What Are the Benefits of Mergers and Acquisitions?

benefits of mergers

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. 

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 greater profit — but it’s useful to understand the different ways that a merger or acquisition can bring this about.

Mergers and acquisitions benefits

So, what are the most common benefits of mergers and acquisitions? Let’s have a look at them in more detail.

Access to new markets

Let’s start with a real-life example — the acquisition of Envisage Technologies by Vector Solutions in 2021. Both companies offered training software in the US and Canada — Vector worked with firefighters, and Envisage with law enforcement agencies. So, why did Vector buy Envisage? The answer is that Vector was already serving over 90% of firefighter corporations in the US. 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. 

Increased market share

Now suppose Vector had been working with only 50% of firefighter corporations in the US, 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.

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 companies do so in order to protect their investors’ money and increase their returns.

Access to new material resources

What about Envisage — what did it gain from being acquired by Norwest? The simple answer is that it gained the money it needed in order to continue growing. When a company has an existing business plan to scale its operations, it needs capital, and a merger or acquisition can bring in just that. It can also bring non-financial resources, such as access to new distribution facilities, machinery, distribution channels etc.

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 business intelligence or valuable intellectual property, or in obtaining quality staff. This happens specially 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, a company can solve the problem of scarce specialized workforce.

New corporate capabilities

Yet another kind of non-material resource 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 company that has great marketing capabilities. Such a move will increase profits because the new company will be much better at advertising its product than the original company was.

Economies of scale

When two businesses pool their resources together according to a well thought-out strategy, they can lower costs considerably by saving in 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.

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.

In short…

The above are some — not all — of the advantages that companies can derive from M&A. In order to reap these or other benefits from a merger or acquisition, companies must have a solid strategy — one that sets corporate goals, and takes into account past and present performance and current market trends.