In most cases, there are clear reasons behind mergers and acquisitions (M&A). Participating companies and investors often discuss mergers and acquisitions benefits, which are expected to improve their competitive position and add value for shareholders.
Here are 17 benefits we have seen across industries during our decades of work supporting mergers and acquisitions.
An integrated company can leverage its increased scale to realize cost savings. Examples include negotiating better contracts due to higher procurement volumes, lower costs of shared services supporting more employees, better technology pricing due to a higher number of licenses, devices, and services purchased, sunsetting unnecessary applications, and more. Companies can also realize cost savings from streamlining an integrated organization.
Another frequent benefit of mergers and acquisitions is the ability to increase sales and drive higher top-line revenue. That might be a combination of access to new customer segments, the ability to sell additional products or services, access to additional distribution capabilities, and many other factors.
Improved asset leverage
Mergers and acquisitions offer an opportunity to optimize capital-intensive assets. For example, a company with multiple stores might decide to retain only some of the stores from an acquired company. Manufacturing and pharmaceuticals are other asset-heavy industries with manufacturing or production facilities and research labs. In the technology and operations space, consolidating data centers, physical mail and scanning centres, and archiving facilities offer an opportunity for better asset leverage.
Access to talent
A merger is an opportunity to choose standout talent from both companies and streamline the organizational structure. The integrated company doesn’t need to retain the entire staff from the acquired and acquiring companies. Instead, they can choose the most vital employees from both to join the new organization. Choosing employees requires quick and fair assessment and execution; otherwise, the best employees could leave first because they are uncertain about their future in the integrated organization.
Access to knowledge and innovation
Access to knowledge and innovation is one of the most significant benefits of a merger or acquisition, especially in industries such as pharmaceuticals. It can come in many forms, such as product, process, manufacturing knowledge, or innovative supply-chain management. Putting a price tag on knowledge and innovation can be challenging, but it often offers a competitive advantage.
Risk reduction by diversifying portfolios
Private equity firms and investment funds often reduce risk by acquiring a company in a different industry, enabling them to diversify their portfolio. For example, investors who had travel businesses as a part of their portfolio saw this industry struggling during the initial years of the pandemic. For investors with diverse portfolios, better performance in other sectors, such as tech-enabled or digital services, offset the struggling businesses.
Value chain integration
Sometimes companies prioritize select value chain elements over revenue and profit. By acquiring a company with complementary value chain elements, an integrated company may reap additional benefits by expanding its presence across the entire value chain. For example, a cannabis company focused on researching, cultivating and processing a product might decide to acquire a player with strong distribution capabilities to bring its product directly to the end customers.
Improved brand reputation
A merger or acquisition of a company with a strong overall brand can significantly benefit the acquiring company. A company with a weaker brand can also benefit from the acquiring company’s brand. In 2000, TD Bank purchased Canada Trust, which had an excellent reputation for customer service. The integrated company was named TD Canada Trust to leverage the positive customer reputation of the Canada Trust organization.
Access to new markets
Cross-geography deals enable companies to access new markets. These markets can be based on global or regional presence or different client segments, such as a commercial insurance provider entering a small business insurance market. Access to new markets will usually drive sales and increase revenue.
Access to new channels
When a company is limited to select channels and wants to increase its reach, it can seek a merger with or acquisition of a company specializing in other channels. This enables the integrated company to use a wider range of channels to reach a broader customer base. The combined entity will be able to better cater to the preferences of different demographics by unlocking access to new customer segments.
Access to new vendors
Access to new, better vendors is another benefit of mergers and acquisitions. The acquiring company can leverage an acquired company’s established vendor relationships across the entire integrated company. In some scenarios, both companies might be too small to work with a particular vendor independently, but as an integrated company, they can do so. In addition, access to trusted vendors is valuable when entering new geographies and markets.
Access to best practices
Considering the acquired company’s best practices is important when building an integrated operating model. Access to an acquired company’s best practices is a significant benefit of mergers and acquisitions. These best practices can relate to onboarding employees, supply-chain management processes, a superior CRM system, a more efficient and effective decision-making approach, or other areas. Research and development, sales and marketing, operations, HR, and finance all have best practices that could benefit an integrated company.
New product or service opportunities
A merger or acquisition can unlock an opportunity to offer an entirely new product by combining products or services offered by each company. Technology-enabled industries often have products or services that the acquired company can combine into one. For example, the company can create a platform solution that offers clients single access to all the services provided by both organizations. Large tech giants like Microsoft or Google are known for folding most of their acquired acquisitions directly into their platforms, increasing value and convenience for clients.
Reduction in competition
If a company acquires a competitor, it will have one less competitor after the integration. However, should a company acquire or merge with a company in an entirely different space, it can find itself facing a new set of competitors.
A merger or acquisition offers a unique opportunity to examine product or service pricing through a new lens. The integrated company may consider pricing insights from the acquiring and acquired companies. The integrated company might increase its price if the acquired company was a competitor. At the same time, there might be opportunities to offer better pricing to the customers if the new, increased scale allows it. As a result, the integrated company can capture a more significant market share.
Organizations typically have different cultures. Sometimes mergers and acquisitions fail because the two companies coming together have incompatible cultures and cannot build bridges. When managed correctly, a merger or acquisition is an opportunity to refresh an existing, stale culture by incorporating the best elements of cultures from both organizations. Mergers can enable companies to build a better, more open, and dynamic culture.
Auxiliary financial benefits
Financial benefits of a merger or acquisition can include tax optimization, such as changes in tax rate via geographical relocation of company headquarters, tax-saving benefits or tax loss carryforwards, improved access to capital, such as the ability to get better interest rates and access to other capital markets, improved working capital management, changes in capital structure, and more. Not all companies have access to these benefits due to the nature of their business.
Hard vs. soft M&A benefits
Hard M&A benefits are tangible and likely to have a real financial impact on the integrated company. Soft benefits are less concrete. While soft benefits might not directly impact revenue, they can improve the integrated company. Hybrid benefits fall in the middle because they combine tangible and intangible benefits.
The table below divides all 17 mergers and acquisition benefits into hard, soft, and hybrid benefits.
- Cost benefits
- Improved asset leverage
- Stronger value chain penetration
- Pricing optimizations
- Revenue benefits
- Auxiliary financial benefits
- Risk reduction through portfolio diversification
- Access to new markets
- Access to new channels
- Access to new vendors
- Access to best practices
- New product or service opportunities
- Access to talent
- Access to knowledge and innovation
- Improved brand reputation
- Reduction in competition
- Culture refresh
These examples have been compiled based on our experience leading numerous M&A and post-merger integration projects. If you are considering a merger or acquisition, we would be happy to discuss how our experienced M&A consulting team can add value to your deal. Reach out to us to find out more.