Mergers and Acquisitions- Corporate
Mergers and acquisitions in the corporate world refer to the process of buying, selling or combining of different corporations to achieve rapid growth. In case of merger, two companies, often of same size, decide to go ahead as a single unit (new company) instead of operating separately. While, on the other hand, in case of acquisition, one organization takes over another to establish itself as the new owner of the business. Corporate mergers and acquisitions play pivotal role in the business and economy of any country. These result in significant restructuring of the industry and contribute substantially to the growth of the industry and economy of the country as well.
Importance of Corporate Mergers and Acquisitions
Corporate mergers and acquisitions have a great impact on the industry and economy of any country. These events restructure the industry and influence the country’s economy as a whole. Corporate mergers and acquisitions also increase the market competition and also work as ‘engines of growth’. Corporate mergers and acquisitions involve skill transfer and other sharing activities. Besides, these also result in increase in production, which again lead to rapid growth of the corporation.
Types of Corporate Mergers
Corporate mergers can be of the following types:
- Horizontal Merger: In horizontal merger, the two companies are direct competitors who represent the same market and also sell the same products/services.
- Conglomeration Merger: In this type of merger, the participating companies do not represent the same industry.
- Product-Extension Merger: In product-extension merger, the participating companies sell different products of related category.
- Market-Extension Merger: Here participating companies sell same products in different markets.
Why Corporate Mergers and Acquisitions?
There are several reasons why corporates go for mergers and acquisitions. The main goal is to increase the business and market share as well as to improve the financial performance of the corporation. Following are some of the reasons why corporates go for mergers and acquisitions.
- Through corporate mergers and acquisitions, duplicate departments can be eliminated in the combined company, which would help to reduce its fixed costs. As a result, the profit margins would go up.
- It helps the organization to increase revenue and market share.
- Cross-selling of products/services is possible.
- A profitable corporation also buys a loss-making company in order to use the ‘losses’ of the target company to lessen its tax liability.
- Mergers and acquisitions also let the companies to transfer resources. By this way, one company may use the specialized skills of the others.
- Companies also go for mergers/acquisitions for vertical integration, where the vertically integrated company can gather one deadweight loss by setting the output of the upstream company to the competitive level.