Mergers involve the combination of two companies into one. The new company will have a larger market share, enabling it to realise economies of scale and achieve greater success. In addition, the merger will reduce competition, which may lead to increased prices for customers. An acquisition occurs when one company (the acquirer) obtains a majority stake in the target firm, which incidentally retains its name and legal structure. In this article, why mergers and acquisitions happen, we take a look at the process involved and the options available to you.
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What is the difference between a merger and an acquisition?
People frequently use the terms Merger and Acquisition together, thinking they are the same thing. Nonetheless, there are numerous differences between them.
A Merger is the union or joining of two entities into one. When two companies opt freely to merge and form a new company, this is referred to as a Merger. Acquisition, on the other hand, occurs when an entity purchases another entity with its consent. Thus, the purchaser receives all of the target company’s assets and resources. It combines with the other organisation.
There are many reasons for Merger & Acquisition, such as the ability for businesses to expand and alter their character. De-mergers are comparable to Mergers & Acquisitions since they involve the partition of a single entity into two or more companies.
What are the different types of merger?
- Product Extension Merger
Such mergers happen between businesses operating in the same market. The merger will result in the addition of a new product to one company’s existing product line. Companies can gain access to a broader consumer base and enhance their market share as a result of the merger.
- Conglomerate merger
A conglomerate merger is the amalgamation of businesses with unrelated operations. The merger will only occur if it boosts the stockholders’ wealth.
- Market extension merger
Companies that operate in distinct markets, but sell the same products, merge to get access to a broader market and more customers.
- Horizontal merger
Companies operating in markets with fewer competitors merge to expand their market share. A horizontal merger is a sort of consolidation of businesses that sell comparable goods or services. It eliminates competition; hence, economies of scale can be realised.
- Vertical merger
When companies in the same industry, but at separate levels of the supply chain, unite, this is known as a vertical merger. These mergers promote synergies, supply chain management, and efficiencies.
Why do mergers and acquisitions happen?
Mergers & Acquisitions create new opportunities for a business. There are a number of reasons mergers and acquisitions happen and these can include the following:
Economies of scale: When two organisations merge into one, the resulting entity is more potent and has more resources. The newly established company will have access to better qualified personnel, which will aid in expanding its operations. Through Merger and Acquisition, one may benefit from economies of scale. Due to the efficient use of products, optimal distribution of networks, research and development facilities, etc., such economies will be realised. The economies of scale only operate optimally in the event of a horizontal merger (companies dealing in the same line of products).
Synergy: This refers to the increased worth of the amalgamated companies as compared to the sum of its independent components. It is a synergy merge when two organisations unite to produce greater efficiency or scale. Additionally, synergies can result in numerous benefits, such as improved sales, combined personnel, robust technology, and cost savings.
Diversification of products and services: Diversification is one of the primary benefits of Mergers and Acquisition. For example, if a clothes company merges with a technology company, it enables the clothing company to explore new business operations. In addition, it makes it easier for a corporation to join with an established entity, so minimising the danger of failure.
Mergers and acquisitions between two or more companies lessen competition in an industry. It not only reduces the degree of competition but also reduces the company’s advertising costs. Consequently, the combined company is able to lower its production expenses. It will also benefit customers, who would have access to cheaper items.
Better Financial Planning: When one or more organisations decide to engage in a Merger & Acquisition, they can manage their resources optimally. The combined funds and finances of a merged corporation will be greater, and their use may be more efficient than in the individual divisions. It aids in bridging the gap between organisations with short and long gestation periods.
What are the disadvantages of mergers?
- Mergers increase the price of goods and services, which is undesirable. A merger decreases competition and increases market share. Thus, the new company can establish a monopoly and raise the pricing of its goods and services.
- Creates communication gaps
The cultures of the companies that have decided to merge may differ. It may result in a communication breakdown and negatively impact the performance of the personnel.
- Creates unemployment
In an aggressive merger, one business may decide to dispose of the underperforming assets of the other. It may result in the loss of employment.
- Prevents economics of scale
In situations where companies share few similarities, it may be difficult to achieve synergies. In addition, a larger organisation may not be able to motivate people or reach the same level of control. Thus, it is possible that the new company will not be able to obtain economies of scale.
How we can help
We have a proven track record of helping clients deal with the process involved in company mergers and acquisitions. We will guide you diligently and ensure all checks are carried out swiftly and efficiently and we firmly believe that with the right solicitors by your side, the entire process will seem more manageable and far less daunting. You can read more about the range of corporate services we offer by clicking here: https://blackstonesolicitorsltd.co.uk/corporate-legal-services/
How to Contact Our Corporate Solicitors
It is important for you to be well informed about the issues and possible implications of a business merger or acquisition. However, expert legal support is crucial in terms of ensuring your business is set up correctly.
To speak to our Corporate solicitors today, simply call us on 0345 901 0445, or click here to make a free enquiry. We are well known across the country and can assist wherever you are based. We also have offices based in Cheshire and London.
Disclaimer: This article provides general information only and does not constitute legal advice on any individual circumstances.
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