Mergers and Acquisitions on the rise
Although companies acquire and merge with others for a range of reasons, the main rationale such mergers and acquisitions take place is that the purchasing company seeks improved financial performance, according to experts.
“Mergers and Acquisitions (M&A) can create cost efficiency through economies of scale, can boost the revenue through gain in market share and can even generate tax gains,” Trevor Mendis, Course Director at IIHE for UK BSc and MBA programmes said at an evening presentation to discuss the opportunities and challenges associated with business growth through mergers, acquisitions and restructuring, organised by The Sri Lanka Chapter of the Chartered Management Institute of UK (CMI) together with knowledge partner, KPMG recently.
He said that the acquirer’s financial performance can be enhanced through an M&A through increased revenue and/or market share. “This would typically occur when the buyer takes over a major competitor, reducing its competition and thus building up its market power by capturing increased market share.” In the case of a merger, two firms together form a new company. After the merger, the separately owned companies become jointly owned and obtain a new single identity. With acquisition, one firm takes over another and establishes its power as the single owner.
Explaining ‘how’ a deal is done, Asanga Seneviratne, Managing Director of Anilana Hotels and Properties noted that if the acquirer has a dominant enough position, it could then exercise greater power in setting prices as well. The reciprocation of the target company and the approach of the acquiring company plays a vital role in the entire process, he said. While M&A have been found to lead to cost cuts and increased revenues, their failures are not uncommon. These failures may harm the companies, tarnish their credibility in the market, and ruin the confidence of their shareholders, Mr. Seneviratne said, adding that approximately only 30 per cent of such deals add value, while 50 per cent destroy it.
He added that before the closing of the deal, when the negotiation process is on, from that time, the management of both the companies need to work on a proper integration strategy. “After finalizing the merger or acquisition deal, the integration process of the companies should start on time,” he said. This is to ensure that no potential problem crop up after the closing of the deal.
Giving tips for M&A, he said, “It’s a roller coaster ride – so keep your cool.”
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