Waiting for a company to increase in size through natural, organic expansion can take years. It can even take decades to reach the desired level. However, by using the business strategy of M&A, an ambitious company can become significantly larger in a fraction of the time. M&A is often viewed as a convenient method of combining the assets of rivals.
In terms of competition, there are two reasons why companies choose M&A. One is to expand its own market share or product portfolio. To push the competition out of the market or to strengthen their own position. The second reason is that companies do not want their competitors to buy the target company and thereby lose market power. There are numerous examples in various industries, with the telecommunications sector being one of the best known when it comes to rivalry.
In order to generate synergies, two companies from the same sector are merging with each other. This allows the companies to give new impulses to their individual projects. By consolidating their assets and merging factories, offices, and supplies, duplicate operations are eliminated. In addition to the cost savings that result from the merger usually, the network of suppliers is expanded, which leads to cheaper and in some cases faster procurement of goods. Also, the use of production processes or the use of company secrets that are disclosed during the merger creates positive synergy effects.
Many companies use M&A procedures as a way of becoming dominant forces in their particular sector. Such combinations of large businesses often have the potential to create a powerful monopoly. However, this type of transaction is subject to intense investigation from various watchdogs and regulatory committees. They safeguard competition from such mergers. However, there are prominent cases where only one company dominates the entire market. One example is Facebook, through its merger with Instagram in 2010 and WhatsApp in 2014, which makes Facebook a dominant force that is difficult to regulate.
There are often several reasons why companies use M&A strategies including tax purposes. Many well-known companies from America have chosen corporate inversions. This is due to the States having until recently one of the highest rates of corporate tax. Using this strategy the American business first purchases a small competitor from a foreign country. Then the merged company’s tax liability relocates overseas, where the tax jurisdiction is much lower. As a result, the company’s tax bill is drastically reduced.