Raksha Singh, Amity University, Kolkata
INTRODUCTION
Creating value is the primary objective of mergers and acquisitions (M&A). This involves enhancing the overall economic worth of the combined entity beyond the sum of the two separate companies.
Synergy is the most prevalent driver of value creation. Synergy refers to the additional benefits that arise when two companies merge or one acquires another. There are two principal types of synergies: cost synergies and revenue synergies. Cost synergies entail reducing expenses by eliminating redundant functions, optimizing operations, or leveraging economies of scale. Revenue synergies involve boosting sales by merging products or services, entering new markets, or enhancing customer relationships.
M&A can also create value through financial restructuring. For instance, an acquiring company might enhance its financial standing by acquiring a target company with a lower cost of capital or a more favourable tax situation. Additionally, M&A can enable companies to achieve strategic objectives that might be unattainable independently. For example, a company might acquire a competitor to increase market share, a supplier to secure raw materials, or a distributor to extend its reach. However, value creation through M&A is often challenging. Various obstacles can hinder a deal, such as overpaying for the target company, integration difficulties, or unforeseen cultural differences. Overpaying for a target company can erode potential value as the anticipated benefits may not offset the premium paid. Integration difficulties, including aligning different corporate cultures, systems, and processes, can lead to inefficiencies and conflicts. Unforeseen cultural differences can create significant barriers to a smooth integration, affecting employee morale and productivity.
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