What is a Merger and Acquisition Strategy?

Explanation

Generally, the bigger companies in the market hunt for smaller companies for the acquisition process. Companies have different policies for mergers & acquisitions like expanding an existing business, research, development, etc. All these policies should be kept in mind while entering the M&A Strategy by both companies. Failure to implement proper planning, study, and lack of strategies, also fails the merger & acquisition strategy. The resulting company formed cannot survive in the long run. Hence, proper planning, understanding of the market and the business of both the companies and proper strategies should be done well in advance before implementing merger & acquisition strategies.

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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 acquisition steps.The next step is a thorough study of the business of the company to be purchased. The study of the expected business, demand, and future growth is also to be undertaken. It will also give the idea of risks 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 customers’ demands.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.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 shareholders, promoters of both the companies, management, and other key persons of both the companies. Then, the merger & acquisition deal should be finalized.

Example

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 a start-up company struggling to exist 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 led the market due to its Apple iPhone and Windows mobile products. After the acquisition of Android by Google, 54.5 Percent of U.S Smartphone Subscribers became 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 to meet the competitive edge, which Windows created from its products like iPhone and Windows Mobile.

  • They are popular due to their advantages, including 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 emerge, 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 resulting company. Also, the company’s purchasing power improves due to improvement in negotiation power. As there is a combined business, the production volume 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.read more.The resulting company formed due to merger and acquisition gains a much competitive edge from its peers because it is well equipped with better technology, better workforce 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 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.read more, new sales opportunities, and new areas to explore.Hence, considering the above benefits of mergers and acquisitions, these strategies are very popular. 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.

Conclusion

Many small and big companies prefer merger and acquisition strategies to fight or survive in the competitive environment in the market. Loss-making companies or small companies always prefer to merge with big companies to save themselves and stand in the market. However, if there is a lack of proper planning and strategies, the mergers and acquisition strategies also fail. Hence, both the companies should undertake a thorough study and the proper analysis to make the strategies successful without any failure.

This has been a guide to merger and acquisition strategy & its overview. Here we discuss merger and acquisition strategies along with an example and why it is popular. You can learn more about from the following articles –

  • Types of Mergers and AcquisitionsCareers in Mergers and AcquisitionsWhat is Reverse Merger?Vertical Merger Definition