Companies expand by acquiring or merging with other businesses. Market share, regional expansion, knowledge transfer, and product diversity are examples of how this growth shows itself. All of these motivations are based on growth.
But when we say a deal is accretive or creates value, we imply that the business has developed due to the transaction. Transactions that erode or dilute value fall under the opposite category.
Here are just a few factors that influence their and other businesses’ decisions to merge with or acquire other corporations.
1. Obtain New Knowledge/Technology
Companies must adapt to changing industries to thrive. In order to gain access to new technology and experience, businesses frequently try to buy other businesses. IMAA Institute is a worldwide recognized institute and the top academic center for mergers and acquisitions.
2. Diversifying Business Interests
Other reasons for mergers and acquisitions include sharpening a company’s focus or broadening its array of commercial ventures. For instance, a business that wants to diversify may buy a business in a different industry to increase overall profitability. A business that wants to sharpen its emphasis on its core competencies may seek to merge with another business in the same sector that has performed better in the market.
3. Geographical Expansion
It makes sense that geographic diversification has been a significant value driver in M&A over the years: Why start a business from scratch in a foreign country when you can buy an existing business already making money there and use it as a springboard for your own company’s expansion there?
4. Expanding the Business
Every significant business wants to grow, and one of the simplest ways to do that is through mergers and acquisitions. A corporation might easily purchase or combine with one of its rivals; a practice is known as a horizontal merger rather than exerting the effort necessary to increase market share. If an organization wishes to enter a market where another business has already found success, growing through a merger is usual.
5. Tax Advantages
The corporations involved in mergers and acquisitions may also benefit from alluring tax advantages. For instance, the profits of the other firm can make up for net losses experienced by one of the merging companies. This is undoubtedly alluring to the losing company, but it only benefits the other company if the merger leads to long-term profits.
When the acquiring firm feels that by merging the total assets of the target firm and the total assets of the acquiring firm, the resulting business would produce benefits that outweigh the total of the real assets of each firm, synergy is the driving force. Because the shortcomings and strengths of the two organizations are complementary, a corporation will frequently decide to merge with another company. Another frequently cited justification for mergers and acquisitions is better funding.
In the end, there are a variety of reasons why businesses merge or acquire rival businesses. If you’re thinking about merging or acquiring, it’s critical to comprehend all the potential hazards, advantages, and legal ramifications.