Since 2000, the number of M&A transactions has been steadily rising. For example, in 2000, there were 31,000 deals, and by 2010, that figure grew to 45,000. In 2022, this number reached 50,000. This trend demonstrates the increasing significance of mergers and acquisitions due to the numerous advantages they offer to companies.
This article provides insights into these key benefits and explains how specific industries leverage M&A for strategic business growth.
Strategic benefits of mergers and acquisitions
So, what are the benefits of mergers and acquisitions? Let’s explore the seven most important.
1. Synergies
When a transaction has synergy, it means that the combined value and performance of two companies are greater than the sum of their individual values and performances. Achieving financial synergies is one of the key M&A benefits and objectives.
Proper planning and utilization of financial resources may result in two types of synergies:
- Cost synergies
They happen due to reduced costs achieved through shared marketing budgets, shared technology, supply chain optimization, facilities consolidation, increased purchasing power, and staff reductions.
- Revenue synergies
They occur when two businesses combine resources. This can involve cross-selling products, leveraging each other’s customer base, and accessing each other’s patents or other intellectual property. This creates more competitive products and leads to increased sales and revenue.
Read our article to learn how to calculate synergies in M&A.
2. Economies of scale
The improved economic scale in mergers and acquisitions often becomes the main goal of the transaction. Economies of scale refer to the cost advantages that arise when the scale of production, operation, or distribution increases. In short, the larger the business, the more the cost savings.
Key economic benefits of mergers and acquisitions include:
- Lower costs
Through mergers and acquisitions, companies can produce goods or services at a larger scale, leading to lower average costs per unit. This cost efficiency results from spreading fixed expenses over more units.
- Increased access to capital
Mergers and acquisitions boost the credibility of the combined company, making it easier to secure funds from investors or through loans. This financial strength allows the merged entity to invest in important areas like expansion, innovation, and strategic projects.
- Better bargaining power
The larger merged entity provides stronger negotiating power, especially in dealings with suppliers. This advantage enables the company to secure more favorable terms and pricing structures, leading to cost savings.
Economies of scale don’t merely stem from a company’s growth. They’re also the result of strategic decisions from M&A management. Take, for instance, the implementation of advanced technologies, streamlined production processes, and bulk purchasing practices. These proactive measures are key in realizing the efficiencies and cost advantages.
3. Market expansion
Among the most important benefits of mergers and acquisitions is the ability to expand internally and externally. Merging with or buying an existing and established business in a market the company wants to reach can be much quicker and cheaper than starting from scratch.
Cross-border acquisition benefits are especially evident as going into foreign markets can be challenging because of unfamiliar regulatory frameworks, cultural differences, and language barriers.
Here’s what companies get from international, regional, or national growth:
- Increased diversification
If one market faces challenges, success in others can help avoid negative impacts. For example, in 2017, Amazon acquired Whole Foods and diversified its business into the grocery industry, which helped mitigate risks associated with fluctuations in the e-commerce market.
- Enhanced distribution capacities
When a business reaches new markets, it increases its ability to distribute products and services to more people. For example, the acquisition of TNT Express by FedEx in 2016 strengthened its presence in Europe.
- Greater brand recognition
Corporate expansion enhances the credibility of a business, leading to better brand recognition. When more people know and trust a brand, sales and revenue increase. For example, Walt Disney’s acquisition of Marvel in 2009 improved Disney’s recognition in the superhero genre, attracting a broader audience.
- New market tax benefits
Acquiring companies in a location with a lower tax base and relocating operations there can reduce costs significantly. For example, in 2015, American medical device maker Medtronic acquired Irish-based Covidien, partly motivated by the desire to benefit from Ireland’s lower tax rate: the acquisition was expected to deliver $850 million of annual pretax savings.
Tip: When reaching new markets, conduct thorough due diligence on foreign countries’ tax regimes to avoid M&A tax implications.
4. Increased market share
When two firms become one, the new larger company gets a bigger market share than each previously had separately. It, in turn, can lead to:
- A competitive edge
Dominating a larger part of the market gives the company a competitive edge. It can influence industry trends, set standards, and attract more customers, further improving its position.
- Increased revenue
Even though a company can increase revenue through organic growth, acquiring a business that operates in the same sector may be a faster and easier option.
Tip: Our article on the best books on mergers and acquisitions guides executives on what to read to learn more about the nuances of M&A, including consolidation benefits.
5. Risk diversification
One of the most obvious benefits of M&A is risk diversification. Here are a few examples of how it works:
- Industry diversification
Expanding into a new industry reduces reliance on a single sector. If economic conditions impact one industry negatively, the diversified portfolio allows the company to rely on the performance of other industries.
- Product and services diversification
When acquiring a target business, new products and services become accessible for integration into a company’s own distribution channels. This creates opportunities for new revenue streams. If one revenue stream faces difficulties, a company can spread risk using its alternatives.
Make sure to create an effective diversification strategy, align it with the existing business plan, and continually reassess its performance. Initiate the process during the early stages of M&A planning; otherwise, the transaction may face challenges post-merger.
Read our article Why mergers and acquisitions fail to learn how to avoid common pitfalls that jeopardize a deal’s success.
6. Competitive advantage
Competitive edge through M&A is another reason why businesses consolidate their strengths. The thing is, larger companies are usually harder to compete with. Thus, M&A is a great option for firms that want to avoid high levels of competition.
To reap the competitive benefits of acquisitions and mergers to the full extent, McKinsey recommends following these steps:
- Manage the acquiring company’s reputation
Buyers should consider how they are perceived by target businesses and work on presenting themselves as bold, collaborative, and able to provide mentorship.
- Confirm the strategic vision
Many companies focus on financial, legal, tax, and operations due diligence and forget about the strategy behind the acquisition. That’s why buyers are advised to adopt a fact-based approach, involving key stakeholders from various departments to assess the advantages and potential challenges of a deal.
- Reassess synergy targets
Businesses involved should reassess synergy objectives throughout the deal, even after it closes, to ensure that expectations align with the real potential of the deal and capture opportunities for value creation in mergers and acquisitions.
Sell-side M&A should proactively approach the deal, clearly communicating its unique value proposition to potential acquirers and ensuring them that together, they can achieve a competitive edge.
7. Talent acquisition
The recruitment industry goes through hard times: the research indicates that about 75% of companies struggle to recruit effectively. Thus, obtaining quality staff and other business intelligence becomes one of the key M&A advantages for the acquiring company. Here’s why it’s beneficial:
- Access to specialized skills
In some industries, like tech or healthcare, specific skills are particularly valuable. With M&A, the buyer gets direct access to the target company’s talent pool, which not only helps fill crucial skill gaps but can also put the combined company in a prime position for innovation.
- Talent attraction
A financially robust and larger business is often perceived as offering greater stability and growth potential, making it an attractive employer for skilled professionals.
- Better recruitment
The acquired company may have better-organized human resource processes and negotiation tactics. By adopting these best practices, the acquiring company also improves its recruitment strategies.
Business types and tailored M&A benefits
Mergers and acquisitions offer benefits tailored to different business models and industries. For example:
- Tech companies. They leverage M&A to acquire startups, gaining access to cutting-edge technologies, new intellectual property, and talent for rapid growth and advancement. For example, Facebook’s acquisition of Instagram in 2012 allowed the social media giant to incorporate Instagram’s popular photo-sharing features, expanding its user base.
- Manufacturing companies. They use M&A to expand their supply chains and get better production or distribution facilities. For example, in 2015, German manufacturing giant Bayer acquired Monsanto to expand its product portfolio and integrate Monsanto’s global supply chain.
- Pharmaceutical companies. They use M&A to speed up their research and development. They do this by acquiring smaller biotech firms that have promising new drugs in development. This helps the larger company offer more effective treatments. For example, Johnson & Johnson’s acquisition of Actelion in 2017 enabled it to enhance its portfolio in pulmonary arterial hypertension treatments.
- Retail companies. They focus on market penetration through acquisitions of regional retail chains, strengthening their brand presence and attracting diverse customer segments. For example, Walmart’s acquisition of Jet.com in 2016 aimed to improve its e-commerce presence and reach a wider online customer base.
- Financial institutions. They enhance their service portfolios by acquiring fintech startups. This allows them to stay competitive through the integration of digital banking solutions and innovative financial services. For example, JPMorgan Chase’s acquisition of WePay in 2017 allowed the bank to enhance its payment processing capabilities, integrating WePay’s technology into its services.
- Startups. They grow rapidly by acquiring established businesses instead of building them from scratch. With M&A, they can access new markets, customer bases, and experienced teams in a matter of months. For example, when Airbnb acquired HotelTonight in 2019, it quickly expanded its offerings to include last-minute hotel bookings, tapping into a new segment of travelers.
- Large corporations. They streamline operations through consolidation, eliminating competition and achieving economies of scale. They also diversify into new markets to reduce dependency on specific sectors. For example, the merger of Dow Chemical and DuPont in 2017 resulted in DowDuPont, creating a chemical giant with diverse product lines.
Key takeaways
M&A integration offers a variety of benefits, including:
- Synergies
They are achieved through cost reduction and revenue enhancement.
- Economies of scale
It’s achieved through large-scale production, access to capital, and enhanced bargaining power.
- Market expansion
M&A facilitates internal and external growth, offering diversification, expanded distribution capacities, greater brand recognition, and potential tax benefits in new markets.
- Increased market share
Merging companies in the same industry result in a larger market share, leading to increased revenue and a competitive edge.
- Risk diversification
M&A allows for industry and product/service diversification, spreading risk across different sectors and revenue streams.
- Competitive edge
Consolidation through M&A reduces competitive threats.
- Talent acquisition
M&A enables access to specialized skills, attracts top talent, and improves recruitment strategies.
