Global GDP has now reached a major milestone: $100 trillion, according to World Bank. The private market, including private equity, is an ever-increasing part of that GDP, with the total amount of assets under management (AUM) in private equity alone double what it was in 2019, up to $12 trillion, according to PwC.
However, private equity is only one part of the picture. Investment banking, venture capitalists, institutional investing, and even corporate development all have their part to play in the global economy. The driver for most of this growth? Mergers and acquisitions (M&A). In fact, just private equity's share of global M&A was over a third — 36% — as of early 2023.
For both the companies and organizations involved with M&A, the benefits of mergers and acquisitions in the banking industry, as well as every other industry, can be significant. Let's discuss what the advantages associated with mergers and acquisitions are for organizations on both sides of the deal.
To properly understand the advantages of mergers and acquisitions, it's important to first understand the two sides of every transaction: the buy-side vs. the sell-side.
As you can likely glean from the terms, the buy-side is the one making the purchase. This is often a private equity or investment banking firm, a larger company, or another entity with enough capital to purchase at least a portion of another entity or even acquire it outright.
The sell-side is the one selling part or all of its company. While transactions can take many different forms (e.g., delisting a public company, funding rounds, asset purchases, add-on acquisitions, private credit lines, etc.), the gist is that the sell-side is giving up something in order to receive some benefit, though it's often driven by securing capital.
The first — and likely driving — benefit of a merger or acquisition is immediate or future access to capital.
Buy-Side: For the buy-side, M&A can be the main method of creating revenue for the business over time. While the transaction does transfer funds away from the firm or organization, it is only ever given up with the expectation of making a return on that investment in the future.
Sell-Side: In the same vein, the seller in the deal generally transacts because it wants an immediate injection of capital. Smaller companies are often unprofitable to start, and the additional capital can fuel rapid growth, including hiring new employees or funding additional research & development.
Another of the benefits of mergers is the potential to tap into new markets, industries, or geographic locations.
Buy-Side: The purchaser in the deal has two different considerations to make: does the organization itself want to access a new market, or does it want to provide additional avenues for its portfolio companies? (The answer could even be "both.") Through M&A, the buy-side can drastically lower — or even remove — the barrier to entry to begin operation in another location or market.
Sell-Side: The same can be largely true for the sell-side of the deal. With additional access to resources — whether it's capital or simply the knowledge and connections of the buy-side — the purchased entity can explore operating in new markets or locations with a reduced or removed barrier to entry as a result of the M&A.
On top of making new markets or locations available to one another, M&A often results in the creation of additional revenue streams.
Buy-Side: For the buy-side, the additional revenue streams could simply be the merged or acquired company itself and the products or services it offers. Perhaps they fill a gap in the current portfolio's offerings, add new intellectual property (IP), or create new lines of business (LOBs).
Sell-Side: With a merger or acquisition, opportunities for upselling and cross-selling among the buy-side's portfolio are plentiful. By becoming part of that portfolio, the acquired company now has access to those and can set up valuable cross-promotions and package deals in addition to its current offerings to generate more revenue. Plus, new products, IP, and LOBs can increase the business' market penetration and help them become a leader in their industry.
In addition to revenue, both sides of the transaction offer many other benefits to each other. One of these is taking advantage of the other's relationships within their respective industries.
Buy-Side: The fact is, the buy-side would not have entered into a transaction without receiving some benefit. In some cases, the merger or acquisition opportunities lie within the sell-side's industry connections, regardless of the actual product or solution they may be selling.
Sell-Side: An advantage often associated with mergers for companies is the networking and mentorship opportunities that become available for the sell-side from the buy-side. Private equity and other types of buy-side entities are often heavily reliant on networking, and the connections they've made can become available to the sell-side post-transaction.
Separate from capital, IP, or products, sometimes the experiences of the employees themselves can answer the question of "what is an advantage associated with mergers?"
Buy-Side: As the acquired or merged company will have its own set of employees, executives, and even board members, mergers and acquisitions can provide opportunities to gain a large amount of knowledge and talent in a very short period of time.
Sell-Side: Part of the benefit of being acquired is gaining access to the wealth of knowledge the buy-side offers. Private equity, venture capital, and investment banking firms will all have an entire portfolio of companies under management and can offer expertise and mentorship opportunities that wouldn't be available otherwise. Additionally, corporate development organizations or departments are specifically designed to improve business operations and can drastically improve the efficiency and productivity of the sell-side.
The foundational resources necessary to run a firm or business are often the same, no matter the industry. One of the common merger and acquisition opportunities is to reduce costs by finding synergies.
Buy-Side: Many companies have the same or similar overhead costs: software, office space, and even employees. As such, it's a common occurrence in M&A to see merged or acquired companies adopting the same software or moving into the same building to reduce costs. Acquisitions also have the potential to reduce costs through more creative means, such as a company becoming its own supplier to reduce vendor costs (as was the case when Apple acquired a computer chip manufacturer), streamline production, or even have more control over the final product.
Sell-Side: The cost savings from the buy-side also extend to the sell-side. Smaller companies have the potential to reduce costs through access to cheaper facilities or manufacturing that are often prohibitively expensive. Similarly, another benefit of becoming part of a firm's portfolio or larger business is the potential to take advantage of more robust or scalable options, such as foregoing online payroll software to instead use the buy-side's Human Resources department.
Business is inherently risky, so many organizations involved with M&A wisely follow the old adage of "Don't put all your eggs into one basket."
Buy-Side: Holding a variety of businesses that vary in size, focus, and even industries is a smart investing play. While firms shouldn't stray from their investment theses, having a diversified portfolio is incredibly important, regardless (and sometimes because) of the global economic state. Plus, depending on the type of deal, it's possible to reduce the average portfolio multiple and buy-side's level of risk.
Sell-Side: With added revenue streams, cost synergies, and even networking opportunities, M&A offers many ways for the sell-side to reduce and diversify its risk post-transaction. Additionally, simply the process of a merger or acquisition — in the banking industry or not — often has many rules and regulations that make it prudent to increase operational efficiency and even profitability in order to "get ready" for a funding round or to attract investors, which can also help to reduce business risk.
As the game Monopoly taught rather effectively, albeit frustratingly, reducing competition can be one of the many benefits of mergers and acquisitions.
Buy-Side: Attempting to purchase the competition does have several laws and regulations that must be satisfied, especially for larger or public companies. Still, it is a regular practice in M&A, and taking over the competition is one method of increasing an organization's competitiveness in the market.
Sell-Side: The sell-side in a transaction where two competitors are merging often receives as much benefit as the buy-side. However, companies have also been known to sell specific portions of their business, such as Lockheed's IS&GS division sale, to streamline operations and let them focus on their most valuable and competitive products or services.
M&A transactions are almost always a big, newsworthy event, whether they occur in the public market or not.
Buy-Side: Whether it's the buy-side's first acquisition or the hundredth, a successful deal is something to celebrate, and many issue press releases with the news. These articles have many benefits, including being able to tout a new AUM total, additional brands in the portfolio, and even specific individuals involved with the deal. All the press can also attract better talent, as well as more prestigious connections and investors.
Sell-Side: One of the merger and acquisition opportunities for smaller companies is attaching their name to a larger one, which can improve brand recognition and reputation. Publications and other press are also more receptive to media placements with a larger brand name, and so sell-side companies can often find the barrier to entry for article placements has been drastically reduced after a transaction.
While we won't get into the details here, many M&A transactions have been made simply because of the tax benefits associated with them.
Buy-Side: Deals can take on a nearly infinite number of forms, and the benefits of mergers for the buy-side depend on the deal structure. For instance, if a deal is only for certain company assets and not a full acquisition, there will likely be reduced regulations and tax considerations since there may not be any personnel involved in the transaction.
Sell-Side: Just as there are countless deal types, there are many different company structures, which all handle taxes differently. On top of this, countries around the world have their own tax laws, and depending on where the buy-side and sell-side are headquartered before and after a transaction, there could be considerable tax benefits.
The benefits of mergers and acquisitions can be monumental for all parties involved. But deals don't happen by chance.
For dealmakers, a successful merger or acquisition begins with deal sourcing. A deal sourcing platform, such as Sourcescrub, can help fuel M&A data and analytics, streamline dealmakers' efforts, and enable them to find opportunities before anyone else.
With hundreds of thousands of sources, millions of data points, and the context you need to understand companies, competitors, and entire categories, Sourcescrub can launch your organization to source and close more deals than ever. See what Sourcescrub can do by requesting a demo today.
