Advantages of Mergers and Acquisition

Ø Synergy

            The basic concept of synergy is that the unified whole is greater than the sum of its individual parts. It can be expressed as 2+2 is greater than 4, in case of synergy. Say, there is ABC Bank Ltd with an annual operating profit of Nrs. 10 Million and MNO Bank Ltd. with an annual operating profit of Nrs. 8 Million. Then if the two banks work together, according to the concept of synergy, their annual operating profit will exceed Rs. 18 Million. This is a result of synergetic effect by the cooperation between the companies.

Ø Staff Reductions

            As every employee knows, mergers tend to mean job losses. Consider all the money saved from reducing the number of staff members from accounting, marketing and other departments. Job cuts will also include the former CEO, who typically leaves with a compensation package.

Ø Economies of Scale

            This refers to the fact that the combined company can often reduce its fixed costs by removing duplicate departments or operations, lowering the costs of the company relative to the same revenue stream, thus increasing profit margins. A bigger company placing the orders can save more on costs. Mergers also translate into improved purchasing power to buy equipment or office supplies - when placing larger orders, companies have a greater ability to negotiate prices with their suppliers.

Ø Acquiring New Technology

            To stay competitive, companies need to stay on top of technological developments and their business applications. By buying a company with unique technologies, acquiring company can maintain or develop a competitive edge.

Ø Improved market reach

            This states that the buyer will be absorbing a major competitor and thus increase its market reach and enhance market power. Companies buy companies to reach new markets and grow revenues and earnings. A merger may expand two companies' marketing and distribution, giving them new sales opportunities.

Ø Reducing Competition

          M&A between the companies, except the conglomerates, reduces the competition among the business companies. This can be used to eliminate the waste, for e.g. marketing expenses; commissions etc., and increase the economies of scale of the company.

Ø Taxation

              A profitable company can buy a loss maker to use the target's loss as their advantage by reducing their tax liability. Tax minimization strategies include purchasing assets of a non-performing company and reducing current tax liability under the Tanner-White PLLC Troubled Asset Recovery Plan. Simlarly, the profit of one company can be cary forwarded to meet the loss of another company in order to escape the tax- liability. In this age of globlisation, many companies across the world go with M&A with the companies in tax haven countries in order to reduce tax liability.

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Net Blog: Types of Mergers and Acquisitions