In the course of carrying out normal business by companies, stakeholders sometimes develop an interest or need to join forces with other business entities. This interest or need may be actualized through a merger or an acquisition.
What are mergers and acquisitions?
A merger is a business structure change where one entity combines its business activities with another to form one entity and operate as one business. The ownership structure therefore changes to accommodate the stakeholders from both entities.
An acquisition happens where one business entity fully takes over another business entity and its operations. Unlike mergers, the entity being taken over fully relinquishes its operations and ownership to the acquiring entity, in accordance with the terms agreed upon.
When can they happen?
Mergers and acquisitions can take place in several circumstances. One of them is when it would result in the addition of a new product to the existing line of products of a company, and especially where the companies operate in the same market. Also, companies operating in different markets, but selling the same products, would go through a mergers and acquisition process in order to access a larger market for their products. In an instance where the companies deal with the same products and market, they could agree to a mergers and acquisition process in order to eliminate competition.
Companies can also merge to increase their synergies, their control of the supply chain, and their general efficiency, especially in cases where the companies operate in the same industry, but are at different levels in the supply chain. Another good reason for merging companies would be to increase shareholders’ income, especially where the companies are in different lines of business.
What is the effect?
Mergers and acquisitions bring a number of changes within the organization. The size, the stocks, the shares and the assets of the organization(s) definitely undergo some changes. The ownership may also change depending on the terms of the agreement. Also, as discussed above, mergers and acquisitions will have an effect on the specific market. The introduction of a new product, the reduction of competition, and an increase in the revenue received by the stakeholders are just some of the changes that may be experienced when mergers and acquisitions take place. A common negative effect is the lay-off of employees which happens oftentimes, in an attempt to avoid duplication of roles.
In the current economic times, operating a business requires both a watertight strategy, and flexibility of operations. It is advisable to join forces and approach the market as one. Certainly, this would reduce expenses used in managing competition from other companies in similar industries, although it would have the effect of creating monopolies. From a strictly business sense, however, isn’t it great to become the monopoly? It is, therefore, definitely a good idea to consider a merger or an acquisition.
By: Praxedes Kageha