Reasons for mergers and acquisitions Every company wants to achieve higher growth rate and diversification. Mergers can give the acquiring company an opportunity to grow market share without having to really earn it by doing the work themselves – instead, they buy a competitor’ business for a price. While one often hears CEOs saying that M & As are inspired by a ***** to diversify or achieve higher growth rate, the reasons could be varied.
Some of the commonly identified reasons are:
1. Synergy: (a) It refers to the difference between the value of the combined firm and the value of the sum of the participants,
(b) Synergy accrues in the form of revenue enhancement and cost savings.
(c) For example, if firms A and B merge and the value of the combined entity—V(AB)—is expected to be greater than (VA+VB), the sum of the independent values of A and B, the combined entity is said to be benefitting through synergy.
2. Acquiring new technology: To remain competitive, companies need to constantly upgrade their technology and business applications. To upgrade technology, a company need not always acquire technology. By buying another company with unique technology, the buying company can maintain or develop a competitive edge. For example is a merger
(a) Logistics company such as a land transport entity with an air-line cargo company.
(b) Blackberry and Treo which can incorporate cell phone capability and e-mail connectivity in one device; palm pilots and tablet laptops can provide benefits to both the entities.
3. Improved profitability: Companies explore the possibilities of a merger when they anticipate that it will improve their profitability. For example, **** Media Group Betelsmann, Pearson, and others have driven their growth by expanding into the US though M&As.
4. Acquiring a competency: Companies also opt for M&As to acquire a competency or capability that they do not have and which the other firm does. For example,
(a) the ICICI ITC alliance made the retailer network and depositor base available to the merging entity.
(b) IBM merged with Daksh for acquiring competencies that the latter possessed.
5. Entry into new markets: Mergers are often looked upon as a tool for hassle-free entry into new markets. Under normal conditions, a company can enter a new market, but may have to face stiff competition from the existing companies and may have to battle out for a share in the existing market. However, if the merger route is adopted, one can enter the market with greater case and avoid too much competition. For example, the merger of Orange,Hutch, and Vodafone took place to achieve this objective.
6. Access to funds: If a company finds it difficult to access funds from the capital market. In such situation, a company may decide to merge with another company that is viewed as fund-rich. For example, TDPL (Tamil Nadu Dadha Pharmaceuticals) merged with Sun Pharma since TDPL did not have funds to launch new products.
7. Tax benefits: Mergers are also adopted to reduce tax liabilities. By merging with a lossmaking entity, a company with a high tax liability can set the accumulated losses of the target against its profits gaining tax benefits. For example, Ashok Leyland Information Technology (ALIT) was acquired by Hinduja Finance, a group company, so that it could set the accumulated losses in ALITs books against its profits.
