M&A transactions involve the acquisition by a different company of an existing company, typically in exchange for cash or shares. The aim is to gain an enduring competitive advantage in the market. It’s not the best solution for every strategic goal however, those who know what it offers and use it with care will be able to realize substantial growth.
M&A allows companies to achieve economies of scale, the phenomenon that “one plus one is more than two.” Facebook, for example, tapped into a new market of customers when it bought WhatsApp and Instagram. It did not need to invest a lot in the development of these services. It also gained market share and scale, which boosts bargaining power with suppliers or customers.
A common motive is the desire to create an empire. Managers are motivated to purchase companies that will increase the share of their market or cut down on competition. This strategy could be extremely successful, if executed within the context of clearly-defined objectives and with adequate financial predictions.
M&A can also help a company prosper and thrive in volatile markets. For instance, a number of banks merged to protect themselves from the Great Recession of 2008-2011, when credit quality declined. It can also be used to diversify revenue by buying an organization from an entirely different industry or region. For instance, retailers often acquire technology or e-commerce firms to enter new markets and increase revenues. A common mistake is to view M&A as a simple financial tool without considering the strategic benefits that are created.
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