Coming on the back of a powerful surge in the deal activity in 2021, mergers and acquisitions in India have bucked a frail global trend, in recent months.
A large pool of potential consumers for companies looking to expand into new markets, and abundant cash reserves, among other things, have bumped up deal volumes.
In turbulent times, organic expansion and cost cutting don’t pack a hefty punch for driving market growth: Buying growth may be a superior strategy. Stronger businesses frequently gain market share at the expense of weaker hands amid economic downturns. With deep financial stress facing weaker players, post pandemic, takeover opportunities abound for companies and private equity firms looking to strengthen a business’s standing in the competitive landscape.
Businesses and private equity firms choose to acquire other businesses for a multitude of reasons, including gaining access to new markets, new or complementary skills; beating competition; boosting the bottom line; and becoming more efficient.
Boost your bottom line, gain efficiencies & beat the competition
Trends in digitization have inspired a host of companies to acquire and integrate new technologies. Moreover, takeovers have allowed significant cost savings by eliminating duplicate functions and consolidating operations. Similarly, foray into new products and services have opened up opportunities for increased sales and market share growth. In addition, the acquired company's products or services may complement those of the acquiring company, increasing its competitive edge.
Underpinning all mergers and acquisitions strategized by investment banking firms are the economies of scale. Potential for economies of scale in a vertical merger is, however, lower than in a horizontal merger -- a vertical merger would not benefit from technical economies of scale (Vertical integration is a merger of two or more firms at different stages of production merge).
By acquiring another company, a firm can instantly add new products or services to their portfolio, giving them a leg up on the competition. Additionally, takeovers and mergers can help companies eliminate weaker players in their industry, further solidifying their position at the top.
A note of caution, however, is warranted.
There are kinks that have to be worked out before embarking on the road to financial wellness. M&A disasters happen when companies overpay for their target firms. “Strategic” deals are often grandiloquence, dressing up M&A transactions that don’t make financial sense. Very often, teams working on the deal in the initial stage are not in charge integrating businesses. For the acquisition to succeed, teams should not change and comprehensive responsibilities must be assigned for planning and implementing all phases of the deal.
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