Estimated reading time: 5 minutes
The merger and acquisition activity have risen tremendously over the past few years specially in the energy sector. From around $248 billion in the year 2009 to around $512 billion in 2016. One of the major reasons we witnessed such massive growth is due to advancement in technology.
The oil and gas industry had witnessed a slowdown in the merger and acquisition (M&A) deals towards the end of 2018 when the prices took a hit and dropped from $85 to $50 per barrel. Another reason for the slowdown was that a lot of firms were moving towards more renewable resources in order to reduce their carbon footprint and move closer to their CSR goals.
It was very likely that the M&A deals would be softened due to such high price volatility but instead the total value for 2019 was at $92 billion (with respect to US), which is $14 billion more than the industry average of the last decade. This was due to the deal between Occidental Petroleum’s and Anadarko, where the former bought the latter for $57 billion.
The 5 reasons why firms go ahead with M&A deals:
- Value generation
- Tax gains
- Increase market share
- Reduce competition and cost
- Underperforming business
- Value generation: Generally, after any M&A deal the value of the company takes a hike and more importantly the shareholder value increases in comparison to the acquirer.
- Tax gains: Many governments around the globe provide tax benefits after completion of M&A deal. Singapore is one such country which provides considerable tax benefits if you start a business here by acquiring or merging with an already established company.
- Increase market share: Entering a new market and building a distribution chain from scratch can be very challenging and partnering up with an existing company which has a loyal customer base can save both time and cost.
- Reduce competition and cost: Quite often the big firms acquire the small firms in order to eliminate competition. The merged firm will experience higher production and reduction in costs due to shared resources and marketing budgets.
- Underperforming business: Generally, when small firms are struggling financially and not able to generate enough free cash flow, they look out for M&A deals to grow rapidly and have more sturdy balance sheet.
What to look out for?
The acquiring company generally considers the oil & gas prices as well as the oil & gas reserves of the individual firm they are looking to acquire, or merge with. The production of oil & gas is also a critical factor which can have influence over the decision of merger and acquisition.
It is also key to understand the different types of mergers available, to understand the differing levels of involvement for product and consumer share. The 3 main types of mergers include: horizontal mergers, vertical mergers and concentric mergers. Horizontal Merger is when the merging companies are providing same end-product to their customers. Vertical Merger is when the merging firms share the same value chain of producing similar products but are at a different stage of production. Concentric Merger is when the merging firms are producing complementary products but have the same end consumer.
Mergers and acquisitions are a crucial part of any business strategy. Given the current scenario, where the business world is evolving at such fast pace, it’s important for them to be quick and innovative in order to survive in the industry. To call for an M&A is a very fragile decision for any company and now you have a brief overview of why they go ahead with such deals and what they watch out for.