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How Can Mergers Help A Business Expand?

Reasons to choose Wilson Browne

Merging your business with another can offer opportunities to accelerate your growth.

Mergers are a strategic means of expanding into new markets or territories, gaining access to expertise or new technologies and attracting investment.

These strategic aspects to mergers go beyond immediate financial gains, providing added value through long-term benefits.

Exercising Economies of Scale

Economies of scale provide a company with cost advantages when it increases its output.

Essentially, you get more for less. The operational efficiencies that a merger gives you allow you to make the most of a fall in variable costs and therefore increase your production.

There are various economies of scale that companies in mergers can exploit:

  • Technical – lower average costs instead of significant fixed costs
  • Financial – gaining better rates of interest
  • Organisational – a more efficient structure
  • Purchasing power – the capability of buying in bulk and attracting discounts in this way.

These are the kinds of factors that allow merged firms to increase in size and expand their markets.

Adapting to Technological Change

Marketplaces change, sometimes unexpectedly. These changes can leave gaps in what a business currently offers. Merging strategically can fill these gaps and provide a platform for further growth in the process.

Mergers also provide ways for companies to acquire new intellectual property (IP) and fresh talent to support expansion and growth in the face of change.

In the digital age, IP is now a very powerful modern business currency, and it offers dynamic routes to markets dominance.

It may be that one company has technical expertise and depth of knowledge in a specialist field, but it’s challenged by the demands of scaling up its business model.

A larger company can offer the resources and infrastructure to accomplish this scaling up, but it itself lacks the skills base to develop technologically in ways it wants to.

This becomes the perfect marriage of convenience. The merged company can combine its structural power with cutting-edge innovation.

Turning Synergies into Practical Tools

Synergies occur where the combined value and performance of two previously separate companies is greater than the sum of the individual parts.

There are cost synergies and revenue synergies in mergers. Synergies help reduce costs by consolidating aspects of a merged business and may contribute to increased purchasing and negotiating power.

Revenue synergies enable the merged company to sell more products or services or raise its prices. There’s a shift in the balance of power that comes from the merger.

From its new position, the new company can:

  • Reduce the competition
  • Access new markets and territories
  • Expand its customer base through cross-selling
  • Market a wider range of products or services.
  • Diversifying into Fresh Business Models

Many business models are changing. We’ve seen this in how businesses have had to adapt to selling to customers during the pandemic and lockdown.

Plus, various factors continue to influence and impact supply chains, such as oil prices and geopolitics.

Mergers can support companies in making the sorts of changes they need to compete more effectively and, in some cases, embracing new business models altogether.

This increased adaptability and flexibility is a long-term benefit, giving merged companies an improved ability to adapt and meet changing market demands.

In some mergers, companies can add a whole new range of services to their existing portfolio, or integrate digital, online models into a business that has previously been very much based in the physical realm.

In 2017, by merging with the Whole Foods grocery chain, Amazon expanded its offline reach and moved into a new retail market.

Accelerating Change to Drive Expansion

Businesses evolve but they don’t necessarily progress. Sometimes the pace of change is too slow for a company to manoeuvre itself into a better market position. And change can place too high a demand on existing resources and skillsets.

A well-thought-out, strategic merger can accelerate the whole process of change, from acquiring access to R&D resources to wholesale organisational transformation.

What Kind of Merger Will Work Best?

Mergers present lots of expansion opportunities, but the success of any merger will depend on the companies involved being the right fit for each other.

This still applies in conglomerate transactions, where the businesses that are merging are completely different and unrelated.

Companies intending to merge must be clear about their objectives for the merger, and about how they intend to align their objectives for the best possible outcome.

As well as conglomerate mergers, there are vertical transactions, where one company joins with another in a different area of the supply chain. There are horizontal mergers, involving two companies that would normally compete in the same marketplace.

Companies may also merge to extend their markets geographically, or to exploit a common customer base but with a different range of products.

The whole process of negotiation and reaching an agreement is therefore critical to the success of mergers.

This is especially true when you consider that there is very little statutory protection in common law for M&A transactions.

The options may be varied for expanding via a merger, but due diligence must be a fundamental part of the process.

A specialist M&A solicitor will undertake due diligence and provide vital advice, guidance, support and negotiating expertise throughout the process.

For more details about our legal support for M&A transactions, please contact us.

 

George Iles

Posted:

George Iles

Trainee Solicitor

George is a Trainee Solicitor currently working with the Corporate & Commercial team.