Sowjanya Bonda, a leader at AND Business Consulting, specialises in mergers and acquisitions (M&A) and transaction advisory services. She breaks down what M&A mean in practice and how deals can help companies boost growth and achieve strategic objectives.
M&A is a general term that refers to the consolidation of companies or assets. M&A’s can be broadly classified into three main categories: Horizontal (merger of companies in the same space), Vertical (merger of companies in different stages of same supply chain), and Conglomerate (merger of unrelated companies).
Rationale for M&A
There are various strategic reasons for companies to consider making an acquisition and a successful takeover can help companies achieve their strategic objectives as well as increase cost effectiveness within the business. Some of the major reasons include:
- As an inorganic growth opportunity to reach untapped markets or customers.
- Viable business solution for companies attempting to downsize, reduce costs and streamline operation leading to an increase in profitability or alignment with business strategy.
- Shareholders or investors looking for an exit.
An M&A can be a rapid way for companies to achieve their objectives and increase company’s growth. The intention is that the resulting combination of products, people and pipelines will take the business to new heights.
Since the early 1980s, high-profile leveraged buyouts such as Duracell International, Uniroyal, and RJR Nabisco have attracted widespread attention. Much of the fanfare has focused on negotiation tactics, savvy financial structures, and prices. Little attention, however, has been given to the other numerous buyouts that have occurred in that time period and to the fundamental changes in operating practices that have generated positive returns for many of those companies.
Merits of M&A
An overview of the strategic, financial and operational advantages that M&A can offer to organisations:
1) Intellectual Property
Through M&A’s, a company can obtain improved technological know-how, trademarks and patents, thereby increasing efficiency in production and pricing.
2) Economies of Scale
M&A’s bring greater negotiating strength in dealing with vendors due to the larger size of the resulting entity, in addition to higher output of products/services resulting in lower fixed costs per unit.
3) Larger Portfolio
To obtain a new product line for diversification or substitution or to complete a product range e.g. Nigeria Breweries Plc. planned takeover of Schweppes. It can bring about a new market outlet, eliminate competition or protect an existing market.
4) People
It has often been said that the success of the any big business depends to a large extent on the quality of its management personnel. Through M&A’s, external managerial talent can be acquired and utilized most efficiently. Also due to its larger size, the company has the advantage of offer better remuneration, better growth opportunities and can hence reduce attrition.
Demerits of M&A
However, the combined business has to deal with increased operational & personnel related complexities – presence in multiple markets, more diverse consumer base and more complex product/service portfolio.
Cost synergies, a tangible and often quickly attainable goal, take precedence over the grinding work of formulating, isolating and tracking revenue metrics and growth efforts. Cost reduction goals can even conflict with revenue growth opportunities.
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