What is a Merger and Acquisition Strategy?
Merger & Acquisition Strategy is the process undertaken in which one corporate buys, sells, or combine with the other corporate in order to achieve certain specific goals of the market or in order to attain rapid growth in the competitive market, taking into consideration different factors like market value of corporate’s stock, financial health of the both the companies, threats of both the companies, new opportunities that can arise along with market conditions.
Generally, the bigger companies in the market hunt for smaller companies for the process of acquisition. There are different policies the companies have for the merger & acquisitions like the expansion of existing business, research, and development, etc. All these policies should be kept in mind while entering the M&A Strategy by both the companies. Failure to implement proper planning, study, and lack of strategies, also fails the Merger & Acquisition Strategy, and the resulting company formed cannot survive in the market for the long run. Hence, proper planning, understanding of the market as well as the business of both the companies, along with proper strategies, should be done well in advance before implementing Merger & Acquisition Strategies.
Strategies of Mergers and Acquisition
- The most crucial strategy of M&A is the hunting of the target company. Once the company has decided its target company for acquisition, it can plan further steps of the acquisition.
- The next step is the thorough study of the business of the company to be purchased. The study of the expected business, its demand, future growth is also to be undertaken. It will also give the idea of risks that are involved in the acquisition or future business.
- Next, the study of the market should be undertaken. It will give the idea of growth factors in the market. The company can also get the idea of future opportunities, trends in the market, and demands of the customers.
- There should be the consent of both the companies, i.e., the acquiring company and the target company, taking part in the merger and acquisition before implementing the strategy.
- Future Plans and strategies should also be studied like staff involving process, work environment, Work to be done by the staff by gathering knowledge and information.
- Finally, there should be approval of shareholders, promoters of both the companies, management, and other key persons of both the companies and then the Merger & Acquisition deal should be finalized.
The most common and famous example of Merger & Acquisition is Google and Android. Google is the master company in the IT industry and search engine, whereas Android was just a start-up company, struggling for its existence in the mobile phone market. Android was also not much known in the telecom or IT industry. Hence, Android was taken over by Google for $50 million. At that time, Microsoft was leading the market due to its products like Apple iPhone and windows mobile. After the acquisition of Android by Google, 54.5 Percent of U.S Smartphone Subscribers became the users of Google Android devices. The report was based on the May 2018 data.
In this example, the small company Android was taken over by large company Google in order to meet the Competitive edge, which was created by Windows from its products like iPhone and Windows Mobile.
Why are Strategies of Merger and Acquisition Popular?
- They are popular due to their advantages, which include the business efficiencies and performances of both the companies. As two companies get combined and carry on the single business, the ideas from the businesses of both the companies get emerged, and the resulting company formed as the result of merger and acquisition attain many financial benefits in terms of profits.
- As both the companies carry on a single business, the staff and other costs relating to both the companies get reduced, and these costs apply to only one single resulting company. Also, the purchasing power of the company gets improved due to improvement in negotiation power. As there is a combined business, the production volume gets increases, resulting in a reduction of production per unit costUnit CostUnit cost is the total cost (fixed and variable) incurred to produce, store and sell one unit of a product or service. It is calculated by adding fixed and variable expense and dividing it by the total number of units produced..
- The resulting company formed as a result of merger and acquisition gains a much competitive edge from its peers because the resulting company formed is well equipped with better technology, better manpower talent, and better resources.
- The network of the resulting company formed as a result of merger and acquisition gets improved, and hence market reach also gets easy for the resulting company. Because of this, the company gets the new shareholdersShareholdersA shareholder is an individual or an institution that owns one or more shares of stock in a public or a private corporation and, therefore, are the legal owners of the company. The ownership percentage depends on the number of shares they hold against the company's total shares., along with new sales opportunities and new areas to explore.
- Hence, considering the above benefits of mergers and acquisitions, these strategies are very popular, and also the market value of the resulting company formed as a result of merger and acquisition gains a much better market share making it eligible to survive in case of challenging situations in the market. The resulting company also enjoys new technological benefits and updating.
Merger and acquisition strategy is preferred by many small as well as big companies to fight or survive in the competitive environment in the market. Loss-making companies or small companies always prefer to get merged with big companies in order to save themselves and stand in the market. If there is a lack of proper planning and strategies, the mergers and acquisition strategies get failed also. Hence, the thorough study and the proper analysis should be undertaken by both the companies to make the strategies successful without any failure.
This has been a guide to What is Merger and Acquisition Strategy & its overview. Here we discuss strategies of merger and acquisition along with an example and why it is popular. You can learn more about from the following articles –