When a business discovers a gap in its service or product offerings, or realizes they have a weakness in comparison with a competitor, mergers and acquisitions can help strengthen the firm. Of course, there are several things you’ll need to understand here.
When it comes to complexity, mergers are usually the more difficult to manage. Acquisitions are a bit more straightforward, and often result in the acquired company largely retaining its own identity, while being a subsidiary of the larger firm. In a merger, the less dominant firm is completely subsumed by the dominant firm, usually resulting in a brand new company.
There are many reasons for mergers and acquisitions, as well. For instance, one of the most common reasons is to diversify a firm’s product offering or to hedge against market risk. Another reason is to reduce foreign exchange risk or the risks involved in a recession.
Sometimes they are more concerned with improving the less dominant company’s financial position by leveraging the dominant firm’s connections or assets. There are also tax reasons for mergers and acquisitions, as well as the possibility of creating operational efficiency advantages.
With that being said, there are definite risks with mergers and acquisitions. For instance, if a merged company were to suffer a significant financial loss soon after joining, it might create the need to “spin off” the losing company. Another risk is that the corporate cultures of the two firms involved will not be good matches, or will clash completely. Finally, there’s the possibility that a merger/acquisition will create a monopoly, which can harm the public.
These are just a few of the things that must be understood where mergers and acquisitions are concerned. The process can be incredibly complex depending on the companies involved. For more information, contact Bear River Financial.