M&A transactions involve the purchase by a different firm of a company typically in exchange for cash or stocks. The goal is to gain an enduring competitive advantage in the marketplace. It’s not the right solution for every strategic objective however, companies that know what it has to offer and utilize it prudently should be able to realize substantial growth.
M&A helps companies gain economies of scale, a phenomenon that “one plus one is more than.” For example when Facebook acquired WhatsApp and Instagram it was able to tap the growing demand of a new client base without having to invest massively in developing these services. It also gained the size and market presence which increases bargaining power with suppliers or customers.
The most common motivation this hyperlink is the desire to create an empire. Managers are motivated to buy companies that will increase their share of their market or lessen competition. This strategy is likely to be successful when it is executed with clearly defined goals and accurate financial projections.
M&As can also assist businesses to survive and thrive in a market that is tumultuous. For example, many banks joined to shield themselves from the Great Recession of 2008-2011, when credit quality declined. It can also be used to diversify revenues by buying an organization from a different region or industry. Retailers, for instance typically acquire companies in technology or ecommerce to expand into new markets and increase revenues. A common mistake is to treat M&A as a strictly financial tool, with no thought given to strategic value creation.