquisition as a route for gaining resources and competencies currently not held. Not only is this a practical and smart shortcut to the sought-after service and expertise, you also acquire a built-in customer base and target audience. It is not uncommon to see internal battling over customers and sales credit. Larger organizations are typically able to produce goods and services more efficiently and at a lower per-unit cost than smaller businesses because fixed costs are spread out over a larger number of units. This leads to key personnel of the acquired company quitting and leaving with priceless intellectual property and customer relationships built up over many years.
In simple English, that means, avoid the shares of an acquiring company. But when is it advantageous to proceed with an aggressive growth strategy of mergers and acquisitions, rather rely on disciplined? A merger enables the firm to be more profitable and have greater funds for research and development. While this can provide cost savings for the company, it can also have a negative effect on employees. Usually, while a merger or acquisition takes place, the companies tend to reduce and remove those assets which will not be resulting in their profiting rearing process. The shares of both companies tanked while they scrambled to raise money to cover the huge acquisition debt. Revenue synergies alter the competitive balance of power and create opportunities to change market dynamics, sell more products, or raise prices. So what does a strategic merger look like? This is a great opportunity for new ideas to emerge within the company.
You can guard against this by being clear about the culture you want and using all tools at your disposal to ensure you achieve it. Owned by The Unified Papers Enterprises Inc. A merger may also offer a new type of service, such as brokerage, insurance or money management. In the end, a successful high-growth strategy will include the following elements: It is forward-looking—A good strategy is not just a response to what has been. A national network may imply the most efficient number of firms in the industry is one. The target firm offered must-have qualifications and contracts with a must-have client.