The mergers and acquisitions market varies greatly between countries that have different regulations on what defines target ownership. Many entrepreneurs look for merger and acquisition negotiations for a variety of reasons.
The main ones are economic reasons, gaining greater competitive advantage and even defensive strategies driven by changes in customer demands or competitors’ actions.
In this post, you will be able to understand when and why a company decides to carry out mergers and acquisitions, the reasons why they occur and how the cycle can help in the firmness of the purchase!
How does the merger process work?
Many like-sized companies with similar business goals come together to create or buy a new business ( the education sector is an example), which will be understood as a merger of equals. In this situation, many assessments are created – better known as pre-agreement – that are crucial to the progress of the process.
Participating companies are able to review their market assessment, resources, capabilities, costs and revenues before deciding what they want in the end.
That is, they go through an integration process to ensure the perfect conduct of these joint operations and that they will be suited to different mutual objectives.
This deal, finally, is only closed after all parties sign an agreement with clauses that better define the terms of the alliance. Normally, one party always gives up its actions to integrate the other.
If you are interested in knowing in detail how the entire M&A process works, we recommend reading this article.
Why does a company decide to merge or acquire another business?
Typically, this merger or acquisition process is seen as a way of dealing with problems related to the growth of an establishment in a certain market niche.
Furthermore, since two companies in the same sector can merge and become the largest share of the market, this becomes an important competitive advantage.
M&A helps in these merger and acquisition operations, through a specialized team that will be responsible for coordinating the operation processes in the company, studying current and future opportunities to stand out in the market and, of course, have gains on all possible fronts.
What are the main reasons for an M&A?
Many companies seek to make their mergers and acquisitions for many (and diverse) reasons, and often this is linked to the company’s economy and the situations it is going through at the moment.
Therefore, we will list here the 6 main reasons to do an M&A:
strategic goals
The main reason for an M&A operation to occur depends on the strategy that will be adopted by each company. The most common are:
protect or increase market share;
gain access to new markets;
obtain new products and services;
acquire access to new features; and
Scale economy.
When there is a strategy with established goals, being an active participant within the sector in which you want to undertake can help in negotiating better prices and/or conditions with suppliers and sellers. Thus, it is possible to increase the reach of the brand with other customers and raise prices.
synergies
With regard to synergy, it is divided into two categories, after all, companies believe that – when they combine – they will be getting a result greater than simply the sum of the parts.
Revenue synergies: aims to improve the company’s revenue generation capacity through various strategies such as cross-selling, opening new distribution channels for products or services and territorial expansion that will expand the geographic reach of the company. company and facilitate entry into new markets.
Cost synergies: optimize and consequently reduce the cost structure of the companies involved in the operation, since they will be able to share fixed costs, increase the effectiveness of the supply chain, cut other related costs such as the cost of patents and implement best practices to extract maximum value from processes at the lowest cost.
Diversification
When mergers occur, they happen for reasons of diversification. That is, a company can carry out one to diversify its business operations, entering new markets or offering new products or services.
However, shareholders do not always willingly accept some situations on which the merger business is based, especially when the objective of diversification is risk. Some mergers may occur for diversification objectives such as product or market extension and conglomerate mergers.
Increase in financial capacity
Each company has a profile and, therefore, faces a different load of financial capacity that finances its operations via the debt market or via the stock markets.
When you are at the limit of financial capacity, the company can merge with another and, consequently, this business combination guarantees greater financial capacity that can be put into various business development processes.
Replacement of leadership
In a privately held company, it is normal for a merger or acquisition to take place if the current owners cannot find someone within the company to succeed them.
Here in Brazil, cases of family businesses being part of M&A processes as a form of succession are recurrent.
Survival
And last but not least, it is never easy for a company to recognize that it has to survive the chaos of the financial crisis. Therefore, many businesses use M&A to grow and survive during the crisis, otherwise they may go bankrupt and go out of business.
Therefore, the good preparation of professionals and executives in this matter is essential for a prudent, structured and well-founded decision-making to define successful merger stories in the future. And having expert advice is the most important step for your M&A process to be successful. Count on 3Capital to assist you at all times in your company!
