When companies come together through the mergers and acquisitions process [M&A], there are numerous issues that must be analyzed to determine if the benefits of such a move outweigh the risks that are involved. There are always benefits to the M&A process and there are always disadvantages. Even long-term advantages may outweigh short-term difficulties. This is why evaluating the numerous pros and cons of mergers and acquisitions that are transaction specific is so important.
The Pros of Mergers and Acquisitions
1. It adds more value to the combined entity than either individual company can produce on its own.
At its heart, the M&A process is all about reducing duplication so that more efficiencies can be achieved. The end result is typically an enhance level of overall revenue because there aren’t costly redundancies that occur through the product chain.
2. It opens up new markets for both companies.
Once an organization has merged with another, it instantly gains a new market share that it may not have had before. Many people within an industry are brand loyal and the M&A process allows people to maintain that loyalty while potentially transitioning to new goods or services. The customer base may even be encouraged to experiment with new goods or services after the merger or acquisition is complete because they have access to more resources through their preferred brand.
3. It is a cost-effective method to fuel expansion.
If a business has to upgrade their internal processes or their existing technologies on their own, then this can create a massive charge on several budget lines that can be difficult, if not impossible, to absorb. The M&A process allows businesses to come together so that their specific needs can be met by another in a more affordable manner. This includes employees as a resource as well since some organizations have talented employees in position already so that additional training costs are not required.
4. It can create multiple growth opportunities.
Two businesses that may have been competing against each other now work together as one entity in the completion of the M&A process. This means they are more effective on a local level at providing economic benefits because there isn’t a “race to the bottom” occurring. Consumer prices on goods or service may or may not rise because of this, but overall a more effective company is one that create more economic opportunities.
The Cons of Mergers and Acquisitions
1. It creates distress within the employee base of each organization.
The M&A process invariably consolidates positions within the companies that are duplicated. This often means that there is a chance layoffs could occur, which would place people out of work for an indefinite period of time. Because none of this potential becomes definite until the M&A process has been completed, many people are forced into higher levels of uncertainty because they don’t know what will happen to them.
2. It may increase the amount of debt that is owed.
If there are debts owed by either organization [or both], then the M&A process may increase the balance sheet debt of the combined company. Although not by itself catastrophic, it can impact the combined company’s ability to establish new credit lines or borrow additional funds to fuel a wanted expansion.
3. There can be differences in corporate culture that are not easy to consolidate.
Let’s say Company A doesn’t have an official dress code policy. They don’t even care if someone where shorts and sandals to work every day. The environment is relaxed, workers sit on couches instead of computer chairs, and every Friday the executive team springs for their staff to enjoy a beer or two while on the clock. Now Company B has a business formal dress code, requires compliance, and is structured with the standard cubicle office format. Drinking? Forget it. Consolidating office cultures can be more difficult than any other aspect of the M&A process.
4. It isn’t a one person decision most of the time.
Many mergers and acquisitions require numerous people on both sides of the aisle to be on the same page. When that doesn’t happen, the amount of time it takes to complete the M&A process can be extended. This creates added costs to the process which may cause the risks of a merger or acquisition to be greater than the benefits that could be experienced by the deal.
The pros and cons of mergers and acquisitions show that this business transaction should not be something that is just rushed into without thought. An empowered decision is required. By evaluating all of the key points, it becomes more likely that the best possible decision can be made.