The principal benefits from mergers and acquisitions can be listed as increased value generation, increase in cost efficiency and increase in market share.
Benefits of Mergers and Acquisitions are the main reasons for which the companies enter into these deals. Mergers and Acquisitions may generate tax gains, can increase revenue and can reduce the cost of capital. The main benefits of Mergers and Acquisitions are the following:
Greater Value Generation
Mergers and acquisitions often lead to an increased value generation for the company. It is expected that the shareholder value of a firm after mergers or acquisitions would be greater than the sum of the shareholder values of the parent companies. Mergers and acquisitions generally succeed in generating cost efficiency through the implementation of economies of scale.
Merger & Acquisitionalso leads to tax gains and can even lead to a revenue enhancement through market share gain. Companies go for Mergers and Acquisition from the idea that, the joint company will be able to generate more value than the separate firms. When a company buys out another, it expects that the newly generated shareholder value will be higher than the value of the sum of the shares of the two separate companies.
Mergers and Acquisitionscan prove to be really beneficial to the companies when they are weathering through the tough times. If the company which is suffering from various problems in the market and is not able to overcome the difficulties, it can go for an acquisition deal. If a company, which has a strong market presence, buys out the weak firm, then a more competitive and cost efficient company can be generated. Here, the target company benefits as it gets out of the difficult situation and after being acquired by the large firm, the joint company accumulates larger market share. This is because of these benefits that the small and less powerful firms agree to be acquired by the large firms.
Gaining Cost Efficiency
When two companies come together by merger or acquisition, the joint company benefits in terms of cost efficiency. A merger or acquisition is able to create economies of scale which in turn generates cost efficiency. As the two firms form a new and bigger company, the production is done on a much larger scale and when the output production increases, there are strong chances that the cost of production per unit of output gets reduced.
An increase in cost efficiency is affected through the procedure of mergers and acquisitions. This is because mergers and acquisitions lead to economies of scale. This in turn promotes cost efficiency. As the parent firms amalgamate to form a bigger new firm the scale of operations of the new firm increases. As output production rises there are chances that the cost per unit of production will come down
Mergers and Acquisitions are also beneficial
- When a firm wants to enter a new market
- When a firm wants to introduce new products through research and development
- When a forms wants achieve administrative benefits
- To increased market share
- To lower cost of operation and/or production
- To gain higher competitiveness
- For industry know how and positioning
- For Financial leveraging
- To improve profitability and EPS
An increase in market share is one of the plausible benefits of mergers and acquisitions. In case a financially strong company acquires a relatively distressed one, the resultant organization can experience a substantial increase in market share. The new firm is usually more cost-efficient and competitive as compared to its financially weak parent organization.
It can be noted that mergers and acquisitions prove to be useful in the following situations:
Firstly, when a business firm wishes to make its presence felt in a new market. Secondly, when a business organization wants to avail some administrative benefits. Thirdly, when a business firm is in the process of introduction of new products. New products are developed by the R&D wing of a company.
Employee Benefits under Mergers and Acquisitions in US
The 'Employee Retirement Income Security Act' was enacted in 1974. It is also known as ERISA. Since then programs for employee benefit have been a major component of the balance and income statements of US business organizations. Current law promulgations have attached supreme importance to the presence of post retirement pension schemes and welfare benefit schemes as a part of corporate obligation. As a result employee benefit programs are affecting the viability of mergers and acquisitions in the USA.
Expenses accruing due to employee benefit programs may not be fully reflected in a company's balance sheet. Some employee benefit obligations may arise out of a change in the corporate structure of a firm. Retirement income schemes and benefit plans may vary from company to company. Companies going for mergers and acquisitions strive to iron out the internal differences to maintain a specified level of employee satisfaction.