Business owners of all backgrounds have a common goal in mind: to make more money. Of course, there may be secondary motives as well, such as helping their local community. However, earning a profit is a reasonable priority for many businesses. To achieve this goal, some companies try to expand their operations and increase their capacity do more business. That is where the potential for a merger or an acquisition comes in.
Mergers and acquisitions are a great tactic used by various companies of different backgrounds. Sometimes, the justification behind this strategy may be to make bigger profits or expand the company resources. At other times, the mergers and acquisitions might be the result of a prime opportunity to create value. Whatever the case is, both options come with numerous managerial and financial benefits.
Larger organizations may look at a potential business and decide that combining operations may be good for business. As a result, new doors may open up and the opportunity to make more money arises. Here are six reasons for why mergers and acquisitions may be necessary.
1. Diversifying Operations
A company may choose to pursue a merger or acquisition with another business because of opportunity. Some businesses may want to capitalize on a new market, or their services may need expanding to a different industry. With mergers and acquisitions, a partner may have the potential to grant access to these markets through their established presence.
By formalizing a merger or acquiring the company in question, a diversified portfolio can be reached. Not only can this introduce new demographics to market towards, but risk can also be mitigated as well. By killing two birds with one stone, a company may be able to reach goals faster!
2. Asset Acquisition
Corporate strategies are usually implemented with the most expert calculations in mind. Some may range from increasing profits, while others directly have to do with acquiring assets. Through normal means, specific assets may not be able to be garnered through conventional methods.
Should a company decide to take matters into their own hands, an acquisition can allow them to do just that. By following through with an acquisition, these assets can legally be acquired. For example, the ability to access newer technologies for an IT department may be the impetus to pursue an acquisition.
3. Creating More Value
Two companies in the same market may, at some point in their lifespan, reach a plateau. Even though most operations have been successful, there will come a time where things slow down. As a result, it might be wise for these two companies to join their operations together. Through this, more value can be created.
The benefits of a merger are much more present in comparison to if they were to stand apart. Cost structures can be wholly reduced, and the elimination of certain costs can happen as well. Most of these value-proven strategies help to reach economies of scale in the long run.
As mentioned previously, many mergers or acquisitions are pursued in order to reach new markets. Sometimes, these markets may not be readily accessible due in part to their location. Should a company decide to use a merger or acquisition with another business, expansion can be possible.
Geographical expansion is a big motivation for companies to reach new quotas in their operations. By expanding services to a niche market in another city or country, profits and recognition are sure to be made. If growth is a goal for the long term, then a merger or acquisition may be what is needed.
Another big reason for companies to merge, or for one to acquire another, comes down to cross-selling. Sometimes, established businesses may slow down when it comes to selling their products. Should a company want to spur short term growth, another business in a similar market may merge with them.
Not only does this allow for more profit to be made, but newer customers can also be made as well. Two companies combining their operations will inevitably result in more choice for the consumer. It is a powerful way to not only increase revenue, but also to create more value out of the business too.
6. Cash Flow
Above all else, the opportunity to generate increased profits will be a prime reason to pursue a merger or acquisition. Sometimes, one business may have a successful cash flow that is sustained for a long period of time. Strategically, this may be a reason to acquire the company in totality.
It might seem like a corporate takeover, in order to spark growth, but it is more common than one may realize. Many companies are essentially bought for their stream of cash flow, so that profits can be pursued. Making money, at the end of the day, is what all companies are striving towards!