Merger And Acquisition (M&A) -
A Horizontal And Vertical Growth Strategy

Mergers and Acquisitions are also known as M&A. Companies Act 2013, define merger as the collaboration of two or more companies to form a new company. Merger is defined as the combination of two or more separate firms into a single firm. The process of Merger could either acquire identity or provide a complete new identity. Acquisition, on the contrary, is a process of selling one company to another. When one company decides to amalgamate with another company and setup itself as the new company, this process is called acquisition.

Merger and Acquisition have been identified as important features of corporate structural changes.

Business merger and acquisition (M&A) is considered as an effective strategy for both horizontal and vertical growth and expansion. Companies normally merge to adjust its excess capacity, increase market access, acquire new technology more quickly than it could be built with time, develop new scope for businesses, and improve the targeted company's performance. Merger and acquisition is strategically done to increase company's stock price and make it global.

Here it is to be noted that the key reason behind merger and acquisition might be anything from survival, sustaining stiff competition, obtain new technology, diversify market base, acquire or retain crucial employees having deep critical knowledge, skill, customer relationship etc. Whatever the reason may be merger and acquisition is adopted only when it is presumed that post merger and acquisition is successful.

Post merger and acquisition, the new combined entity, can successfully achieve the following if the integration efforts go well.

1. Acquiring New Customer Base:

This is almost always a basic factor in strategic acquisitions. Companies buy another entity in the same trade but in a different geographical location. They integrate to get market presence, create brand awareness, and increase market momentum.

2. Obtaining Operating Leverage:

Acquisition is also done to obtain operating leverage. When a company is not fully utilizing its operating capacity, it may acquire a small unit in the same trade. the acquired company's plant is sold and staff are let go, but the new customers are served more cost effectively.

3. Capitalization Of Companies Strengths:

When two great companies merge, their strengths in different areas get multiplied may folds overnight and get the benefit of many of those strengths. As such, acquisition is considered as a very powerful business accelerator. Customer base, management skill, production capacity, sales and distribution channels, brand recognition etc are some strength that can get further boosted post acquisition.

4. Blanket Weakness or weaknesses:

Business merger and acquisition is also helpful to cover weakness. It is not necessary for an entity to have all positives; there might also be some negative aspects like customer concentration, product concentration, weak product line, lack of management and technical knowhow, poor sales and marketing etc. which it might find difficult to rectify at individual level.

5. Buying A Low Cost Supplier:

Business merger and acquisition is often found to be helpful at improving profit margins rather than growing revenues. This stands true for a company whose product is composed of different component manufactured and supplied by other suppliers. One way to improve corporate profitability is to acquire one of those suppliers. Overall cost control, availability of supply, and greater value-add to your finished product can be achieved with merger and acquisition.

6. Increasing Product Line:

Business merger and acquisition is also found to be done for increasing the existing product line of an entity. Adding new products to product line improves the profitability and revenue growth of a concern. By taking advantage of the existing sales and distribution channel, the buying process can be simplified by providing customers the advantage of one stop shopping.

7. Technological Competency:

Acquiring new technology through acquisition is often found to be an excellent growth strategy. For smaller firms where the R&D costs are generally lower, merger and acquisition can have a huge impact on the ultimate success of a product.

8. A New Scale And Access To Capital Markets:

Based on the notion of 'The Bigger The Better', large companies are always considered to be safer for investments. Some companies make acquisitions in order to get big enough to attract public capital in the form of an IPO or investments from Private Equity Groups.

9. Protecting Customer Base From Competition:

Studies showed that customers have the tendency to switch for better product or services. With business merger and acquisition the likelihood of the customer defecting to a competitor drops significantly. Multiple products and services at reasonable rate provided to the same customer dramatically improve retention rates.

10. Remove Barriers:

For example when two completely separate firms say for example, IT Firm and Law Firm, comes under one umbrella through merger and acquisition the result will firstly remove barrier for new entry into market and secondly for the clients it becomes convenient for them as they don't have to deal with two different entity. Whenever a new product or service is to be launched, it has to go through many process and legal formalities. For the client, the whole thing gets wrapped into a package thus making the complex process simplified.

Many firms have adopted corporate growth strategies through acquisition. Business merger and acquisition is done through presumptions that fit into their well-defined acquisition criterion. Successful business merger and acquisition is reflected through multiplied financial valuation, integration of strength and achievement of strategic performance.