Mergers and acquisitions (M&A) are strategic initiatives that reshape industries, enhance competitiveness, and drive growth. Though used interchangeably, these terms differ in their legal meanings and implications. In mergers, two businesses of similar size combine to operate as a single entity. On the other hand, acquisitions happen when one large organization outrightly purchases another business, mostly a small entity often referred to as the target.
Organizations consider M&A for several reasons. One is the pursuit of optimized synergy. Combining two entities' assets and capacities allows the business to operate with optimized profitability and efficiency. M&A helps reduce costs and improve economies of scale to enable the new business to produce more units of a commodity, combine and expand the customer base, and increase market shares.
Through mergers and acquisitions, organizations can improve their workforce’s productivity. This strategic initiative brings together employees from different companies, resulting in a skilled and experienced workforce. The new business, therefore, benefits specifically in decision-making and innovativeness. Combining two entities’ capacities also helps share technologies and improves access to valuable market insights. The entities share their trade secrets and devise a means of optimizing these capacities to improve productivity.
Mergers and acquisitions is a viable option for diversification. An entity can merge with or acquire another business in a different sector to reduce market risks. This approach protects the new business’ cashflows if one industry experiences complications, significantly mitigating losses.
Businesses can also enjoy tax benefits after merging with or acquiring other entities. This often happens when the acquiring company is profitable with significant taxable income and the target company is incurring losses, necessitating a tax loss carryforward. In this situation, the acquirer can use the other entity’s tax losses to minimize liability.
The horizontal, vertical, conglomerate, and congeneric are the primary forms of transactions in M&A. A horizontal transaction involves combining two companies operating in the same sector. These entities share the same product lines and compete in the same markets. This transaction aims to dominate the market share, enhance the economies of scale, and decrease market competition.
In vertical transactions, two companies operating in different production phases combine their assets and capacities. For instance, a wholesaler can combine with a retailer or a business can combine with one of its suppliers. Vertical transactions help entities consolidate their industry positions by moving them up or down the supply chain.
Conglomerate transactions involve combining two companies operating in unrelated industries. In most cases, the two entities operate separately in different markets. Conglomerate transactions help diversify, mitigating total losses if one business or industry experiences a slowdown.
Two companies offering different products or services but operating in the same market and targeting the same customers can combine in a congeneric transaction. Since both entities utilize the same technology and distribution channels, this approach helps increase market shares, expand product lines, and venture into new markets after combining the two companies’ assets and capacities. An example of a congeneric transaction is a television manufacturer merging with or acquiring a cable company.