Mergers and acquisitions are key strategies used by corporations to strengthen their position in their business domain. Companies want to capture the majority of the market share or gain entry into a new one with these tactics. They engage mergers & acquisitions consulting experts to conduct such transactions in an efficient manner and understand the repercussions for their organization. These deals affect the financial and organizational structure of a business besides impacting its valuation and human resources. Companies also hope to streamline their efforts in all aspects of running a business with these strategies. In this article, we will discuss the effect of these transactions on the research and development activities of both the involved organizations.
1. Increased Budget For Research And Development
One of the biggest benefits of a successful merger or acquisition is that the new entity gets increased financial resources for its innovative efforts. The combined coffers of both the enterprises result in an increased budget for the research and development department. The amplified research budget not only helps in giving a boost to innovative efforts of the workforce but also helps in acquiring new patents. The new company can also speed up the process of creating new and better products. Moreover, they can launch a range of innovative items quickly and expand their user base. A wide product range decreases the dependence of the company on a single item to generate revenue. In short, the increased research budget opens up the avenue for increased revenue generation for the new entity.
2. Reduced Costs Of Development
A successful M&A deal can reduce the cost of developing new products. As mentioned earlier such transactions are strategically done to strengthen an organization’s market position. Companies ask mergers and acquisitions consulting firms to scout for suitable partners according to their requirements. A corporation looking to enter a new market will try to acquire an established smaller player to gain smooth ingress in a new location. Similarly, organizations look for partners with efficient research facilities to augment their own development efforts. For example, in 2015 through one of the biggest mergers and acquisitions in India, the Indian pharmaceutical company Lupin acquired US drugs firm GAVIS Pharmaceuticals LLC for $880 million. Many experts believed at the time that the deal was expensive but Lupin not only gained entry in the lucrative US market but also got access to 66 abbreviated new drug application filings pending with the US FDA and a portfolio of 65 under-development products. In the long run, the deal proved to be profitable and reduced the company’s spending on R&D.
3. Decreased Competition In The Business Segment
It is common knowledge that a successful mergers and acquisitionstransaction helps in reducing the competition for the new entity. The formation of the new organization automatically eliminates one player from the business segment. This has an impact on the R&D efforts as well. Most of the time corporations look to identify a target company which has a high-performance product or state of the art technological production solutions. The successful closure of a deal turns a rival item into an own product. The research personnel also breathe easy as they do not have to worry about developing an alternative to a high-quality item. Instead, they can focus on innovations in other fields to bolster the organization’s position in those areas.
4. Better Synchronized And Concentrated Efforts
The reduced competition and increased financial support help in concentrating the efforts of the R&D department of the new entity in the desired direction in a better manner. The acquiring organization must adapt, assimilate, and develop the technology acquired from the target company for ready use.
The large size of the new company also provides greater exposure to markets and with the increased budget they also lower their financial losses because of failed experiments. This increases their confidence to undertake more incisive research into critical areas which can lead to the development of even more innovative products. This will have a positive impact on the core competence of the corporation which will be helpful in fortifying their market position.
5. Effect On Merging Companies Possessing Similar Technologies
When two companies with similar technology decide to join hands, it helps reduce the costs of conducting research. The new enterprise saves money by eliminating duplication of the R&D efforts and by reducing the strength of the concerned department. Moreover, it does not need to open new facilities for research purposes. A successful deal turns a rival into an ally and eliminates chances of facing competition from a similar product. R&D labs can speed up development and enhance the product portfolio of the company. The downside of such a transaction is that the decreased threat of competition also reduces the incentives to innovate.
6. Impact On Merging Entities With Complementary Technologies
A merger or an acquisition taking place between entities with complementary technologies will give a boost to innovation through cross-fertilization of ideas between the personnel of both the companies. The new entity will develop proficiency in new areas of technology and utilize its resources in a better manner. They will use each other’s strengths to achieve excellence in their area of expertise and create high-quality products which will enable them to dominate their business domain.
Successfully closed mergers and acquisitions transactions help corporations increase their allocation for research and development efforts. They also provide access to new technologies and talented professionals who help the new organization develop better products and reduce competition.
Seema Mehra is a business advisor working at Ashok Maheshwary & Associates-top Chartered Accountant firm. She is a professional writer and loves to share Financial related topics.