Let’s consider a merger that takes place between Company A (based in England), Company B (based in the U.S.) and Company C (based in Hong Kong), creating Company ABC. Assume that each company previously generated £1 million each per year. How could M&A (mergers and acquisitions) activity lead to cost saving and cost cutting?
Costs
- Company ABC (the newly merged entity) will likely have duplicate departments and assets. For instance, each individual company pre-merger may have had its own Human Resources department, head office and factory that essentially carried out the same functions. Post-merger, there may no longer be the need to retain some of these duplicate departments/assets. Shutting down duplicate departments or selling off/ceasing to use duplicate assets can give rise to cost savings for Company ABC. Other costs (such as marketing/distribution cost) may also be shared. This means that Company ABC’s total costs (e.g. the cost of running/renting factories or employing unnecessary personnel) should reduce.
Capabilities
- To sell products in a particular jurisdiction, companies will usually have to have acquired particular resources and assets. This includes distribution channels; relationships with suppliers and retailers; knowledge of the local market and the behaviour of consumers in that market (in order to inform marketing strategies); and brand loyalty (i.e. trust from local consumers). It can be incredibly expensive and time consuming for companies to build up these resources and assets from scratch in a new jurisdiction. If companies merge with other companies that already have the capabilities in other jurisdictions, it may then be able to more easily sell its products to a new market. Going back to our example above, Company ABC should more easily be able to distribute and market (and thus sell) all the products developed by Companies A, B and C separately in England, the U.S. and Hong Kong after the merger, as all the knowledge and resources will be shared.
- If Company A has a strong product to offer, but lacks marketing abilities, contacts, finance or other resources, but Company B has ample experience launching new products and Company C is resource rich, a merger between these may be desirable for all parties involved.
- Finally, a crucial but frequently overlooked synergy relates to the sharing of experience, knowledge and skills. If key personnel from Companies A, B and C have accumulated a wide array of experiences, valuable knowledge and effective management skills, following a merger, Company ABC could benefit from the sharing of this experience, knowledge and skills.
Competition
- In addition, Company ABC would benefit from reduced competition in the market place, as Companies A, B and C would no longer be competing with each other. If there are consequently fewer companies in that market, Company ABC may enjoy increased bargaining power with both their suppliers (who will be more reliant on Company ABC’s business) and customers (who will have fewer options to purchase elsewhere).
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By Jake Schogger - City Career Series