Few firms reach the very top without conducting at least a few M&A transactions.
And the fact that the most successful firms in the world employ teams of professionals whose only role is to seek out attractive potential acquisitions tells its own story.
Implemented well, an active mergers and acquisitions strategy can be a highly fruitful process for any company.
1. Economies of Scale
Underpinning all M&A activity is the promise of economies of scale. The benefits that will come from becoming bigger:
- Increased access to capital,
- lower costs as a result of higher volume,
- better bargaining power with distributors, and more.
While buyers should always avoid the temptation to indulge in ‘empire building,’ as a general rule, bigger companies usually enjoy advantages that small companies do not.
2. Economies of Scope
Mergers and acquisitions bring economies of scope that aren’t always possible through organic growth. One only has to look at Facebook to see that this is the case.
Despite providing users with the ability to share photos and contact friends within its platform, it still acquired Instagram and WhatsApp.
Economies of scope thus allow companies to tap into the demand of a much larger client base.
3. Synergies
Synergies are typically described as ‘one plus one equaling three’: the value that comes from two companies working together in tandem to make something far more powerful.
An example is provided by Disney acquiring Lucasfilm. Lucasfilm was already a huge cash generator through the Star Wars franchise, but Disney can add theme park rides, toys, and merchandise to the customer offering.
4. Opportunistic Value Generation
Some of the best deals happen when a company isn’t even actively pursuing an acquisition.
The hallmark of these acquisitions is that the purchase price is less than the fair market value of the target company’s net assets.
Often these companies will be in some financial distress, but a deal can be made to keep the company afloat while the buyer benefits from adding immediate value as a direct consequence of the transaction.
5. Increased Market Share
One of the more common motives for undertaking M&A is increased market share.
Historically, retail banks have looked at geographical footprint as being key to achieving market share and as a result, there has always been a high level of industry consolidation in retail banking (most countries have a group of “Big Four” retail banks.
A good example is provided by the Spanish retail bank Santander, which has made the acquisition of smaller banks an active policy, allowing it to become one of the largest retail banks in the world.
6. Higher Levels of Competition
The larger the company, in theory, the more competitive it becomes.
Again, this is essentially one of the benefits of economies of scale: being bigger allows you to compete for more.
To take an example: there are currently dozens of upstart companies entering the plant-based meat market, offering a range of vegetable-based ‘meats’.
But when P&G or Nestle begin to focus on this market, many of the upstarts will fall away, unable to compete with these behemoths.
Conclusion
As this list shows, there are numerous benefits to good acquisitions.
And what’s more, the better constructed the deal, the more these benefits are likely to arise. Learn more about M&A best practices in the video below:
Anybody looking to put an M&A strategy into practice should consider which of these benefits they’re most looking for from the acquisition when thinking about their motives for buying.