What Are M&A Transactions?
M&A transactions involve the purchase by a different company of an existing company, usually in exchange for cash or stocks. The aim is to gain a competitive advantage that will endure in the marketplace. It may not be the best option for all goals, but those who understand its benefits and make use of it effectively can achieve significant growth.
M&A allows companies to achieve economies of scale, which is the phenomenon that “one plus one is more than.” For example when Facebook bought WhatsApp and Instagram it was able to tap the need for a new customer base without having to invest heavily in developing those services. It also achieved scale and market presence, which boosts bargaining power with suppliers or customers.
Another popular motive is empire building which is when managers have an incentive to purchase companies which will increase their market share or cut down on competition. This strategy can be very successful if it is done within the context of clearly-defined objectives and backed by accurate financial predictions.
M&As also aid a company to survive and thrive on turbulent markets. As credit quality deteriorated as banks merged in order to protect themselves against the Great Recession from 2008-2011. It can also be used to diversify revenue by purchasing an organization from an entirely different industry or region. For instance, retail companies often buy technology or e-commerce firms to gain access to new markets and increase revenues. A common mistake is to treat M&A as a purely financial tool, with no thought given to strategic value creation.
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