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Mergers and Acquisitions: what are they and why are they valuable?

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The business world is relentless and unforgiving. The aim of the game is growth and profit, with all competitors sharing a slice of a finite pie. Market share is a significant metric for businesses to track and evaluate – indicating how their strategies are faring against rivals. However, when a business reaches a certain level of maturity, it usually has the resources and influence to increase its market share more authoritatively through acquisitions and mergers. What are these processes and how can they benefit the businesses involved?

What’s the difference between a merger and an acquisition?

There is often confusion over the differences between these two terms, but they are unique processes in the business world. A merger occurs when two separate companies join forces to create a new entity. Mergers are typically done to boost the profitability and capital value of the two merging parties. A famous example of this process was the merger between two oil giants in 1999 – where Exxon and Mobil joined together to form the Exxon Mobil Corporation, which is one of the largest companies trading on the New York Stock Exchange today.

On the other hand, an acquisition is where one larger company buys and absorbs a smaller organisation. This is usually done to increase the market share of the acquiring company or to provide new extended reach and diversification in a particular industry. A recent example is the acquisition of AIR HAMBURG by aviation group Vista Global. This move serves to increase their capabilities and capacity worldwide, benefitting both the group and their clients.

How do they benefit the businesses involved?

Mergers and acquisitions can benefit the businesses involved in a variety of ways. Mergers can help to boost profitability and shareholder value or can assist in managing operations on a global scale. Acquisitions may seem to only benefit the purchasing party, but the business being acquired can reap the rewards too. For example, they can receive operational and strategic support from the acquiring business and achieve a more sustainable level of growth.

Are they bad for consumers?

Mergers and acquisitions have been slated for being ‘anti-competitive’, but they can often benefit the consumer too. Theory dictates that when competition in a market decreases, prices should go up relative to supply and demand – but mergers and acquisitions can lower costs for companies who may then be able to lower or maintain their prices at a greater rate of profitability. This, of course, comes down to individual circumstances and some companies may prefer profitability over passing savings to the consumer.

 

We are a team of writers passionate about innovation and entrepreneur lifestyle. We are devoted to providing you the best insight into innovation trends and startups.

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