February 26, 2024
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The Q4 2023 U.S. deal volume was still around 50% below Q4 2021, although it improved since Q4 2022.
Source: Deloitte
At the same time, over 79% of corporate executives anticipate higher M&A volumes in the next 12 months. Although experiencing periodic headwinds, M&A has always been a core driver for business success.
Based on 20 years of empirical research, M&A is, on average, 362% more effective than organic growth, which is the least rewarding business strategy. Why do companies merge, and what are the benefits? This article explores the merger and acquisition benefits based on historical data and prominent case studies.
Benefits of mergers and acquisitions: Buy-side and sell-side
There are many reasons why companies merge, including strategic dominance, risk diversification, and tax benefits. M&A provides many more benefits to buyers and sellers than organic growth. Let’s discuss the benefits mergers and acquisitions offer the acquiring company first.
4 M&A benefits for buyers
Active buyers (over five acquisitions) benefit from nearly 500% higher enterprise value and compound growth rate than non-buyers, EY finds.
Source: EY
Acquirers enjoy the following benefits of mergers and acquisitions:
- Market dominance. M&A allows buyers to access new markets, customers, suppliers, and distribution facilities. Higher maker share offers higher pricing power and more cross-selling opportunities.
- Market diversification. Buyers pursue M&A to diversify revenue streams and hedge against unstable market conditions.
- New capabilities. Scope mergers pursue new technology, talent, products, and services. New capabilities expand growth opportunities and provide a competitive advantage in the same industry and related markets.
- Economies of scale. Mergers result in production synergies and cost efficiencies. Buyers can increase revenue potential and lower costs simultaneously.
4 M&A benefits for sellers
According to PwC’s study encompassing 19 years of U.S. divestitures, 60% of them produce higher EBITDA, while 42% of sales generate value equal to unsold business. During M&A, the target company enjoys the following benefits:
- Access to capital and resources. Target businesses receive sufficient resources for growth and development within a larger company. That is especially beneficial when the acquired business retains independence.
- Better market positioning. M&A boosts the brand value and market positioning of the acquired company due to operational efficiencies and new customers. Cross-selling opportunities and synergies enhance the target’s revenue streams.
- Strategic divestment. A company acquires capital to develop new ventures and strengthen its core operations while selling underperforming assets.
- Risk mitigation. A seller may capitalize on its business under stressful conditions such as a lack of development resources, unfortunate events, or unfavorable market conditions.
Benefits of merger and acquisition: Quick comparison
| Buyer’s M&A benefits | Sellers’ M&A benefits |
| New markets New customers New technology and talent Competitive edge Economies of scale Risk diversification | Secure business growth Revenue synergies Higher brand value Business capital Focus on core assets Timely divestment of risky assets |
4 examples of successful M&A
The following four case studies exemplify many advantages of mergers and acquisitions:
- Facebook + Instagram (2012)
- Oracle + NetSuite (2016)
- Disney + 21st Century Fox (2019)
- LVMH + Tiffany & Co. (2021)
1. Facebook + Instagram (2012)
Facebook acquired Instagram for $1 billion in 2012. At the time of acquisition, Instagram was a startup with a dozen employees. While many considered this deal overvalued, Facebook would soon reap acquisition’s benefits.
| M&A rationale |
| 1. Innovative product. Users liked the fun photo-sharing app with social network features. Instagram accumulated 25,000 users in a single day after its launch. In two years, its user base reached 27 million. 2. Competitive advantage. Facebook experienced substantial competition from Twitter and Google +. Instagram allowed Mark Zuckerberg to secure a superior position in the market. 3. Revenue potential. While Instagram generated zero revenue at the time of acquisition, it was innovative and showed high monetization potential. |
| Facebook’s benefits |
| 1. Massive revenue stream. In 2023, Meta generated over 40% of its annual revenue from Instagram. It was a 10% increase in three years. 2. Massive user base. As of 2024, Facebook and Instagram have five billion users combined, 64% of the world’s population. |
| Instagram’s benefits |
| 1. Value creation capital. Facebook’s capital helped Instagram develop direct messaging, stories, IGTV, reels, and other features that significantly boosted the platform’s growth. 2. Extended user base. Instagram’s user base surged over 200% soon after the acquisition, benefiting from Facebook’s larger marketing budget. |
2. Oracle + NetSuite (2016)
Oracle, a computer technology corporation, acquired NetSuite, a cloud software company, for $9.3 billion in 2016. Oracle aimed to expand its cloud software portfolio, supporting its existing business plan.
| M&A rationale |
| 1. Increase cloud market share. Oracle invested heavily in cloud software companies for nearly a decade before the NetSuite deal. It successfully increased its cloud software sales by 50% in the 2014-2015 fiscal year. 2. Competitive advantage. Oracle faced fierce competition from Amazon, Microsoft, Salesforce, and others. NetSuite would provide Oracle with additional capabilities and strengthen its position in the market. |
| Benefits for Oracle |
| 1. Global reach. Oracle leverages NetSuite’s customer base, technology stack, and market presence to strengthen its global reach and compete with Google, Salesforce, Amazon, and others. 2. Long-term success. A strong position in cloud technology allowed Oracle to survive economic headwinds and benefit from COVID-19-driven market transformations. Its market cap surged 97% in 2020-2021. |
| Benefits for NetSuite |
| 1. Better resources and opportunities. NetSuite retains independence as Oracle’s unit. Its resources help NetSuite develop new products and expand its market reach. 2. Stable business growth. As of 2023, Netsuite runs 13 data centers across North America, Asia Pacific, Europe, Africa, and Australia. Thanks to Oracle, Netsuite’s customers benefit from cutting-edge solutions. |
3. Disney + 21st Century Fox (2019)
Disney acquired 21st Century Fox for $71.3 billion in 2019. Disney aimed at Fox’s enormous intellectual property portfolio at the time of the merger. One of the biggest M&A deals in entertainment history was also one of the most successful and strategically reasonable.
| M&A rationale |
| 1. Entertainment portfolio. Disney would access full rights to the Marvel Cinematic Universe (MCU), James Cameron’s Avatar, and other profitable franchises. 2. Revenue potential. High-grossing franchises would provide Disney with massive revenue opportunities for years to come. |
| Benefits for Disney |
| 1. Massive portfolio. Besides the MCU, Disney owns Avatar, Die Hard, Home Alone, Alien, Predator, and many others. 2. Revenue scaling. Disney generates billions in revenue from successful movie franchises. Thus, Avatar: The Way of Water grossed over $2.3 billion, while its budget was in the $350-$450 million range. |
| Benefits for 21st Century Fox |
| Capital for business transformation. TV shows have always been the Fox Crop’s primary revenue stream. The deal allowed Fox to channel efforts toward sports and news TV shows and seek success as a narrow niche player. |
4. LVMH + Tiffany & Co. (2021)
LVMH Moët Hennessy Louis Vuitton acquired Tiffany & Co., a luxury design house, for $15.8 billion in January 2021. That was a highly successful acquisition, which allowed LVMH to break revenue records in the following years.
| M&A rationale |
| 1. Expand product portfolio. LVMH’s portfolio enumerated over 70 premium brands. Tiffany & Co. would allow it to grow revenue streams from additional products and services. 2. Competitive advantage. LVMH experienced competitive pressure from Gucci, Chanel, and Dior, while its watches & jewelry division generated the lowest revenue. The acquisition of Tiffany & Co. would help LVMH close this revenue gap. |
| Benefits for LVMH |
| 1. Better market positioning. This acquisition placed LVMH the third most powerful player in the jewelry industry. 2. Strong revenue stream. LVMH’s 2020 watches & jewelry division generated €3.3 billion in revenue. In 2021, LVMH generated €8.9 billion in revenue from watches and jewelry, a 169% increase. |
| Benefits for Tiffany & Co. |
| High brand value. LVMH initiated Tiffany & Co. rebranding post-merger to cater to wider audiences. As a result, its worldwide brand value surged from $4.9 billion in 2020 to $5.4 billion in 2021 and over $7 billion in 2023, a 42% increase since the acquisition. |
The bottom line
- M&A acquirers pursue strategic dominance, economies of scale, and risk diversification.
- M&A sellers pursue deals for tax benefits, access to capital, favorable market exit strategies, and risk prevention.
- M&A helps buyers access new capabilities, increase market share, diversify business operations, and achieve economies of scale.
- M&A allows sellers to secure financing for business development, divest underperforming assets in a fair market, secure capital for core operations, and reduce market risks.