Advantages to Merger and Acquisition Deals
A merger is a deal where two companies join together as fairly equal partners. Sometimes the two companies involved simply form a brand new company. Other mergers result in the merging of previous names into a new name. For example, when America Online (AOL) merged with Time Warner in 2000, the company they formed was called AOL Time Warner.
An acquisition, however, is typically a larger company buying or otherwise acquiring a smaller company. Some companies may merge their identities. Sometimes, however, the smaller company is simply absorbed by the larger company, becoming part of its brand and identity.
Why would two companies want to cede control or radically alter the way they conduct business through a merger or acquisition?
Growth or Expansion
Through careful mergers and acquisitions, a company may increase the market share of its products or services. Another reason is to obtain capital for much-needed expansion or growth into other sectors. Oftentimes, it is a race to the market and it is advantageous to bolt on an existing operation for a geographic or product/service related expansion of offerings. Being the first to market or quick to market has the advantage of avoiding the start up pains associated with growth.
Don’t put all your eggs in one basket’ is an old saying that is still relevant to today’s business climate. Using all your resources in one place – or in one industry or for one product – may not be wise.
For example, the Minnesota Widget Company manufactures and sells widgets. But then interest and sales begin to decline. The company may want to considering acquiring or merging with a company that sells gadgets or widget accessories to continue operating.
A company may buy out, take over, or merge with suppliers, vendors, and distributors. This type of vertical merger may allow the acquiring company to bypass the markups previously charged by the companies they acquired. Expenses for distribution may decrease also.
Two competing companies can eliminate or ramp down competition by merging. Business resources can be used for strengthening the business instead of outmaneuvering a competitor.
Merger and Acquisition Deals Have Many Moving Parts.
If your company appears headed for a merger or acquisition, consult with an experienced business attorney to keep everything in order.