When businesses consolidate or one business acquires another, this process is referred to as mergers and acquisitions. Working to ensure a smooth transition is critical in avoiding merger and acquisition problems. In this article, Apolo Lawyers (Tel: (+84) 903.419.479) will discuss how a merger and acquisition can be beneficial. 

Merger and acquisition are becoming more and more popular all over the world. So, identifying the pros and cons of mergers and acquisitions is very important for investors to consider before entering into an M&A transaction. 

1. What are the mergers and acquisitions? 

Mergers and acquisitions are two words that are usually used synonymously. However, these two words have different meanings. In a merger transaction, two separately owned companies become one jointly owned company. On the other hand, an acquisition happens when one company, usually a bigger company, takes over another company, usually a smaller company, and runs the establishment with its identity.

Read more: Why is legal due diligence important?

2. Difference between mergers and acquisitions: 

In an acquisition, the company acquiring the other company typically maintains its business name, legal structure and operations. In a merger situation, the companies involved may choose a new name that better reflects the vision of the new, joined company, or they may choose to use one of the existing company names to maintain brand awareness and loyalty.

From a legal standpoint, the company acquired by another company essentially ceases to exist under its previous name and as its own legal entity. It is absorbed by the acquiring company, and if the acquired company sold or traded stock, the stock would be owned and managed by the acquiring company.

Although the two terms are often used interchangeably, certain situations are mergers and others are acquisitions, depending on the terms of the business deal. If a company does not wish to be taken over by another, this situation is regarded as an acquisition and may be referred to as a hostile takeover. The difference often presents in the way the merger or acquisition is presented to the employees, board of directors and shareholders. However, many merger and acquisition situations are mutually beneficial and allow companies to grow their presence and expand their reach.

Read more: Mergers and Acquisitions: What is the difference?

3. Advantages of mergers and acquisitions. 

3.1. M&A is the fastest way to achieve growth:

There is no other form of corporate activity that can grow your top line of company as fast as a merger or acquisition.

This is why the biggest companies of the world unashamedly use M&A as a means for growth, particularly when it looks as though growth in their existing business is shuddering to a halt. Growth is therefore the most common reason for undertaking M&A, and underpins most of the other motives.

3.2. M&A enables companies to enter new markets:

In a similar vein to growth, there may be no better way to enter a new market than to acquire a company already successful in that market.

This goes for almost every industry. Merging with or acquiring a company in an attractive market avoids most of the cultural, regulatory, and commercial issues that can beset companies entering new markets without through greenfield ventures.

3.3. M&A enables companies to change their business model:

M&A can also be used to transform a company. The example of Nokia is a case in point. Though starting out as a paper mill, it acquired a cableworks in the 1920s.

A merger between this cableworks company and a television manufacturer in the 1970s was cell phone division of the genesis of Nokia. When the cell phone devices division was sold to Microsoft in 2013, Nokia acquired Alcatel-Lucent to transform itself (yet again) into a networks provider.

3.4. M&A can be used to acquire new talent:

‍Acquiring for talent (referred to in some quarters as acqui hiring is most common in high value added industries, such as technology, engineering, or advertising.

Companies like Google, Apple, and Facebook are all considered pioneers in acqui hiring have made acquisitions in the past decade of small startups principally to get the companies founders onto their roster.

An example of this came in 2017 when Google acquired Halli labs, whose founding teams were considered the best AI and ML engineers in the world. 

3.5. M&A can be used to generate synergies:

‍Synergies are what happens when two companies come together and amount to more than the sum of their parts.

This usually occurs through operational synergies (i.e. dropping some duplicated operational costs that arise as a result of the deal) or growth synergies (i.e. where two companies with complementary products join forces to create an enhanced range of products and services).

4. Disadvantages of mergers and acquisitions. 

4.1. Raises prices of products or services

A merger results in reduced competition and a larger market share. Thus, the new company can gain a monopoly and increase the prices of its products or services.

4.2. Creates gaps in communication

The companies that have agreed to merge may have different cultures. It may result in a gap in communication and affect the performance of the employees.

4.3. Creates unemployment

In an aggressive merger, a company may opt to eliminate the underperforming assets of the other company. It may result in employees losing their jobs.

4.4. Prevents economies of scale

In cases where there is little in common between the companies, it may be difficult to gain synergies. Also, a bigger company may be unable to motivate employees and achieve the same degree of control. Thus, the new company may not be able to achieve economies of scale.

To learn more about the advantages and disadvantages of mergers and acquisitions so you can make an informed decision, contact Apolo Lawyers via email at contact@apolo.com.vn or Hotline - (+84) 903419479 for the best legal advice and support. 

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