Sources of gains from mergers and acquisitions can be many and varied. M&A may lead to higher income stream, cost savings, reduced cost of capital and lower taxes for the resulting company.
Marketing synergy, strategic benefits and enhanced market power in the wake of M&A lead to higher revenues. More optimum product mix and resultant economies of distribution generate those marketing gains. Strategic benefits are due to entry into new lines of business that fit in well in the new scheme of things. An acquisition may enhance market power by lessening competition. Such merger may, however, be in contravention of the competition laws.
Economies of large scale arise in horizontal mergers into the same line of business. A vertical merger makes the company self sufficient for a particular finished product by allowing it control over complementary resources like raw material sources, production facilities and marketing outlets.
Tax benefits of mergers and acquisitions are also significant. The buying company can set off its future profits of the next 15 years against the unabsorbed accumulated losses of the selling company of the last 3 years before M&A, to the extent available. This facility enables the purchasing company to reduce its taxable profits of the post acquisition period.
The acquirer can get additional depreciation benefits on the revised value of the assets taken over from the acquired company.
