INTRODUCTION
Mergers and acquisitions (M&A) are a business strategy in the corporate world, and the key to success varies between companies, combining their resources, enforcing a competitive edge, and strategic value. The potential upsides are huge, such as the realisation of synergy, diversification, economies of scale, and growth in market share, but such transactions also come with highly complicated and unpredictable challenges. The major forces behind M&A activity and the importance of investment banks in carrying out M&A are discussed below. They also offer valuation skills, deal structuring, negotiating solutions, and thorough due diligence, all necessary to ensure execution success. M&A is a high-stakes game, and such deals become the milestones of transformation in the life of a company.
MEANING AND CLASSIFICATION OF MERGERS & ACQUISITIONS
Merger occurs when two separate businesses merge their assets and activities to form a single integrated company. The main goal of such an action is to have a more flexible, more effective, and more competitive organisation with the capabilities of attaining a stronger market position and operational synergy.[1]
Horizontal Merger: This merger occurs between firms in the same marketplace and industry. The action of having a significant goal of removing competition, gaining market share, and experiencing economies of scale is the major one.
Vertical Merger: Vertical mergers are those in which two companies in the same industry but of different tiers in the supply chain merge. The idea is to cut the production cost as much as possible, improve operational performance, and better control the supply and distribution process.
Conglomerate Merger: A conglomerate merger is among companies that deal with entirely different and unrelated areas. Diversification followed by expansion to new markets is the main reason for this merger, to reduce risk factors and venture into new business opportunities.
Acquisition is a process that involves the purchase of shares and other properties of a firm by another firm, such that the firm is taken as a subsidiary under the ownership and management of the buying firm.
KEY FACTORS BEHIND MERGERS & ACQUISITIONS
- Synergy
Synergy is the concept that the value of the two merged companies would be higher than that of both companies combined. It is one of the strongest forces that drive mergers and acquisitions (M&A).[2] The synergy may be operated in differing forms, such as savings in expenses by closing unnecessary departments or activities, increased revenue due to future market share, and, in addition, possible corporate-level tax benefits.
- Diversification
Diversification is a strategic concept that seeks to reduce risk by increasing business activities or investments. Mergers and acquisitions help companies achieve the goal of diversification either in the industrial or geographical market segments. This allows them to gain further protection against threats peculiar to the industry and market fluctuations and improve business stability and resilience.[3]
- Economic Scale
Economies of Scale are realised when a firm lowers its expenses by boosting production. This is because the fixed cost, like the rent or equipment, shared among more products is divided by the number of products, decreasing the unit cost. As a result of increasing production, the companies will be able to distribute their costs across more production, cost savings will occur, and efficiency in operations will improve.
- Growth in Market Share
Increased Market Share is the ability of the company to achieve a bigger share of the sales in the market. To improve their access to the market, businesses usually venture into Mergers and Acquisitions. An increase in the market share may have various advantages, including higher bargaining power with suppliers and customers, greater brand recognition and a more competitive edge.
CHALLENGES LEADING TO THE FAILURE OF MERGERS & ACQUISITIONS
- Excessive Purchase Price
Overvaluation is the condition when the buyer of the target firm pays a higher price than the worth of the acquired firm. This is usually due to the market hype, overly optimistic financial projections, or even bidding wars among other interested buyers. Acquiring a company at a premium amount can subject the acquiring company to a lot of economic stress, to the point where it cannot attain an acceptable level of returns on investment and might end up losing the merger or acquisition.[4]
- Organisational Cultural Conflict
The culture of all organisations is particular and determines the values, beliefs, and work styles. The merger of two companies with different cultures may cause misunderstandings, misalignment, and internal conflicts. This cultural misfit can potentially demotivate the workforce, even fostering resistance to change and leading to the eventual harming of the integration and the inability of the blended organization to achieve its potential.
- Ineffective Integration Process
Integration is a process of merging the operations, systems and methods of the two companies in a very smooth and structured manner. It only needs close planning and adequate implementation. When poorly handled, the lack of integration can result in chaos, decreased efficiency, staff attrition, a dissatisfied consumer base, and the inability to get the gains wanted out of the merging or purchase.
- Regulatory Challenges
Whenever firms undergo a merger or an acquisition, they need to obtain clearance from the government agencies so that there can be certain guarantees that the transaction will proceed within the framework of the law and regulations. These agencies keenly check the transaction and how it would impact the competition, customers, and industry.
STRATEGIC ROLE OF INVESTMENT BANKS IN MERGERS & ACQUISITIONS
Investment banks play a critical role in the process of Mergers and Acquisitions (M&A) transactions.
- Transaction Advisory
Companies engaged in a transaction may seek the advice of investment banks in formulating appropriate strategies about selling their business, acquiring other companies (targets), or even buying and selling certain companies, divisions or assets. They rendered advisory services such as merging, acquiring, disposing and advising on issuing debts and raising capital. Moreover, the investment banks provide information about the industry, which enables proper decision-making in the M&A process. Such industry reviews will assist firms in gaining insight into how the industry works and which targets or partners are most relevant as part of potential business transactions.[5]
- Valuation
Valuation is also one of the significant roles investment banks play in mergers and acquisitions, as they estimate the respective fair market value of the companies at hand. Investment banks also contribute to muted valuation expectations of their clients and their transactions by having a grasp of industry trends and recent M&A transactions, so that transactions are made by keeping the current state of the market in mind.
- Negotiation
Investment banks are used to negotiate the final terms of an M&A deal. They aim to ensure that the agreement is reached at a fair and financially favourable price for both the buyer and the seller.
Due Diligence: Investment banks also make due diligence easier by creating secure online data rooms and being the key contact between the buyer (and its advisors) and the seller.
Capital Raising: They can also assist in raising the required capital to finance M&A deals, and in case some financial assistance is needed, they can help acquire debt or equity financing.
CONCLUSION
To sum up, Mergers and Acquisitions are an active area where potential gains and threats exist. This paper has delved into the primary factors influencing M&A actions: synergy, diversification, economies of scale, and entry into a new market. However, it is also essential to understand the risks involved, such as overvaluation, cultural mismatches, integration challenges, and regulatory hindrances. Investment banks have become important in the success of M&A transactions. They offer core services such as strategic advisory, valuation analysis, negotiation support, thorough due diligence, and capital raising. Their knowledge and sector understanding come in handy in helping companies to navigate the rough seas of the M&A environment.
Author(s) Name: Laksmi Suria V (Christ University, Bangalore)
References:
[1] Nikita Sukhathankar, ‘Mergers & Acquisitions in India- Meaning, Difference, Types, M&A Examples’ (Treelife, 10 February 2025) <https://treelife.in/legal/mergers-and-acquisitions-in-india/> accessed 17 June 2025
[2] Punit Manjani, ‘M&A Synergies’ (Wallstreetoasis, 6 November 2024) <https://www.wallstreetoasis.com/resources/skills/valuation/mergers-acquisitions-ma-synergies> accessed 17 June 2025
[3] Troy Segal, ‘What is Diversification? Definition as Investing Strategy’ (Investopedia, 6 May 2025) <https://www.investopedia.com/terms/d/diversification.asp> accessed 18 June 2025
[4] Kison Patel, ‘The 9 Biggest M&A Failures of All Time’ (Dealroom, 21 March 2025) <https://dealroom.net/blog/biggest-mergers-and-acquisitions-failures> accessed 18 June 2025
[5] Thought Leadership, ‘The Role of Investment Banks in M&A’ (Dfinsolutions, 12 September 2024) <https://www.dfinsolutions.com/knowledge-hub/thought-leadership/knowledge-resources/role-of-investment-banks-in-mergers-and-acquisitions> accessed 19 June 2025
