Every firm needs to grow.. grow in terms of size. There are various ways of describing size of an organisation, by its number of employees, market share, market capitalisation, revenue, number of outlets etc.

‘Growth’ is very crucial! No arguments against it. But how to grow? This is a very important question and needs to be addressed. Should one prefer organic growth? This means that the firm would grow by improving its own business activity. Or should one take the path of inorganic growth which is usually through mergers and acquisition. The path of inorganic growth is taken usually in conditions of paucity of resource. Also inorganic growth is usually seen as a faster way for a company to grow when compared to organic growth.

The world has been witnessing a lot of mergers and acquisitions  in the recent years… Many scholars term this as merger-mania. Most of them argue, that the companies follow the M&A path without even understanding the purpose of one. They try to justify this, by saying that, the ROI for most of the corporations have come down after M&A. While the corporates argue that, one should not concentrate on the short term gains but on the expected value of long term returns.

Types of Mergers:

  • Horizontal Merger: takes place when the merging firms are in the same area of business
  • Vertical Merger: takes place when the merging firms are involved in different stages of production/distribution
  • Conglomerate Merger: takes place when the merging firms are in unrelated business

Principle to be followed: For such a transaction to be justified, the two firms involved must be worth more together than they were apart.

Let us try to understand the advantages and disadvantages behind any M&A:

Advantages:

  1. Cost Efficiency though economies of scale
  2. Increase in market share
  3. Benefits in terms of resources, technology
  4. Easy entry into new customer segments
  5. For financial leveraging
  6. Entry into new geographical regions
  7. Tax Benefits
  8. Reduces competition
  9. Risk Spread

Disadvantages:

  1. Diseconomies of scale if the company has become too large
  2. Integration may be difficult
  3. Business model conflicts
  4. Clashes of culture

Usually the announcement of an M&A deal leads to a change in share prices. Usually the share price of the acquirer falls down, while that of the firm which is being acquired increases. But it need not happen everytime. A lot of people also keep raising questions on the way the firms are valued. Also the intention behind an M&A matters a lot. As per investopedia most of the deals fall out due to the wrong or unjustified intentions.

After the 2008-10 crisis, the M&A trend has slowed down, but it seems it might catch up and increase at an unprecedented rate soon. Let us wait and watch, if the argument of long term returns holds good or not!

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