Strategizing is key for any company. The right tactics may mean the difference between growth and no growth in your operations. You can look outside and find exciting strategies that await your company.
For example, mergers and acquisitions (M&A) are a vastly beneficial approach for a growing company. The advantages of M&A are potentially substantial as long as you lay out the strategy well.
Here is a discussion of what M&A is and how it is beneficial to your operations
What are Mergers and Acquisitions?
Mergers are business transactions where one company consolidates with another. Acquisitions occur when a company takes over another.
People in the business world often refer to the entire process as acquisitions and mergers, even while the two words have different technical meanings.
Differences Between Acquisitions and Mergers
An acquisition means your company takes over another but maintains its business name, operations, and legal structure. A merger may involve choosing a different name to reflect a change in the vision, or you can use the name of one of the existing companies to maintain brand loyalty and awareness.
From the legal standpoint, the company acquired ceases to exist under its own legal entity. It is absorbed into the acquiring company. If the acquired entity traded or sold stock, the stock is managed and owned by the acquiring company.
We often use the two terms interchangeably depending on the business deal.
When a company does not wish to be taken over by another, the term acquisition or hostile takeover applies. The difference is in how you present the merger or acquisition to shareholders, board of directors, and employees.
However, the situations are usually mutually beneficial and allow the parties to expand their reach and grow their presence with the aid of mergers and acquisitions firms.
The Business Benefits of M&A
A common term used during the M&A process is synergy. This entails combining the performance and value of two companies to become a greater sum of individual components.
Here are the biggest benefits you stand to gain from this business strategy.
Economies of Scale
They occur when a larger firm achieves increased output at reduced average costs. These lower average costs may also enable lower pricing for your customers.
Different economies of scale from M&A include:
- Bulk buying – A larger firm may get discounts for purchasing raw materials in large quantities.
- Technical economies – If your company has significant fixed costs, then a larger entity means lower average costs.
- Financial – Large companies get better interest rates.
- Organizational – A single head office is more efficient than two.
- Network – The bigger a company becomes, the bigger its network. This makes it more attractive to new customers.
A Bigger Market Share
All companies, no matter where they come from, want to increase their profits. Expanding your market share is one general way of doing this.
M&A might be in the cards for companies that seek to increase their market share. For instance, acquiring the assets of a smaller business might be strategic if your company wants to become bigger.
Doing this helps you in two ways:
- Increase profits in the long run
- Merge assets in totality
Businesses are always on the lookout for new operational strategies to get the bigger piece of the cake. Combining operations or acquiring can help you achieve this goal.
Get Through Tough Times
Tough times in the business world never last, but robust companies will. More and more businesses are now going global, increasing the level of uncertainty in the worldwide market.
The global economy goes through a phase of change each year. Combining your strengths during the resulting tough times is better.
The best option is to combine your resources for the better when survival is challenging. For example, many banks took the path of merging during the 2008 through 2011 crisis period to protect their balance sheets.
Diversification
The best companies do not put all their eggs in one basket. Diversification may mean the difference between your company succeeding or struggling to maintain profits. Combining your products and services allows companies to gain a competitive advantage over others in a similar industry.
Diversification allows adding more products to your portfolio.
Realize Tax Benefits
M&As offer several tax benefits, such as tax-loss carry-forward. You can offset the losses of one company in the alliance against the profits of the company it is merging with or acquiring.
This provides considerable benefits to the resulting entity. However, the tax benefit is only valuable if financial predictions of the acquiring company show operational gains.
Another commonly overlooked M&A scheme involves bringing together a business from a low-corporate tax rate state with one from a high-corporate tax-rate country. The company in the low-tax environment may be smaller, making it the ideal candidate for a large corporate merger. The resulting entity is now legally in a low-tax jurisdiction and could save billions in corporate taxes.
Other tax gains in M&A may arise due to:
- Unused tax losses
- Surplus funds
- Unused debt capacity
- Write-up of depreciable assets
Mergers and Acquisitions Consulting Can Help
M&A advisory experts will help improve your odds of success by honing your strategy and objectives, and developing your M&A team and its capabilities.
They are also valuable for sourcing buyers, negotiating transactions, establishing seller credibility in the market, and limiting distractions to your team.
If you are considering making a transaction that involves merging, selling, or buying companies, you will want to talk to an M&A consultancy firm.
Get in touch with Align Business Advisory Services today to learn more about the benefits and process of mergers and acquisitions.