Merger and acquisition both are a type of takeover, in merger two companies combined to form one company whereas in acquisition one company is purchased by another company resulting in two companies operated by one owner. Synergy is often set as a goal while merger or acquisition.
Reasons for merger and acquisition with Examples
Suppose, Company A has sufficient cash to invest and considering a takeover of Company B for synergy benefits, following reasons would result in merger or acquisition of the company A and B:
Economies of scale
Currently, Company A has fixed cost of $100 and can provide telecom services to 90 customers however it has only 50 individual customers, resulting in $2 cost per individuals.After having merger or acquisition with the Company B, the customer bank has increased to 90 individual customers by taking more 40 customers of Target Company. Now the company A has $0.9 cost per individual customer which is $1.1 less than before takeover. This means that the company A has attained the benefit in shape of reduced costs.
To utilize sufficient cash
According to the time value of money principle, a certain amount of money worth more today than tomorrow, so if company A has sufficient cash available after deducting interest, tax and dividend payments then that amount should be invested in an appropriate source like investment in merger or acquisition to gain synergy benefits.
If the company B is not making enough profit then it would not be eligible to gain tax reliefs. For this, it should merge into the company B.
To gain market power/share and minimize competition
In a market, with limited product differentiation, a price may be used as a competitive weapon. In such a case, a company with a large volume drives prices to lead in the market.
To explore big data opportunities
When the company A will acquire the company B, it will also take control of knowledge and expertise of Target Company which will result in increased amount of big data available to increase efficiency in operations and gain competitive advantage.
The term is used to describe a situation where a predator company purchased an undervalued company with intent to sell its assets individually at profit.