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M&A transactions are the acquisition of one company by another, usually for stock or cash. The aim is to attain an advantage that can last in the market. It’s not the best solution for every strategic goal however, those who know what it can offer and use it with care will be able to realize substantial growth.
One reason for M&A is that it allows businesses to realize economies of scope, the phenomenon that says “one plus one equals more than two.” For instance, when Facebook acquired WhatsApp and Instagram it was able to tap the demand of a new client base without having to spend hugely in developing the services. It also gained scale and market reach, which boosted its bargaining power when dealing with clients or suppliers.
Another popular motive is empire building managers have the incentive to buy companies which will increase their share of the market or cut down on competition. This strategy is extremely successful, if executed in the context of well-defined goals and with proper financial forecasts.
M&As can also aid a company to survive and thrive in a market that is tumultuous. For instance, many banks have merged to protect themselves from the Great Recession of 2008-2011, because credit quality was declining. It also serves to diversify revenue by buying a company from another industry or region. For example, retail companies often buy technology or e-commerce firms to enter new markets and increase their revenues. One mistake that is common is to see M&A as a purely financial tool without taking into account the strategic benefits that are created.