Benefits of mergers and acquisitions for your company to get

To start with, let’s get our definitions right. Both “mergers” and “acquisitions” refer to two companies becoming one, but there’s a difference between these terms. Though things are not always clear-cut, generally speaking, one can say that a merger happens when two companies that are equal in size and scale become a single entity. Whereas, an acquisition happens when a larger company buys a smaller one. 

• Disclaimer: However, in our blog, we use “merger/s” when referring to both mergers and acquisitions.

The modern M&A market is active, though much slower than before. Even despite the record-breaking 2021, the global M&A deal volume reached $3.8 trillion in 2022 and $1.3 trillion in the first half of 2023.

There are several reasons why companies acquire other companies or merge with them. Of course, at the end of the day, all those reasons boil down to making a greater profit, but it’s useful to understand the different ways that a merger or acquisition can bring this about. 

This article dwells on the most obvious benefits of acquisition companies involved in M&A can get.

Highlights:

• The main reason for mergers and acquisitions and a benefit acquiring company and acquired company seek is making a greater profit.
• The top benefits of mergers include access to new markets, increased market share, risk diversification, access to new material and non-material resources, new corporate capabilities, economies of scale, and tax benefits.

Top 10 mergers and acquisitions benefits

So, what are the most common benefits of mergers and acquisitions? Let’s take a closer look at the several benefits mergers and acquisitions can bring.

1. Access to new markets

Let’s start with a real-life example: the acquisition of Envisage Technologies by Vector Solutions in 2021. Both are businesses involved in offering training software in the U.S. and Canada: Vector worked with firefighters, and Envisage worked with law enforcement agencies. Why did Vector buy Envisage? 

The answer is that Vector was already serving over 90% of firefighter corporations in the U.S. This meant that in order to continue growing, the company had to move into a new market. By acquiring Envisage, Vector gained immediate access to the law enforcement market, thus adding to its organic growth. 

2. Increased market share

Now, suppose Vector had been working with only 50% of firefighter corporations in the U.S., while Envisage served 30% of them. By merging with or acquiring Envisage, Vector would not only have gained access to the new market of law enforcement agencies but would also have increased its share of its original firefighter training market.

As with entering new markets, increasing its market share is a way a company can increase revenue. One way to do this is organic growth, the other is acquiring companies that operate in the same sector.

3. Risk diversification

Before the acquisition by Vector, Envisage had been acquired in 2020 by Norwest Venture Partners, an investment firm. Why?

For Norwest, one of the reasons was diversifying its risk. Mixing investments from different asset classes in a portfolio is a strategy that leads to higher long-term returns and lowers the risk of individual holdings.

Investment companies that acquire successful and growing target businesses do so in order to protect their investors’ money and increase their returns.

4. Access to new material resources

What about Envisage? What did it gain from being acquired by Norwest?

The simple answer is that it gained more financial resources it needed in order to continue growing. When a target business has an existing business plan to scale its operations, it needs capital, and a merger or acquisition can bring in just that.

Mergers and acquisitions are also greatly beneficial when a company’s own distribution channels aren’t enough to scale. M&A can bring non-financial resources, such as access to new distribution facilities, machinery, and distribution channels.

5. Access to non-material resources

Besides material resources, a merger or acquisition can bring other kinds of resources to a company. For instance, it can help it in gaining access to other business intelligence or valuable new intellectual property, or in obtaining quality staff.

This happens especially in industries where experts are scarce, and where everyone is competing to hire the best people. By merging with or acquiring a company that operates in the same industry, an acquiring company can solve the problem of a scarce specialized workforce.

6. New corporate capabilities

Yet another kind of non-material resource and a key benefit that a merger or acquisition can bring to companies is specific corporate capabilities.

For instance, a company that has great engineering but poor marketing can successfully merge with another larger business that has great marketing capabilities and, probably, a larger marketing budget. 

Such a move will increase profits because the new entity will have shared marketing budgets and will be much better at advertising its product than the original company was.

7. Economies of scale

When companies merge and pool their resources together according to a well-thought-out strategy, they can lower costs considerably by saving on rent, transportation, energy, salaries, and so on.

These economies of scale are yet another reason why two companies can decide to merge: they create better chances for regional or national growth in a fair market.

8. Tax benefits

Within the same country, tax regimes can be more favorable to some industries than to others. And between two different countries, they are often more favorable in one country than in the other.

For a company that wants to cut tax expenses, acquiring companies in a place with a lower tax base and moving its operations there, can be a good strategy, reaping the benefits of mergers and acquisitions.

9. M&A synergy

Mergers and acquisitions often result in synergies, where the combined entity’s value exceeds the sum of the separate companies. M&A synergies can arise from cost savings, increased revenue opportunities, or enhanced operational efficiencies.

For example, merging companies might streamline overlapping functions, negotiate better terms with suppliers, or cross-sell products to a broader customer base.

10. Reduced competition

Merging with or acquiring another company can strengthen a firm’s competitive position in the market. This can be achieved by eliminating a competitor, gaining proprietary technology, or consolidating market share.

A stronger competitive position can lead to increased pricing power, improved market influence, and a more robust overall business strategy.

10 additional benefits of mergers and acquisitions

Let’s explore more benefits of acquisitions and mergers:

1. Enhanced research and development (R&D) capabilities
   Acquiring a company with strong R&D capabilities can accelerate innovation and product development, leading to quicker market introduction of new products.
2. Access to specialized expertise
   Merging with a company that has unique skills or expertise can fill gaps in the acquiring company’s knowledge base, leading to better decision-making and innovation.
3. Improved supply chain management
   M&A can optimize supply chains by consolidating suppliers, reducing costs, and improving logistics and inventory management.
4. Better bargaining power
   A larger, combined entity can have more leverage in negotiations with suppliers, distributors, and other business partners, potentially leading to better terms and conditions.
5. Geographical diversification
   Expanding into new geographic regions can reduce dependency on a single market and spread risk across different economic environments.
6. Stronger brand recognition
   Acquiring a company with a strong brand can enhance the acquiring company’s reputation and market presence.
7. Enhanced customer base
   M&A can bring in new customers from the acquired company, broadening the customer base and increasing revenue potential.
8. Improved corporate culture
   Integrating with a company that has a strong, positive corporate culture can enhance employee morale and productivity in the acquiring company.
9. Strategic real estate assets
   Acquiring companies often bring valuable real estate assets that can be leveraged for operational or investment purposes.
10. Learning and best practices
    Merging with or acquiring another company can provide opportunities to learn and adopt best practices from the acquired firm, leading to overall business improvement.

Additional read: Read our article on conglomerate mergers to understand how they differ from other types like vertical or horizontal mergers, and discover the unique advantages and challenges involved.

How M&A affects employees

Despite so many advantages of mergers and acquisitions, there are several challenges related to the transaction’s impact on employees. More precisely, M&A can lead to uncertainty, fear of job loss, and changes in workplace culture.

These factors can result in demotivation and reduced productivity if not managed properly. To avoid these negative outcomes, consider the following strategies:

1. Transparent communication
   Clearly explain the reasons behind the M&A, the key advantages of merging for employees, and the steps involved in the process. Regular updates and open forums for questions can help alleviate concerns and build trust.
2. Employee involvement
   Involve employees in the transition process by seeking their input and feedback. Creating cross-functional teams to address challenges related to the post-merger integration process can give employees a sense of ownership and reduce anxiety.
3. Support and training
   Provide comprehensive support, such as training programs and counseling services, to help employees adapt to the new environment. Offering mentorship and coaching can also ease the transition.
4. Positive workplace culture
   Focus on preserving a positive workplace culture by celebrating shared values and recognizing employee contributions. Organize team-building activities and open discussions to encourage a collaborative environment.

Key merger and acquisition benefits for employees

Highlight the following benefits of merger and acquisition to motivate employees:

1. New career opportunities
   Mergers often result in the expansion of the company’s operations and markets, creating new job roles and career paths for employees. This can lead to promotions, transfers to different locations, and opportunities to work on diverse projects.
2. Higher salaries
   This is probably the main benefit of merger and acquisition for every employee. As companies grow and achieve economies of scale, they may generate higher revenues and profits. This financial growth can translate into better compensation packages for employees, including salary increases, bonuses, and enhanced benefits.
3. Soft skills development
   Mergers typically involve significant changes in processes, systems, and team dynamics. Employees can develop valuable soft skills, such as adaptability, communication, problem-solving, and teamwork, as they navigate these changes and collaborate with new colleagues.
4. Company longevity
   Another important advantage of mergers and acquisitions for employees is the potential for enhanced career stability. Successful mergers can strengthen a company’s market position and financial stability, ensuring its long-term viability. This increased stability can provide employees with greater job security and confidence in the company’s future.

FAQ