Mergers and acquisitions (M&A) combine two business entities into one. A merger takes place when the two businesses form a new, third entity. On the other hand, in an acquisition, one company purchases and absorbs the other into its operations. In the past, Anand Jayapalan had spoken about how a business merger or acquisition presents an effective strategy for expanding a company and acquiring new revenue streams that can improve bottom-line profitability.
To gain a good understanding of the advantages of mergers and acquisitions, one must know that there are likely to be two sides to these transactions. The buy-side and the sell-side. The buy-side is the one making the purchase. This can be a private equity or investment banking firm, a larger enterprise, or some other entity with enough capital to purchase at least a part of another entity or even acquire it outright. The sell-side is essentially the one selling part or all of its company. The sell-side basically has to give up something in order to receive some benefit, though it is generally driven by securing capital.
One of the biggest benefits of a merger or acquisition is immediate or future access to capital. For the buy-side, an M&A transaction can be a huge method for generating revenue for the business over time. Even though the transaction does transfer funds away from the firm, this money is given with the expectation of enjoying a good ROI in the future. The seller in the deal typically transacts in the same vein as it wants an immediate injection of capital. Many smaller companies tend to be unprofitable to start. For them, the additional capital can help fuel rapid growth. These companies may use the money to hire new employees, fund additional research and development, and so on.
Earlier, Anand Jayapalan had spoken about how providing companies with the change to tap into new markets, industries, or geographic locations is another major benefit of mergers. Through M&A, a company can significantly lower or even remove the barrier to entry to begin operation in another location or market. Mergers and acquisitions additionally result in greater financial strength for both companies involved in the transaction. This improved economic power can lead to higher market share, higher influence over customers, as well as lower competitive threat. In addition to making new markets or locations available, M&A often results in the creation of additional revenue streams as well.
For the buy-side, the additional revenue stream can be just the merged or acquired company itself and its offerings. They may fill a gap in the current portfolio’s offerings, create new lines of business (LOBs) or add new intellectual property (IP). In the context of an M&A, the acquired company gains numerous opportunities for up-selling and cross-selling within the buyer’s portfolio. As part of this portfolio, the company may take advantage of these prospects by creating cross-promotions and bundled deals alongside its existing products or services. This would increase their revenue potential. Additionally, access to new products, intellectual property, and lines of business can enhance the market reach of the company, positioning it to strengthen its competitive standing and potentially become an industry leader.