Transactions involving the transfer or consolidation of the ownership of corporations, other business organizations, or their operational divisions are known as mergers and acquisitions in the world of corporate finance. Companies are consolidated via mergers and acquisitions. Mergers and Acquisitions are two distinct phrases that describe the process of merging two separate businesses into a single entity. As a part of corporate finance, mergers and acquisitions play an important role. The rationale behind M&A is that two different firms working together create more value than they would if they were operating alone. With the goal of maximizing profits in mind, corporations are always examining new Acquisition and merger options. There are two ways to integrate or amalgamate: either by absorption or consolidation.
Merger and Acquisition is one of the integral parts of organizational strategies and corporate finance that deals with the purchases, sales, diving, and merging of different organizations. According on how much time and energy is spent into this type of business activity, a company’s growth might either accelerate or slow down. To construct a single entity, merger and acquisition (M&A) transactions differ from other sorts of strategic partnerships (Brakman et al., 2005). It’s becoming more difficult to tell the difference between an “acquisition” and a “merger,” especially regarding the long-term financial impact. In general, a merger is when many or two different organizations join together, each of them giving up its prior image and strategies in favor of a new one that combines the best of both. When a corporation acquires another corporation, the acquired company often adopts the brand name of the new owner.
Merger occurs for several reasons that make it advantageous for different organizations or institutions. These advantages include companies’ improvement, business diversification, organizational growth, chain supply cost and competition reduction or elimination, foreign markets risk reduction, and tax benefits (Brakman et al., 2005). Corporate restructuring may be facilitated by mergers and acquisitions, which is a significant factor in corporate finance. In a nutshell, mergers and acquisitions are the processes of merging two separate businesses into a single entity. To buy or combine with another firm, there are several reasons. Business expansion is the most typical consideration. The acquiring firm may be able to expand its market share due to a merger. In addition, a company’s ability to combine with or buy another company is enhanced by its ability to diversify its operations (Brakman et al., 2005). It’s possible to lessen the impact of a single industry on a company’s profitability by restructuring.
Additionally, mergers and acquisitions save money. Building business activities that match a company’s strengths might be less expensive with the help of these tools. It is possible that the purchase will provide the supply chain with more control over price (Wang & Moini, 2012). In addition, reorganizing a company in this manner might help a company get rid of potential rivals. Investing in a company’s long-term success may be achieved by purchasing or merging with another. As a result, the challenges that need to be addressed in a corporate merger and Acquisition are distinct. Before committing to a contract, company owners that keep these considerations in mind are more likely to make the greatest and most suitable choices (Brakman et al., 2005). Because of the complementary strengths and shortcomings of both companies, a corporation may opt to combine with another company. Another major incentive for mergers is to improve funding. While smaller companies may struggle to get funding from banks, bigger companies may be better able to get their hands on it. Both organizations may be able to get access to finance that was previously unavailable when they combine into one bigger corporation.
Two other reasons for mergers are to narrow a company’s focus or to broaden its range of business activities. When it comes to diversification, for example, a corporation may buy a company in a new industry to boost overall profitability. If a firm wishes to narrow its focus even more, it may elect to combine with another business in the same industry of the operation that has had more success breaking into the market (Wang & Moini, 2012). Every significant corporation strives for expansion, and mergers and acquisitions are one of the most straightforward methods of achieving this aim. It’s possible to acquire or merge with the competitors instead of performing the effort necessary to gain market share. This kind of merger is called a horizontal merger. Mergers are often used to expand a business in new markets wherein one firm has already achieved success.
Acquisitions are a common way for businesses to gain more price leverage in their supply chains. Purchasing a vendor to reduce supply costs, buying a vendor to reduce the, and buying a distributor to save shipping costs are a few instances of this approach. This corporate strategy is also a crucial technique for decreasing competition. By purchasing a rival’s business, the acquiring corporation may gain market share by eliminating direct competition. It’s also simpler to ward off prospective rivals with an acquisition or merger. Because the acquiring business must persuade other owners to the merger, this approach of reducing competition has a price tag that is typically rather high (Brakman et al., 2005). Companies engaging in mergers and acquisitions may also be able to take advantage of tax advantages. A company’s net losses may be offset by the other company’s earnings through a merger, for example. Obviously, this is appealing to the firm that is losing money, but only if the merger results in future benefits for the other company. Additionally, mergers are an option for major corporations that want to reduce their tax burdens. The bigger firm, for example, may combine with another company located in a nation with a lower corporation tax rate. Contrary to popular belief, this strategy is quite successful in reducing a company’s taxes (Wang & Moini, 2012). A firm may merge or acquire to achieve a specific strategic purpose, such as reorganization, market share growth or protection, expansion into new markets, the purchase of a given product or service, or the Acquisition of additional resources.
Mergers also have their disadvantages. Merger leads to a serious increase in the services or the product prices, communication gaps creation, unemployment creation, and economies of scale prevention (Wang & Moini, 2012). Competition is reduced and market share rises when 2 or many corporations join forces. Because of this, the new company has the chance to become a monopoly and increase the prices of its products and even services. It must not lead to an increase in prices if the government regulates it sufficiently, even if a company gains monopoly power through a merger. Price limits, for example, are imposed by the government in some sectors in order to prevent excessive price rises (Wang & Moini, 2012). As a result, businesses are able to take advantage of economies of scale while yet protecting consumers from monopolistic pricing.
There may be cultural differences between the firms that have agreed to combine. It may lead to communication gaps and influence the employees’ performance within the new organization (Wang & Moini, 2012). An aggressive merger might result in the underperforming assets of one firm being eliminated by the new one. It’s possible that staff may be laid off as a consequence. Mergers might result in the loss of jobs. In case of a forceful acquisition by a property-investment company—a corporation that aims to integrate and eliminate under-performing parts of the target company—this is very worrisome (Brakman et al., 2005). It may be difficult to achieve synergies if there is little in common between the firms. Larger corporations may also have difficulty motivating and managing their employees in the same manner as smaller ones. Consequently, the new company may not be able to realize the economic advantages of scale.
There are several examples of successful mergers and acquisitions; PNB merged by acquiring Oriental Bank of Commerce and United Bank of India; Allahabad Bank became part of Indian Bank; Canara Bank absorbed Syndicate Bank, and Union Bank of India and Andhra Bank amalgamated. The government declared in 2019 that it would consolidate its ten banks into just four (Chilukuri, 2020). Canara Bank, PNB, Syndicate Bank, Corporation Bank, Andhra Bank, and Allahabad Bank all had relationships with the Union Bank of India (UBI), as did Oriental Bank of Commerce (OBC) and United Bank of India (UBI).
In conclusion, a merger is the combination of two businesses into a single entity, either by a takeover or a consensual arrangement. In terms of both benefits and drawbacks, it’s a viable option. A few examples of these benefits include company development and diversification, business diversification and organizational growth, chain supplier cost reduction or elimination, international market risks reduced, and tax advantages. Concerning drawbacks, a merger results in a significant increase in the cost of services or products a rise in communication gaps, and the creation of unemployment.
Brakman, S., Garretsen, H., & Van Marrewijk, C. (2005). Cross-border mergers and acquisitions: on revealed comparative advantage and merger waves.
Chilukuri, S. S. (2020). Management of non-performing assets its trends and impact on profitability of select public sector banks with special reference to Punjab national bank of India oriental bank of commerce and united bank of India.
Wang, D., & Moini, H. (2012). Performance assessment of mergers and acquisitions: Evidence from Denmark. E-Leader Berlin.