The acquisition of a company or the merger of two companies (M&A) are very common business strategies to gain size and competitiveness. The origin of these corporate operations is usually, fundamentally, in the identification of a threat or opportunity in the market. Here are the 10 reasons behind M&A transactions.
Next, the reasons that motivate the decision of a sale or merger in the strategy of two or more companies are listed.
1. Value creation
The objective of any corporate operation must be the creation of value for its shareholders.
When does this happen? When the value of the combined entity is higher than the value of the companies independently (synergistic effect). That is, when there is a potential buyer willing to pay more for the merged company than for what it is worth to its current owners.
Often times, these operations also take advantage of tax advantages that create the possibility of reducing the payment of taxes together considerably.
2. Bullish business cycle
The waves of corporate operations often arise with the stages of economic expansion.
Economic growth and the positive evolution of the stock markets, together with exceptionally low interest rates that make it easier for companies to assume a higher level of indebtedness to face the sale of companies, generate a surplus of liquidity that is used to grow from inorganic form.
On the other hand, a high capitalization of the stock market helps companies finance their acquisitions by using their shares as a means of payment and by self-financing operations through a securities exchange.
3. Stages of economic contraction
The phases of economic recession force many companies to search for restructuring opportunities that improve the efficiency of costs and investments of businesses.
They are periods of need and, therefore, also of opportunities.
4. The opening of markets and globalization
The competition that companies face has grown exponentially in recent years due to globalization and the liberalization of markets.
This effect has been pressing for years to make defensive strategic decisions, consisting of growing to prevent a hostile threat and trying to avoid a takeover by an unwanted competitor, increasing the value of the company.
5. Horizontal integration
It refers to corporate operations that involve companies in the same sector.
With these operations, an increase in power in the market is achieved that could cause less downward pressure on the prices of products or services.
Public Administrations strive to create an antitrust legislative framework that prevents these restrictive practices of competition.
6. Strategic revitalization
During the life of a company, there comes a time when business lines that were profitable in the past, have ceased to be profitable for reasons such as changes in the sector, disruptive innovations, movements by competitors that have changed our initial positioning, difficulties in sustaining the initial business idea, etc.
The obligation to guide the strategy of a company with a declining business, but with a solid brand image or consolidated distribution channels, is another of the motivations of M&A.
A common way to increase size in companies (especially family ones) is the sale in other countries of those products or services that they are already doing successfully in their local markets.
For internationalization, the acquisition of foreign competitors is a quick way to approach the achievement of the established growth objectives.
8. Transfer of business units or companies
The decision to split a subsidiary or business unit by the board of the parent company is made after having carried out a thorough financial analysis, from which it is deduced that said subsidiary or company does not exceed the established minimum profitability threshold.
There are occasions when, due to non-compliance with antitrust legislation, part of the business of the business group must be sold to comply with the antitrust rules.
9. Technological development
Disruptive innovations pressure established companies to be more competitive and encourages the acquisition of technology companies by less technologically advanced ones that need them to grow, survive… and learn.
10. The rise of venture capital
In recent years, the growing activity of venture capital has multiplied the possibilities for business investment.
There are many companies whose market value could be increased through management improvements. Venture capital often offers the possibility of professionalize medium-sized companies that, in a period of 3 to 5 years, acquire the necessary dimension to be listed on organized markets.