Mergers and Acquisitions

Mergers and acquisitions (abbreviated M&A) refers to the aspect of corporate strategy, corporate finance and management dealing with the buying, selling, dividing and combining of different companies and similar entities that can help an enterprise grow rapidly in its sector or location of origin, or a new field or new location, without creating a subsidiary, other child entity or using a joint venture.

The reasons for mergers and acquisitions

One of the most common arguments for mergers and acquisitions is the belief that "synergies" exist, allowing the two companies to work more efficiently together than either would separately. Such synergies may result from the firms' combined ability to exploit economies of scale, eliminate duplicated functions, share managerial expertise, and raise larger amounts of capital.

'Horizontal' mergers (between companies operating at the same level of production in the same industry) may also be motivated by a desire for greater market power. However, some have argued that mergers are unlikely to create monopolies even in the absence of such regulation, since there is no evidence that mergers in the past have generally led to an increase in the concentration of market power, although there may be exceptions within specific industries.

Corporations may pursue mergers and acquisitions as part of a deliberate strategy of diversification, allowing the company to exploit new markets and spread its risks.

A company may seek an acquisition because it believes its target to be undervalued, and thus a "bargain" - a good investment capable of generating a high return for the parent company's shareholders. Often, such acquisitions are also motivated by the "empire-building desire" of the parent company's managers. 

Specific motives for mergers and acquisitions

Growth

This is one of the most common motives for mergers. It may be cheaper and less risky for the acquiring company to merge with another provider in a similar line of business than to expand operations internally. It is also much faster to grow by acquisition than internally.

Sometimes an organization may have a window of opportunity that will be closing fast and the only way the organization can take advantage of the window of opportunity is by acquiring a company with competencies and resources necessary and, most likely, complementarities to the acquiring company to take advantage of the opportunity. Additional benefits of growth motivated mergers are that a competitor or potentially future competitor is eliminated.

Diversification

Diversification is an external growth strategy and sometimes serves as a motive for a merger. For example, if an organization operates in a volatile industry, it may decide to undertake a merger to hedge itself against fluctuations in its own market. Another example can be when an acquiring company pursues a target company which is located in different state or country. This is called a geographical diversification.

Related diversification seems to have a better track record. It refers to expanding in the current market or entering new markets and adding related new products and services to the product or service line of the acquiring company.

Diversification usually does not deliver value to the shareholders because they can diversify their portfolio on their own at much lower cost. Therefore, diversification on its own is unlikely to be sufficient motive for a merger.

Synergy

Synergy occurs when the whole is greater than sum of its parts. For example, in terms of math it could be represented as “1+1=3” or as “2+2=5”. Within the context of mergers, synergy means the performance of firms after a merger (in certain areas and overall) will be better than the sum of their performances before the merger. For example, a larger merged company may be able to order larger quantities from suppliers and obtain greater discounts due to the size of the order.

In the context of mergers, there can be two types of synergy. The first type of synergy results in economies of scalei which refers to decreased costs. Another type of synergy results in increased revenues such as cross-selling.

As per the above, economies of scale are derived from synergy. For example, merging businesses in the same business line will allow elimination of some of the duplicated overhead costs. A new business will not need two human resources and public relations departments. Instead, the best employees will be kept and the rest of personnel and unused office space will be reallocated or no longer used.

Cross-selling is another benefit derived from synergy. If some of the products and services of merged companies differ then cross-selling those products and services to the other firm’s customer base can be a cost effective way to increase sales. Being able to effectively meet more of the customers’ needs may also increase customer loyalty due to higher customer satisfaction which can occur by effectively providing customers with a broader spectrum of products and services which meet customers’ needs.

Synergy benefits with regard to an increase in revenue are usually more difficult to achieve than synergy benefits with regard to decreasing costs. Management also needs to be careful to ensure that potential synergy benefits are not overestimated as this may result in overpayment for the target company.

Acquisition of required managerial skills, assets or technology

The target company may have managerial skills, assets or technology that the acquiring company needs to improve its performance, profits, revenue, cut costs, reduce productivity etc. This can become a motive for merger.

Mergers and acquisitions in Turkey

The future for Turkey will be bright, that’s for sure. People are paying significant attention and consideration to Turkey. Also for good business, investors are now more aware of the Turkish market that incoming investments will increase significantly and that incoming investments will increase significantly.

What made Turkey so popular? The world sees that Turkey is now knitting a strong network. Turkey has a very strong and correct position in light of its geopolitical horizon.

The number of mergers and acquisitions taking place in a country is known to be a reliable measure for determining the flow of business in that country.

Everyone is all focused on developments in global mergers and acquisitions within the framework of the current economic conditions. Almost all had a common point, and that was “the importance of Turkey with its new hinterland.”