A sophisticated mergers and acquisitions strategy, if executed properly, can be a highly profitable process for any company in any industry.

At The Expert Integration Group (TEIG), we work with dozens of clients to assist them during the mergers and acquisitions (M&A) process, maximising synergy realisation, efficiency, and focus on the priorities. 

So, in this article, we look at 11 of the reasons for a merger or acquisition, and why they’re seen as a motivating factor for businesses who hope to grow and scale.

• Economies of Scale

• Economies of Scope

• Synergy Realisation

• Value Creation

• Increased market territory

• Competitive edge

• Access to new talent pools

• Less concentrated risk

• Accelerated strategy implementation

• Tax incentive

• Continuity of Operations

The promise of economies of scale is one of the main reasons for any merger and acquisition activity. The following are the advantages that will accrue as a result of growing in size:

- Increased access to funding

- Lower costs due to increased volume 

- Greater bargaining power with distributors and other stakeholders

Even though buyers should always resist the desire to engage in 'empire building,' larger companies typically enjoy advantages that smaller businesses do not.

Mergers and acquisitions enable businesses to achieve economies of scope that are not always feasible through organic growth alone. You need only look at Facebook to understand that economies of scope is another primary reason for engaging in M&A

The company acquired Instagram and Whatsapp in spite of the fact that Facebook already allowed users to post photographs and communicate with friends within its platform. 

They’re now all housed within Facebook’s new company name – Meta – which refers to the metaverse which Facebook aims to create over the next decade.

Economies of scope, as a result, enable businesses to meet the needs of a significantly bigger client base.

Synergies are generally stated as 'one plus one equals three': the value that results from two organisations working together to create something significantly more powerful than they could have done on their own.

The acquisition of Lucasfilm by Disney serves as an illustration. Lucasfilm was already a significant income producer because of the Star Wars franchise, but Disney had the opportunity to enrich the consumer offering by including theme park rides, toys, souvenirs and other merchandise.

Sometimes, some of the best mergers or acquisitions take place when a corporation isn't even actively looking to acquire another company.

One of the distinguishing characteristics of these purchases is that the purchase price is less than the fair market value of the target company's net assets.

Often, these businesses on the acquired end are experiencing financial difficulties, but a deal can be struck to keep the business afloat while the buyer reaps the benefits of adding instant value as a direct result of the transaction.

Increased market territory is one of the most frequently cited reasons for mergers and acquisitions.

We’ve already mentioned the acquisition of Lucasfilm by Disney – which increased their market share in the streaming market, among other areas – but retail banks have traditionally considered regional footprint to be critical to gaining market share.

As a result, there has always been a high level of industry consolidation in retail banking (most nations have a set of "Big Four" retail banks).

A notable example is provided by the Spanish retail bank Santander, which has made the purchase of smaller banks a key part of its business strategy, helping it to grow to become one of the world's largest retail banking organisations.

As a rule of thumb, the higher a company's market share, the more competitive it typically gets.

As previously said, economies of scale are beneficial in that being larger helps you to compete for a greater share of the available market.

For example, there are already dozens of start-up companies entering the plant-based meat market, each selling a variety of meat-alternative products to consumers.

However, when companies like P&G or Nestle begin to laser-focus their efforts on this market, many of these small businesses in their early stages will be forced to fold since they will be unable to compete with such mature competitors.

If you ask anyone in the recruitment industry where the biggest skill shortages are currently occurring, the answer will almost always be some variation of the phrase "people who can code."

For starters, there is a tremendous demand for coders in the so-called Fourth Industrial Revolution. Not only that, but also because all of the most senior developers have been scouted by huge tech companies.

The most powerful organisations always have access to the most talented individuals. That holds true for every other industry just as much as it does in big tech.

In addition to economies of scope, it’s true that having more revenue streams allows a corporation to dilute risk among those revenue streams rather than concentrating it all within a single revenue stream.

To return to the example of Facebook, some analysts believe that younger people are shifting their attention away from the social media giant and towards other kinds of social media, such as Instagram and Whatsapp, among others.

When one revenue stream fails, an alternative revenue stream may be able to maintain, or perhaps increase, an organization's share of the pie, which reduces the risk posed to the acquiring firm.

Mergers and acquisitions may be the most effective method of transforming a long-term strategy into a mid-term, or even short-term, strategy. 

Consider the following scenario: a company wants to expand its reach and target a new location with its products and services. It might start from the ground up, but this means it could only hope to reach the desired scale in five to ten years time.

Alternatively, it could acquire a business, as well as its client base, distribution network, and brand value, and reap the benefits of all of these assets upon completion of the acquisition.

This is particularly true in sectors such as new product development and research and development, where an organic strategy will rarely be able to match the pace afforded by M&A.

Depending on whether the target firm is in a strategic industry or whether it is located in a nation with a favourable tax environment, acquisitions can result in considerable tax benefits.

For instance, there’s the case of US pharmaceutical corporations acquiring smaller Irish companies and relocating their headquarters there in order to benefit from Ireland's lower tax base. This style of transaction is commonly referred to as a "tax inversion."

The most well-documented example of this was a proposed $160 billion merger between Pfizer and Allergan in 2016, which was ultimately rebuffed by intervention from the United States government.

Some small enterprises are owned by members of the same family or by individuals. Because there may not be a clear succession plan in place for the business, it is possible for the company to fail after the founder departs. 

The knock-on effects can include employees losing their jobs, stakeholders losing trust in the business, and suppliers for the company suffering as a result. A merger or acquisition is one technique that can assist in assuring business continuity, decreasing operational interruptions, and providing job security for staff.

As this 11-point list demonstrates, there are various reasons, or advantages, for pursuing a merger or acquisition.

And once the deal is agreed, there’s no reason why any organisation can’t reap the benefits we’ve described.

That being said, if you’re considering putting an M&A plan into action, you should consider which of the above benefits you’re the most interested in receiving from your transaction.

If you want to guarantee you realise all possible synergies during the integration phase of your M&A deal, but don’t know where to start, get in touch with us at TEIG… we only win together