Mergers and acquisitions can be compared with marriage because in marriages two individuals as well as families become one or come together, in the same way in mergers and acquisitions two companies become one. Mergers and acquisitions are the lifeline of any industry because there is no industry except some industries where the government itself has monopoly powers where mergers and acquisitions do not happen and that is the reason why it is important to know both advantages as well as disadvantages of mergers and acquisitions.
Advantages of Mergers and Acquisitions
- The first and foremost advantage of mergers and acquisitions is that companies which have excess cash and not enough profitable opportunities in their business can invest that cash by merging or acquiring another company which in turn will result in higher sales for combined company and also higher profits. In short cash which was lying idle with the company can be used productively by the company in mergers and acquisitions.
- Diversification is another major benefit because if the company has merged or acquired another company which belongs to other industry then chances of a slump in sales reduce because the loss in sales in one company is compensated by another company sales figure as chances of a slump in both the companies operating in different industries are very rare.
- Another advantage of mergers and acquisitions is that if company is buying company in the same industry then it is effectively reducing the competition and if competition is reduced then company in turn will be incurring less expenditure on advertisement and publicity and more on research and development of products leading to production of better product at reasonable price leading to more sales and profits for the company.
Disadvantages of Mergers and Acquisitions
- The biggest disadvantage of mergers and acquisitions is the price at which these deals happen because there is no standardized or uniform way in which one can find out the right price as each company is unique and different from others which make calculation of right price a tricky one and chances of company overpricing the merger and acquisition deal are always there and since these decisions are irreversible in nature it can lead to problems for the company in future.
- Another disadvantage of mergers and acquisitions is the successful integration of employees of merged firms because just in the case of marriage the bride finds it difficult to adjust with bridegroom relatives and bridegroom relatives too find it difficult to adjust with new member in the family, in the same way the newly merged company employees find it very difficult to cope with new culture, employees, management and so on. The two culprits due to which many mergers fail and companies suffer huge losses are the absence of integration and price of the merger deal.
- If the company is listed then shareholders may not like the idea because if the company takes too much debt for the acquisition then it is risky as failure of merger may lead to company going into bankruptcy and shareholders will never want such situation to happen and also employees will feel unsecure as due to merger there will be duplication of positions and company will resort to lay off of employees.
As one can see from the above that merger and acquisition has many advantages as well as disadvantages and it is very difficult to pinpoint whether a merger is beneficial or detrimental for a company because every merger has different objective and reason behind it and hence company should take all factors into account before going for this very important strategic decision of merger and acquisition.