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Advantages and Disadvantages of Mergers and Acquisitions

May 6, 2022

Merging two companies or acquiring a business can bring several benefits to those involved. However, it is crucial to note that certain drawbacks may arise with mergers and acquisitions that require careful consideration. This article discusses some of the advantages and disadvantages of mergers and acquisitions.

What are 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.

Advantages of Mergers and Acquisitions

The following are a few of the advantages of mergers and acquisitions;

Improved Economic Scale

A new large business or a business that has acquired another company generally has increased needs in terms of materials and supplies. And when a business has high demands, it means it has a high purchasing power. A high purchasing power enables a company to negotiate bulk orders, and when a business is able to negotiate bulk orders, it results in cost efficiency. In other words, by purchasing supplies and materials at higher volumes, a company is able to improve its scale.

Enhanced Distribution Capacities

A merger or an acquisition may result in a business expanding geographically, which would, in turn, increase the business's ability to distribute goods or services to more people.

Increased Market Share

When two businesses operating in the same industry become one, or when a company acquires another company operating in the same industry, the new or larger company gets to enjoy a greater market share.

More Financial Resources

When two companies merge or when a company acquires another company, it results in two companies pooling their financial resources, and that can result in, among other things, a business being able to reach more customers because of a larger marketing budget.

Disadvantages of Mergers and Acquisitions

The following are some of the disadvantages of mergers and acquisitions;

Job Losses

When two companies doing the same activities come together and become one company, it might mean duplication and over capability within the company, which might lead to retrenchments.

Diseconomies of Scale

Sometimes mergers and acquisitions can result in diseconomies of scale. For example, this can happen if the owner of the new larger company lacks the control required to run a bigger company.

Higher Prices

Although not something that affects the business, it is worth mentioning. A great market share is good for a business, but it can be bad for consumers. When a company has less competition and greater market share, consumers tend to pay more for products or services. 

Lost Opportunities

Lastly, the process of merging two companies or acquiring a company takes time and requires energy and money. The energy, time, and funds that go into the merger or acquisition process could mean that the businesses involved give up other potential opportunities.

Seek the Legal Help of an Experienced Santa Clara County Business Law Attorney

To learn more about the advantages and disadvantages of mergers and acquisitions so you can make an informed decision, contact our business law attorneys at SAC Attorneys LLP

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