What are Mergers and Acquisitions?
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Mergers and Acquisitions (M&A) is an umbrella term that refers to the combination of two businesses.
M&A gives buyers looking to achieve strategic goals an alternative to organic growth, while giving sellers an opportunity to cash out or to share in the risk and reward of a newly formed business.
M&A reward vs risk
When M&A is successful, it holds the promise of enhanced value to both the buyer and seller. For the buyer, it can:
Accelerate time to market with new products and channels
Remove competition (buying a competitor is called → horizontal integration)
Achieve supply chain efficiencies (buying a supplier or customer is called vertical integration)
Meanwhile, the cost savings that might be achieved by the reduction of redundant jobs and infrastructure (called synergies) can be shared by both the buyer and seller: The anticipation of lower costs going forward allows the buyer to afford a higher purchase price.
When M&A is unsuccessful, it can destroy value and especially hurt the buyer (since the seller is already cashed out). Poor due diligence, mismanaged integration and overestimation of potential cost savings are common reasons why mergers and acquisitions can fail.
Vertical Integration → In vertical integration, two or more companies with different functions in the value chain decide to merge. Because the combined entity has increased control over the supply chain, the combined company should be able to eliminate operating inefficiencies with improved quality control, at least in theory