Corporate mergers and acquisitions offer various benefits such as expanding market share, reducing costs, and securing technology, but a cautious approach is necessary considering risks like monopoly issues and organizational culture clashes.
Companies compete endlessly to maximize profits. One strategy in this competition is for one company to acquire or merge with another, known as corporate mergers and acquisitions. These can be categorized into horizontal, vertical, and conglomerate mergers and acquisitions based on the form of the business combination. Mergers and acquisitions hold significance beyond simple consolidation and have established themselves as one of the key strategies for corporate growth and survival. Furthermore, M&A is also utilized as a means to strengthen competitiveness in the global market and to establish a foothold for entering new markets.
First, horizontal M&A occurs between companies in the same industry. For example, two electronics companies merge to form a single electronics company. Generally, when horizontal M&A occurs, companies that were competitors combine, reducing unnecessary competition and enabling production on a larger scale than before. This allows the merged company to increase its production volume. When economies of scale are realized in this process, the unit production cost decreases, enhancing price competitiveness and potentially increasing the product’s market share. Furthermore, sharing technology and know-how through horizontal M&A can stimulate the development of innovative products. For instance, when two electronics companies merge, their R&D (research and development) departments can collaborate to develop more innovative products, helping secure a competitive advantage in the market. However, if monopolistic abuses occur after a horizontal merger, it may become subject to regulation. Such monopolistic issues can limit consumer choice and lead to price increases, potentially becoming a social problem.
Vertical mergers are acquisitions between companies in the same industry but at different stages of the production process. Such vertical mergers can be categorized as forward integration or backward integration depending on the direction of consolidation. For example, if a company supplying raw materials for automobiles merges with an automobile manufacturer, it is backward integration when the manufacturer integrates the raw material supplier. Conversely, if the raw material supplier integrates the automobile manufacturer, it is forward integration. When such vertical mergers occur, they offer the advantage of increasing efficiency at the production stage, reducing transaction costs, and enabling a stable supply of raw materials. Furthermore, this integration enhances supply chain management efficiency, helping prevent unexpected supply chain disruptions. For instance, if an automobile manufacturer acquires a raw material supplier, it gains greater control over the quality and delivery schedule of raw materials, ensuring stability in the production process. However, a disadvantage is that if problems arise in a specific company, the entire enterprise may be at risk. Particularly, failure in one part can affect the entire system, making risk diversification difficult. This is one of the key factors highlighting the limitations of vertical mergers.
Finally, horizontal mergers involve the combination of companies with little direct relationship. For example, a company might combine an electronics company, a construction company, and an automotive company into a single entity. In such cases, even if the construction company has low profitability, the advantage is that risk can be dispersed through other companies expected to have relatively higher profitability, thereby maintaining stable corporate profitability. Diversified mergers and acquisitions enhance resilience against economic uncertainty through portfolio diversification. For instance, even if the construction industry enters a downturn, the company can maintain overall financial health if the electronics industry is booming. However, if a company only grows in size externally, it may face limitations in achieving high profits in the market. Furthermore, creating synergies between dissimilar business segments can be difficult, and organizational culture clashes may occur during the integration process. These can act as additional drawbacks of diversified M&A.
Companies can expand their business scale through M&A. This provides various benefits, such as increased market share, cost savings, and technology acquisition. However, in some cases, a focus solely on external growth through M&A may lead to neglect of investments in internal growth, such as research into new technologies. For example, if R&D budgets are reduced due to the financial burden of M&A, the company’s innovation capabilities could decline in the long term. Furthermore, M&A processes can lead to layoffs or reassignments for many employees, potentially disrupting organizational relationships and causing other issues. Therefore, M&A must be conducted with caution. Particularly, if cultural integration fails, internal conflicts may arise, negatively impacting performance. Consequently, systematic support for integrating organizational cultures and helping employees adapt is essential post-merger.
In summary, while M&A is a crucial strategy for corporate growth, it requires a systematic approach that fully considers and manages the various risks that can arise during the process. Thorough preliminary investigation and strategic planning are essential to maximize the potential benefits achievable through M&A. Furthermore, organizational support and management are required to effectively resolve issues that may arise during the post-merger integration process. This enables companies to pursue sustainable growth and strengthen their competitiveness in the global market.
In conclusion, corporate mergers and acquisitions are a vital management strategy companies can choose amidst changing market environments and intensifying competition. By fully understanding the characteristics and advantages and disadvantages of each type of M&A and approaching them strategically, companies can maximize the benefits of M&A. It is crucial to pursue both external growth and internal growth through M&A to secure sustainable competitiveness. This is an essential element for companies to achieve long-term success and will become a key strategy for gaining an advantage in the global business environment.
