As part of business strategy, management need to decide whether the firm should grow naturally (commonly called organic growth) or in the form of going outwards to acquire or merge with other businesses. This is called inorganic growth which normally takes the form of Mergers and Acquisitions (M&A) exercise.
This article seeks to discuss the first step of such Merger and Acquisition move namely the purpose/justifications/reasons for doing so.
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JUSTIFICATION FOR M& A EXERCISE
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- Economies of scale as fixed costs are shared over a larger output and common costs may be reduced;
- Economics of vertical integration-through vertical mergers, large manufacturing companies can gain control over the production process by expanding back towards the output of the raw materialsand forward to the ultimate customer. One way to achieve this is to merge with a supplier or a customer. Vertical integration makes co-ordination and administration easier,
- Strength in size where complementary resources may be pooled together for more effective competition;
- Liquidity, where a company with surplus cash may make acquisitions to produce growth and synergy, or a company may acquire another company which is cash-rich through share swaps to gain control and use the surplus cash; or
- Growth which is substantially higher than organic growth.
- Diversification program to broaden their earning base and reduce risk.
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See other articles on: Difference Between A Merger & An Acquisition(M&A) , Types of Mergers & Acquisitions Common Pitfalls in Mergers & Acquisitions
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