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What are the advantages and disadvantages of mergers and acquisitions?

A:

Quick Answer

Mergers and acquisitions may bring significant financial benefits if all goes well, but result in financial losses and a less productive workforce if they do not work as planned. Mergers and acquisitions can help companies tap into new markets, cut down on the costs of research and development and expedite growth. However, they may be costly to implement and lead to reduced worker productivity and failure to meet stakeholder expectations.

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What are the advantages and disadvantages of mergers and acquisitions?
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Full Answer

Mergers and acquisitions, like most corporate transactions, may be beneficial or harmful. Mergers are best evaluated on a case-by-case basis. They may be performed either to benefit the public or just top-level executives and shareholders: The underlying motive ultimately determines the success of the merger and the overall reputation of the resulting organization. Mergers may produce significant benefits, primarily in the areas of business growth, exposure and economic gain. Mergers may expose firms to larger networks, and in turn help to grow business. When companies combine resources, including finances and personnel, they are often better equipped to conduct research and development. However, they may also result in job losses, inflate prices for certain items and reduce consumer choices for certain products. Acquisitions, likewise, carry risks and benefits. They may help companies grow quickly and build a strong market presence. However, they may produce financial fallout, be expensive to carry out and produce integration problems between the two combining organizations.

When it comes to surviving in the business world, growth and visibility are paramount for success. When a merger goes as planned, the two joining companies combine to create a more powerful and efficient organization than either could achieve on its own. Successful mergers also allow firms to realize greater profits and, in turn, dedicate more funds and personnel for conducting research and development. Another potential advantage of mergers is that they can build impressive economies of scale: This is particularly true in the case of horizontal mergers. Finally, mergers can limit duplicated efforts by eliminating market competition between two previously competitive organizations and enable market regulation. But, as with other financial activities, mergers carry risks too. They may leave consumers with fewer choices for products, cut jobs for employees, and create diseconomies of scale.

Acquisitions, like mergers, may create significant benefits when all goes well. However, they carry significant risks too. Organizations are often drawn to the concept of acquisition because it is one of the most time-efficient growth strategies. Successful acquisitions allow firms to gain instant access to resources and knowledge they previously lacked. Simultaneously, they gain immediate exposure to new product markets, a larger existing consumer base and the opportunity to reach a wider target audience while cutting down on risks and financial costs of new product development. Acquisitions may also help companies meet and even exceed stakeholder expectations. When facing pressure to meet certain expectations for returns and sales, acquisitions can help reach those goals much faster. Lastly, acquisitions may remove market barriers, and save companies the time and financial resources required for tapping into new markets. Acquisitions, however, may produce consequences too. They may lead to financial fallout due to disruption of work flow and higher than anticipated cost of acquisition and create a less productive workforce if employees resent the acquisition and fail to see eye-to-eye.


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