Mergers and Acquisition Objectives, Types, Pros and Cons

Mergers and Acquisitions (M&A) are strategic financial transactions that involve the consolidation of companies or assets, typically to enhance competitiveness, expand market reach, or acquire specific assets. A merger occurs when two or more companies combine to form a new entity, often aiming for synergies that result in greater efficiency, increased market share, or enhanced product offerings. In a merger, companies often have relatively equal standing and decide to join forces to better position themselves in the market or industry. The resulting entity may adopt a new name and brand identity, symbolizing the unification of the companies.

An acquisition, on the other hand, involves one company (the acquirer) purchasing another company (the target). This transaction does not result in the formation of a new company; instead, the acquired company becomes a part of the acquirer, either as a subsidiary or by being fully integrated. The acquirer gains control over the target company, including its operations, assets, and resources. Acquisitions can be friendly, with both parties agreeing to the terms, or hostile, where the acquirer pursues the target company despite resistance. The primary aim of acquisitions is to achieve strategic objectives such as entering new markets, acquiring technologies, or eliminating competition.

Objectives of Mergers and Acquisition

• Growth and Expansion

One of the primary objectives of mergers and acquisitions is to achieve rapid growth and expansion. Instead of growing organically, which is time-consuming and risky, companies merge with or acquire existing firms to instantly increase their market size, assets, and customer base. Mergers enable firms to enter new geographical markets and business segments without starting from scratch. This objective helps companies strengthen their competitive position, increase revenue, and achieve long-term sustainability in a dynamic business environment.

• Economies of Scale

Mergers and acquisitions help firms achieve economies of scale, which result in cost reduction per unit of output. By combining operations, companies can reduce duplication in administration, marketing, production, and distribution. Bulk purchasing, shared infrastructure, and better utilisation of resources lead to lower operating costs. This objective enhances efficiency and profitability. Economies of scale also allow companies to offer competitive prices and improve their market share, strengthening their overall financial performance.

• Synergy Benefits

Synergy is a key objective of mergers and acquisitions, where the combined value of firms is greater than the sum of their individual values. Synergy may arise in the form of cost savings, increased revenues, technological advantages, or managerial efficiency. Financial synergy includes better access to capital and improved creditworthiness, while operating synergy results from improved production and distribution. Achieving synergy helps firms maximise shareholder value and improve long-term performance.

• Diversification of Risk

Another important objective of mergers and acquisitions is risk diversification. Companies may merge with firms operating in different industries or markets to reduce dependence on a single product or market. Diversification stabilises earnings and protects the firm from fluctuations in demand, competition, or economic downturns. This objective is particularly useful for companies facing declining markets or high business risk. Through diversification, firms achieve more stable cash flows and financial security.

• Increase in Market Power

Mergers and acquisitions are often undertaken to increase market power and reduce competition. By merging with competitors, firms can increase market share, control pricing, and strengthen bargaining power with suppliers and customers. This objective enables companies to dominate the market and improve profitability. However, such mergers are regulated by competition laws to prevent monopolistic practices. Increased market power helps firms maintain leadership and strategic advantage.

• Access to New Technology and Expertise

Companies pursue mergers and acquisitions to gain access to advanced technology, patents, skilled manpower, and managerial expertise. Instead of investing heavily in research and development, firms acquire companies that already possess technological capabilities. This objective helps improve innovation, product quality, and operational efficiency. Acquiring technical know-how strengthens the company’s competitive edge and enables faster adaptation to changing business environments.

• Financial Benefits and Tax Advantages

Financial considerations form a major objective of mergers and acquisitions. Merged entities often enjoy tax benefits, such as set-off of accumulated losses and unabsorbed depreciation. Improved cash flows, better utilisation of financial resources, and enhanced borrowing capacity also motivate mergers. A financially stronger firm can acquire a weaker firm to improve overall financial stability. This objective ultimately aims at maximising shareholder wealth and financial efficiency.

• Survival and Revival of Sick Units

Mergers and acquisitions are frequently undertaken for the revival of sick or weak companies. A financially strong firm may acquire a struggling firm to utilise idle capacity, skilled labour, or brand value. This objective helps prevent business failure, protects employment, and ensures optimal use of resources. For the acquiring firm, it provides an opportunity to expand operations at a lower cost. Revival mergers promote industrial stability and economic development.

Types of Mergers

Merger is a form of corporate restructuring in which two or more companies combine to form a single entity. Mergers are classified into different types based on the nature of business activities, objective of combination, and relationship between the merging firms. Understanding the types of mergers is essential in Advanced Corporate Accounting, as each type has different strategic motives and accounting implications.

1. Horizontal Merger

Horizontal merger takes place between companies operating in the same line of business and at the same stage of production. These firms are usually competitors in the same industry.

The main objectives of a horizontal merger are to:

• Increase market share

• Reduce competition

• Achieve economies of scale

For example, when two automobile manufacturers merge, it is a horizontal merger. Such mergers help firms strengthen market power, reduce duplication of operations, and improve profitability. However, they are closely regulated to prevent monopoly practices.

2. Vertical Merger

Vertical merger occurs between companies operating at different stages of the same production process. It may be either:

• Backward integration (merger with suppliers), or

• Forward integration (merger with distributors or retailers).

The objective of a vertical merger is to:

• Ensure regular supply of raw materials

• Reduce production and distribution costs

• Improve operational efficiency

For example, a manufacturing company merging with a raw material supplier is a vertical merger. It helps in better coordination and control over the supply chain.

3. Congeneric (Related) Merger

Congeneric merger takes place between companies that operate in related industries or have similar technologies, markets, or distribution channels, but are not direct competitors.

The objectives include:

• Expansion of product lines

• Utilisation of common technology

• Marketing and operational synergies

For example, a camera manufacturer merging with a lens manufacturer represents a congeneric merger. Such mergers allow firms to leverage existing strengths and diversify moderately without entering completely unrelated businesses.

4. Conglomerate Merger

Conglomerate merger involves companies operating in entirely unrelated businesses. There is no commonality in products, markets, or technologies.

The main objectives are:

• Diversification of business risk

• Stability of earnings

• Optimal utilisation of surplus funds

For example, a cement company merging with a software firm is a conglomerate merger. These mergers help reduce dependence on a single industry but may pose challenges in management and coordination due to lack of business similarity.

5. Market Extension Merger

Market extension merger occurs when companies selling similar products merge but operate in different geographical markets.

Objectives include:

• Expansion into new regions

• Increase in customer base

• Strengthening market presence

For example, two telecom companies operating in different countries merging together. This type of merger enables firms to enter new markets quickly without setting up new operations from scratch.

6. Product Extension Merger

Product extension merger takes place between companies dealing in related products but not identical ones.

The objectives are:

• Product diversification

• Better utilisation of distribution channels

• Cross-selling opportunities

For example, a laptop manufacturer merging with a tablet manufacturing company. Such mergers allow companies to broaden their product portfolio and meet varied customer needs using existing marketing infrastructure.

7. Reverse Merger

Reverse merger occurs when a private company merges into a public company, allowing the private company to become publicly listed without undergoing an IPO.

Objectives include:

• Quick access to capital markets

• Cost and time savings

• Regulatory convenience

This type of merger is commonly used by small or growing firms seeking public status efficiently.

Types of Acquisitions

Acquisition refers to the process by which one company (the acquiring company) purchases a controlling interest in another company (the target company). Unlike mergers, the acquired company may continue to exist as a separate legal entity. Acquisitions are classified into various types based on the nature of control, relationship between companies, and mode of acquisition. Understanding these types is important for analysing corporate restructuring and accounting treatment.

1. Friendly Acquisition

Friendly acquisition takes place with the consent and cooperation of the target company’s management and board of directors. The acquiring company negotiates terms, price, and conditions mutually.

Objectives include:

• Smooth transfer of control

• Better integration of operations

• Minimal resistance from stakeholders

Friendly acquisitions are less disruptive and usually beneficial to both companies, leading to strategic synergy and value creation.

2. Hostile Acquisition

Hostile acquisition occurs when the acquiring company takes control against the wishes of the target company’s management. It is usually done by directly purchasing shares from shareholders.

Characteristics:

• Management opposition

• Use of aggressive takeover strategies

• Possible legal and regulatory challenges

Although controversial, hostile acquisitions can improve efficiency by replacing ineffective management.

3. Horizontal Acquisition

Horizontal acquisition involves the acquisition of a company operating in the same industry and at the same stage of production.

Objectives include:

• Reduction of competition

• Increase in market share

• Economies of scale

For example, one telecom company acquiring another telecom company. Such acquisitions are regulated to prevent monopolistic practices.

4. Vertical Acquisitio

Vertical acquisition occurs when a company acquires another company operating at a different stage of the production or distribution process.

Types:

• Backward acquisition (supplier)

• Forward acquisition (distributor)

This type improves supply chain efficiency, reduces dependency, and lowers operational costs.

5. Congeneric (Related) Acquisition

In a congeneric acquisition, the acquiring and target companies operate in related industries or share similar technologies, customers, or distribution channels.

Objectives:

• Product line expansion

• Technological synergy

• Market development

This allows moderate diversification with manageable risk.

6. Conglomerate Acquisition

Conglomerate acquisition involves companies from entirely unrelated businesses.

Objectives include:

• Diversification of business risk

• Stable earnings

• Efficient use of surplus funds

For example, a manufacturing firm acquiring a financial services company. Such acquisitions reduce industry-specific risk.

7. Asset Acquisition

An asset acquisition involves purchasing specific assets of another company rather than its shares.

Features:

• Selective acquisition

• Avoidance of unwanted liabilities

• Flexible structure

This type is preferred when the acquirer wants only certain assets without assuming full control.

8. Share Acquisition

In a share acquisition, the acquiring company purchases a majority of shares of the target company.

Features:

• Control through ownership

• Target company retains legal identity

• Common form of acquisition

This is the most common method of acquiring control.

Special Forms

• Leveraged Buyout (LBO)

Involves the acquisition of another company using a significant amount of borrowed money (bonds or loans) to meet the cost of acquisition. The assets of the company being acquired are often used as collateral for the loans.

• Management Buyout (MBO)

An acquisition type where a company’s existing managers acquire a large part or all of the company.

Pros of Mergers and Acquisition

• Growth Acceleration

M&A can provide immediate access to new markets and customer bases, accelerating growth more rapidly than organic expansion methods.

• Synergies

Combining operations can lead to cost reductions, increased revenue, and improved efficiency through the integration of best practices, technologies, and resources.

• Economies of Scale

Mergers often result in economies of scale, reducing the cost per unit of production or operation due to larger volumes, which can enhance competitiveness and profitability.

• Diversification

Acquiring companies in different industries or sectors can spread risk across a broader portfolio, reducing vulnerability to industry-specific downturns.

• Market Power

M&A can increase market share and bargaining power with suppliers and customers, potentially leading to better terms and improved margins.

• Access to Technology and Talent:

Acquisitions can provide quick access to new technologies, patents, and skilled employees, facilitating innovation and improving competitive positioning.

• Tax Benefits

Certain mergers and acquisitions can yield tax advantages, such as the utilization of tax losses and more efficient corporate structures.

• Overcoming Entry Barriers

Entering a new market through M&A can overcome barriers to entry such as stringent regulations, high startup costs, and competition.

• Restructuring Opportunities

M&A allows companies to restructure their operations and portfolios more efficiently, focusing on core competencies and divesting non-core assets.

• Financial Leveraging

Acquisitions can be used to leverage the financial strength of the combined entities, improving access to capital and potentially leading to better investment and growth opportunities.

• Strategic Realignment

Companies can use M&A to strategically realign their business focus, shedding less profitable or non-core operations and reinforcing areas with higher growth potential.

• Elimination of Competition

By acquiring or merging with competitors, companies can reduce competition in the market, which can lead to increased market share and pricing power.

Cons of Mergers and Acquisition

• High Costs

The process of merging with or acquiring another company can be extremely costly. Expenses include advisory fees, legal fees, and other transaction costs. Additionally, the premium paid to acquire a company can be substantial.

• Integration Challenges

Combining two companies often involves significant integration challenges, including merging different corporate cultures, systems, and processes. These challenges can lead to disruptions in operations and employee dissatisfaction.

• Overvaluation Risk

There’s a risk of overpaying for the company being acquired due to overestimation of synergies or underestimation of integration costs, potentially leading to a significant loss of value.

• Regulatory Hurdles

Mergers and acquisitions can face intense scrutiny from regulatory bodies concerned about antitrust laws and the impact on competition. Obtaining approval can be a lengthy and uncertain process.

• Loss of Key Employees

The uncertainty and changes brought about by M&A activities can lead to the loss of key employees who may feel insecure about their future roles or disagree with the direction of the newly formed entity.

• Cultural Clashes

Differences in corporate culture between the merging companies can lead to conflict, reduced morale, and a decline in productivity, undermining the benefits of the merger or acquisition.

• Debt Burden

Acquisitions often involve taking on significant debt to finance the deal. This increased leverage can put a strain on cash flow and limit future investment opportunities.

• Customer and Supplier Reactions

Customers and suppliers may react negatively to the news of a merger or acquisition, fearing changes in their relationship with the company or in the quality of products and services.

• Dilution of Shareholder Value

In cases where the acquisition is financed through the issuance of new shares, existing shareholders may experience dilution of their ownership percentage and, potentially, a reduction in earnings per share.

• Failure to Achieve Synergies

The anticipated synergies from a merger or acquisition may fail to materialize to the extent projected, whether due to operational challenges, higher-than-expected integration costs, or cultural issues.

• Reputation Risks

If the merger or acquisition is perceived negatively by the public or fails to achieve its goals, it can lead to reputational damage for the companies involved.

• Distraction from Core Business

The significant effort required to complete and integrate an M&A transaction can distract management from focusing on the core business, potentially leading to missed opportunities or operational shortcomings.

Difference between Mergers and Acquisition

Basis of Comparison	Mergers	Acquisitions
Definition	Two companies become one	One company buys another
Power Balance	Generally equal	Buyer is dominant
Decision Making	Jointly	By acquiring company
Legal Status	Dissolves into one	Remains separate
Objective	Synergies, growth	Control, expansion
Financial Size	Similar companies	Can be unequal
Autonomy	Reduced for both	Acquired loses autonomy
Brand Identity	Often new identity	Usually retains names
Negotiation Atmosphere	Collaborative	Can be hostile
Public Perception	Positive, growth-oriented	Can be negative
Complexity	High integration complexity	Relatively simpler
Example Outcome	New entity formed	Subsidiary or absorbed