Consequences of mergers and acquisitions

Contents:

• Reasons for mergers and acquisitions
• Positive effects of mergers and acquisitions
• Negative consequences of mergers and acquisitions

Mergers and acquisitions of companies (M&A transactions) can be one of the reasons for significant growth for the business and its prospects in the future. However, along with good expectations, it is necessary to take into account the risks of merging a company with another enterprise.

In this article, we will take a detailed look at the reasons why companies turn to mergers and acquisitions. It is necessary to know the positive and negative aspects associated with this type of corporate transactions.

Reasons for mergers and acquisitions

There is no single reason to conduct M&A transactions. Entrepreneurs independently choose the grounds for merging a company with another. As a rule, they are guided by one or more factors from the list.  

• Business development.

M&A deals help companies get the opportunity to expand their business in a short period of time. However, fast is not always safe, so entrepreneurs need to take into account the negative factors that mergers can bring. Among them, it can be noted how positively or negatively the transaction will affect the financial performance of the two enterprises. It is important to take into account the differences in the corporate cultures of the two companies, the risk of losing qualified personnel and the quality of the company’s management.

• The company’s competitive ability in the market.

Gaining access to new sales markets or expanding influence in already established markets is one of the main reasons for M&A transactions. Large corporations can approach a monopoly, which will allow them to impose the most favorable conditions for themselves and receive additional income. Separately, it is worth noting the phenomena of unfriendly acquisitions of companies. After such a transaction, the buyer firm can dispose of the purchased resources at its discretion, including the sale of the business or the closure of the absorbed brand. Such events are usually associated with poor financial performance of the company or with a sharp deterioration in reputation.

• The need to obtain modern technologies and equipment.

Today, companies are striving to obtain the most modern capabilities, including new technologies and equipment. That is why companies can resort to mergers. M&A deals provide an opportunity to work on new equipment, develop little-known deposits or sell products to different target audiences. Mergers and acquisitions are especially relevant for companies with close or related fields of activity. After the transaction, there may be a synergy that will allow companies to reduce the cost of branches and use the released funds to increase profits.

• Increased confidence on the part of creditors and investors.

The growth of the company through mergers or acquisitions will have a positive impact on the opportunities for lending and raising funds through bonds. It is easier for larger companies to get a loan from a bank on favorable terms, since the chance of a company going bankrupt or not fulfilling its obligations will become less.

Positive effects of mergers and acquisitions

Of course, the conduct of mergers or acquisitions of companies has a number of positive consequences. These include:

• An opportunity for a smaller company to become a leader in its segment by gaining access to new resources. The level of growth depends on the degree of market consolidation. When there is a large number of mergers and acquisitions, this indicates market consolidation. Companies want to increase their profits in such times, as it will be easier to get a boost to development.
• Combining technology, resources and labor. This gives the potential to improve the competitiveness of the company. However, here you need to take into account many risks and factors associated with the merger. Often the merger brings a completely different result, different from the expected indicators.
• Reduction of the tax burden. Certain types of businesses that are located in countries with high taxation of legal entities deliberately conduct M&A transactions with foreign companies to transfer their business to a jurisdiction with lower taxation.

Negative consequences of mergers and acquisitions

In the presence of a number of undeniable positive aspects, it is important to remember about the risks associated with mergers and acquisitions. The main negative factors are usually associated with:

• Probable loss of employees. Often, due to integration, some employees have to be reduced, some leave on their own. It is also necessary to take into account the future scheme of building joint activities of the joint management, since the management of the absorbing company may have a different opinion about the company’s development path or other characteristics.
• Negative impact on financial indicators. The merged company faces such consequences as a result of errors in the evaluation of the absorbed firm. Sometimes the amount of money required for the transaction is lower. It is also important to take into account the shortcomings that were made during the transaction. An example is the unaccounted-for costs of upgrading a company’s equipment or new environmental obligations.
• Problems due to different corporate cultures. Before conducting an M&A transaction, you need to consider how it will affect the employees of both companies. This is important, as negativity can have a negative effect on everyone.
• Insufficient market consolidation. If the calculation before signing the contract turned out to be incorrect and the market is insufficiently consolidated, then the entrepreneur may not get the expected effect from the M&A transaction and not expand the sales market.

Before conducting any M&A transaction, it is necessary to seek the help of professional lawyers. The specialist will help to analyze the documents of the absorbed company and assess the likely benefits or risks from the conclusion of the contract. VALEN’s lawyers have all the necessary competencies to support M&A transactions.