Introduction
Mergers and acquisitions are complex corporate strategies that draw much attention from stakeholders, including employees, investors, and even regulatory bodies. Thus, it is very important to understand the fundamental reasons that prompt firms to take the decision to pursue mergers and acquisitions. This understanding is beneficial for a holistic assessment of the potential benefits and risks associated with these actions. Firms will take the actions of mergers and acquisitions for various reasons, ranging from market expansion to achieving efficiencies in operation. This desire to have an expanded market base influence and attain synergy through the amalgamation of entities stands as the main motivator for merging and acquiring firms (Analysis of Mergers and Acquisitions, 2018). This idea is grounded on the belief that a combined entity can yield greater influence and profitability than individual entities operating independently. To support these arguments, a chart representing one of the mergers and how the entity has realized profits is provided.
Mergers and acquisitions come with consequences that are evident and worth discussing. These consequences significantly influence financial performance, employee relations, and regulatory bodies. In this report, a detailed examination of why firms are propelled into mergers and acquisitions will be undertaken. Some of the reasons include diversification through market expansion, cost savings, and strategic positioning. It will also focus on the repercussions of these strategic actions by the firms. Some of the consequences to be looked into include stock market reactions and employee relations, among others.
Why Mergers and Acquisitions?
Firms pursue mergers and acquisitions for various reasons, including:
Value Creation
Mergers are, in most cases, initiated with the primary objective of enhancing the wealth of the shareholder by leveraging synergies to elevate the value of the merged entity. The synergies can take various forms, including revenue collection through market expansion and diversification of production synergy. This overarching goal of mergers to create a unified business entity enables building a cumulative value of the individual component of the mergers. By strategically combining resources from each firm, there is optimization of operational processes, and the merged entity is able to attain a level of efficiency and market influence, which is attainable for the individual entities.
Access to New Technologies and Innovation
Access to new technologies and innovation stands out as a compelling factor for companies engaging in mergers and acquisitions. This happens especially in a rapidly evolving business landscape. The strategic decision allows individual firms to gain entry to cutting-edge technologies, thus positioning themselves at the forefront of innovation. In industries where technology plays a vital role in determining market leadership, this factor significantly influences decisions for merging and acquiring firms. Firms that merge behind this motivation are able to integrate innovative solutions and state-of-the-art technologies; thus, they are able to enhance their competitiveness and ensure they remain at the cutting edge of trends in the industry (CFI Team, 2023). This strategic move also positions the merged entity as a leader in adapting emerging technologies, thereby contributing to sustained growth and success in the market dynamics.
Diversification
Diversification is another key motivator for firms to engage in mergers and acquisitions. Through mergers, firms are provided with a strategic platform to enter new markets and expand their portfolio by offering new products and services. Managers will organize for mergers with the intention of diversifying elements such as risks associated with the operations of the company. Consequently, this creates a more resilient and adaptable business model. Nevertheless, shareholder satisfaction with this motive can be diverse. This is because investors may possess different perspectives on the potential benefits and risks associated with diversification through mergers and acquisitions. Some shareholders might receive diversification as a means to enhance the stability of the company and long-term growth prospects, while others possess concerns about the complexity and potential challenges of managing a more diverse business entity. Therefore, the effectiveness of diversification through mergers and acquisitions hangs on the strategic goals of the shareholder expectations and the successful integration of diverse business elements.
Incentives for Managers
Incentives for managers play a significant role in steering mergers and acquisitions. They are the personal interests and goals of the top management of firms that eventually become the driving forces for merging and or acquiring firms. As the article by CFI Team (2023) discusses, managers may push for mergers with the aim of attaining heightened power, increased prestige, and even the potential for leading a larger company, a phenomenon known as empire building. This is where managers aspire to expand the size of a firm and end up influencing the firm under their leadership. Therefore, the pursuit of building the largest company in the industry in terms of size can be a motivating factor, reflecting the ambitions of the managers and their perceptions that larger companies have the ability to offer higher salaries and bonuses.
Mitigating Disruptions in the Industry.
This reason serves as a strategic motivator for firms operating in sectors that are susceptible to rapid technological or market changes. In response to the dynamic nature of such industries, companies may opt for mergers as a proactive strategy to lessen the impact of these disruptions. The company might opt to merge with a complementary entity. This way, the firm is able to boost its adaptability and resilience, creating a more robust organizational structure. This gives the entities a strategic advantage, enabling the merger to navigate and respond effectively to emerging disruptions. The approach not only helps companies withstand the turbulence in the industries but also positions the entities to capitalize on opportunities that arise during the rapid changes, thus fostering long-term sustainability and growth in the evolving market dynamics (Zhang et al., 2018).
What are the consequences?
Financial Performance and Stock Market Reaction
Successful mergers and acquisitions yield various outcomes when it comes to financial performance and stock market reaction. There are both positive and negative outcomes. Mergers and acquisitions yield improved financial metrics, such as increased shareholder value and positive reactions in the stock markets. This enhances the overall financial performance of the merged entities with a synergy that contributes to increased competitiveness and growth. On the contrary, a poorly executed merger may lead to negative market sentiments and increased stock price volatility. Financial underperformance, challenges of integration, and unmet expectations can contribute to shareholder dissatisfaction and erode confidence in the management.
Brand Equity
Mergers and acquisitions hold the potential for both positive and negative impacts on brand equity. A well-managed merger can reinforce brand equity by combining the positive attributes of the merging entities (Chu et al., 2022). It is this cooperation that creates a more robust brand that is highly recognizable by combining the strengths and positive associations of both organizations. On the contrary, a merger that is not efficient may lead to the dilution of one brand, thus failing on the task of brand equity, consequently leading to a decline in customer loyalty. Managing, maintaining, and enhancing brand equity in the context of mergers and acquisitions requires vibrant planning. Cultural alignment and a strategic focus on preserving the positive aspects of each brand.
Firm Size
Individual entities can realize various outcomes on their firm sizes. Merging with a larger entity can offer numerous advantages, including access to greater resources, expanded market reach, and increased economies of scale. This contributes to heightened competitiveness and enhanced operations efficiencies, especially for a firm regarded as smaller within the merger (Junni & Teerikangas, 2019). Nevertheless, challenges can arise in the form of integration complexities and cultural differences, thus hindering the benefits of increased firm size. Besides, forming mergers with significantly small entities can pause obstacles for firms to increase in size and realize operational efficiencies. Striking the right balance and addressing potential challenges is vital for optimizing the advantages that come with changes in firm size through mergers and acquisitions.
Regulatory and Legal Implications
Engaging in mergers requires that entities navigate through the details of regulatory and legal considerations since this carries the potential to shape the success or challenges of the merger. The entities must commit to follow compliance with regulatory requirements so as to ensure a seamless integration process. This smooth transition allows the merged entities to have efficient operations and optimize their resources. This alignment to regulations and legal frameworks might be seen as an additional process, but committing to this ethical business practice instills confidence and also aligns the merged entity with robust governance standards. On the other hand, failing to comply may lead to legal challenges, including disputes, lawsuits, and regulatory interventions, thus restraining the success of the merger.
Conclusion
In sum, mergers and acquisitions come to be because of strategic decisions influenced by factors such as value creation, diversification, technological advancements, managerial incentives, and industry adaptability. The merged firms will release several impacts either as an individual or as the merged entity. Successful mergers will experience impacts such as strengthened brand equity and increased competitiveness through changes in firm size, while unusable mergers can experience brand dilution integrating challenges, among others. The key to successful mergers is full consideration of motivations, proactive management of consequences, and due diligence of potential risks and benefits.
References
Analysis of mergers and acquisitions. (2018). Financial Planning & Analysis and Performance Management, 535-566. https://doi.org/10.1002/9781119491460.ch23
CFI Team. (2023, March 15). Motives for mergers. Corporate Finance Institute. https://corporatefinanceinstitute.com/resources/valuation/motives-for-mergers/
Chu, Y., Chu, J., & Liu, H. (2022). The impact of mergers and acquisitions on brand equity: A structural analysis. SSRN Electronic Journal. https://doi.org/10.2139/ssrn.3726563
Junni, P., & Teerikangas, S. (2019). Mergers and acquisitions. Oxford Research Encyclopedia of Business and Management. https://doi.org/10.1093/acrefore/9780190224851.013.15
Korsmo, C. R. (2019). The law and economics of mergers and acquisitions. Oxford Research Encyclopedia of Economics and Finance. https://doi.org/10.1093/acrefore/9780190625979.013.346
Zhang, W., Wang, K., Li, L., Chen, Y., & Wang, X. (2018). The impact of firms’ mergers and acquisitions on their performance in emerging economies. Technological Forecasting and Social Change, 135, 208-216. https://doi.org/10.1016/j.techfore.2018.05.015
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