Merger & acquisitions (M&As): pros and cons for growing startups and mature businesses

Mergers and acquisitions (M&A) are strategic approaches companies deploy to grow, expand their market share, and invest in new business opportunities. But diving into these deals isn’t simple; it comes with complexities and requires deep expertise.

In this article, we’ll walk you through everything you need to know to navigate M&A successfully. We’ll weigh the pros and cons of mergers and acquisitions, and highlight important factors to consider before making a move.

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Understanding mergers and acquisitions (M&A)

Mergers and acquisitions are strategic business transactions involving the consolidation of two businesses or organisations. With this strategic business transaction, companies involved can combine their strengths, resources, and customer bases.

As a result, these companies can:

• Unlock new revenue opportunities
• Increase profits
• Increase market share
• Cross-sell

Often, the terms mergers and acquisitions are used interchangeably but both are very distinct from each other.

What is a merger?

A merger is a corporate strategy that involves two independent companies combining resources to operate as a single entity. This arrangement involves companies of roughly equal size joining forces on broadly equal terms.

A notable example of a merger is the £2.5 billion merger between two house-building companies, Barratt and Redrow.¹

Now that you have a clear understanding of what mergers are and how they work, here are the different types of mergers you should know:

• Horizontal merger: This is a merger between companies that directly compete with each other. The goal of this merger is to increase market share and reduce competition.
• Vertical merger: This occurs between companies that operate along the same supply chain. For instance, a car assembly plant merges with a car spare manufacturing company. The main objective of this kind of merger is to achieve high-quality control, make operations more efficient, and reduce costs by removing intermediaries.
• Market-extension merger: This is a merger between companies selling the same product but operating in different markets. Market-extension mergers, as the name implies, help companies gain access to a larger market and expand their customer base.
• Conglomerate merger: This is a merger between two unrelated companies. With these mergers, there is usually no overlap with the two companies involved in terms of product, market, or industry. A good example is a telecommunication company merging with a fast food business.
• Congeneric/product extension merger: This is a merger between companies that offer related products or services and operate in the same market.

What is an acquisition?

Acquisition is a corporate strategy that involves a company (the acquirer) buying most or all the shares in another company (the target).

The main goal of the strategy is for the acquirer to absorb the target, thereby assuming control of the target’s assets and business operations.

Below are the two major types of acquisitions:

• Horizontal integration: This happens when a business absorbs a similar or related company. The two organisations involved here offer similar products or services and are operating at the same production level. The main motive behind this type of acquisition is to eliminate competition.
• Vertical integration: This type of acquisition involves a company absorbing another company within the same industry but at a different stage of production. The company acquired could also offer different products and services, but along the same value chain. This type of acquisition aims to reduce costs while increasing profits.

Advantages of mergers and acquisitions

Mergers and acquisitions offer numerous benefits to companies. This section highlights some of the major advantages of mergers and acquisitions:

Increased market share and synergies

One of the significant upsides to mergers and acquisitions is that it lowers the barrier to entry for companies looking to tap into new markets. The two companies involved consolidate their resources and customer bases.

This way, the acquirer can gain entry into new markets and geographic regions that were not accessible, and both companies involved can have a significantly larger market share than either had individually.

For companies, acquiring an established company in the target region helps them expand into a new market while eliminating many hurdles and entry barriers. Through strategic acquisitions and mergers, companies can leverage the solid foundation of the business they are merging with or acquiring, enabling them to launch operations without starting from scratch. This includes access to the existing company’s valuable resources, including talent, infrastructure, and a loyal customer base.

Cost efficiency and economies of scale

Economy of scale occurs when a company reduces its average cost per unit by increasing production. M&A gives such a company a competitive advantage to offer its products at a cheaper rate or improve its profit margin.

When a company merges or acquires another, it can combine its operations. They can share facilities and buy raw materials in bulk, giving such a company better leverage as it can negotiate better terms and prices with suppliers.

Diversification of products/services and markets

Acquiring and merging with other companies enables an organisation to expand its portfolio by adding more products and services. This allows the organisation to bypass the lengthy processes required to launch its products and services from scratch.

Additionally, M&A provides an opportunity to reach a larger and more diverse audience that may not have been accessible to you prior to the acquisition. It is also a great international expansion strategy for companies looking to enter a foreign market.

With access to more customers and new markets, your organisation can diversify its revenue streams and reduce its risks.

Access to new technologies and talent

Mergers and acquisitions enable you to acquire the talent and resources of the target company. On the technology side, M&A gives you access to the target company's intellectual properties, patents, business strategies, and software.

Aside from getting access to new technologies, you also acquire the target company’s workforce. Acquiring talent from target companies provides access to employees with diverse experience and skillsets, which your company needs to maintain a competitive advantage.

Enhanced financial performance

Mergers and acquisitions, if done right, improve a company’s financial strength. First of all, it can increase an organisation’s revenue and improve its cash flow. Through M&A, a company can also diversify its revenue streams and gain more financial stability, especially in the case of economic downturns.

Disadvantages and risks of mergers and acquisitions

Below are some of the downsides of mergers and acquisitions:

Integration challenges and culture clashes

Integrating two different companies involves the combination of their values, systems, processes, and cultures. In a case where the two companies have different cultures, it may lead to friction and cultural misalignment between these two separate entities.

If not adequately managed, cultural misalignment can lead to employees’ misunderstanding, reduce productivity, or even key talents walking away. Before mergers and acquisitions, it’s crucial to conduct a cultural assessment, especially when doing your due diligence.

High costs and financial strain

Mergers and acquisitions involve huge financial investment, which can put a financial strain on your business. There’s the risk of overpaying for the target company, which can affect the financial health of your company and reduce your return on investment. You might also have to either take on debt or issue new equity. Each of these two options can restrict your cash flow.

Additionally, there are other costs, such as legal and compliance fees, integration costs, employee training, and rebranding.

Loss of key employees and talent

M&A can lead to talent drain, causing high-performing talent to leave the target organisation. These employees may resign due to feelings of insecurity about their roles or uncertainty about their organisation's direction.

When employees in critical roles leave, you must hire and train new employees to fill these positions, which can delay integration efforts. When key employees leave, it can also negatively impact the morale of the rest of your employees.

Regulatory hurdles and anti-trust issues

In the UK, the Competition & Markets Authority (CMA) rigorously reviews M&A transactions that could create monopolies. The CMA would review a merger to determine if it would result in a combined entity with too much market power or if it is against the consumer interest.

Failure to comply with the CMA regulations can result in delays, fines, or legal action. Non-compliance can also lead to the merger being blocked. A good example of this is the CMA blocking Sainsbury’s/Asda merger after finding it would lead to increased prices in stores, online and at many petrol stations across the UK.²

Potential for decreased shareholder value

Mergers and acquisitions (M&A) can lead to decreased shareholder value due to several risks and challenges. One key issue is overpayment for the target company, where acquirers pay a premium that may not be justified by future cash flows, leading to value destruction. To avoid this, you need to know how to value a business.

Additionally, integration difficulties, including operational disruptions, culture clashes, and loss of key talent, can lead to higher costs and lower efficiencies than anticipated.

Strategic Fit and Objectives

Strategic objectives are the specific goals a company aims to achieve through M&A, such as entering new markets, expanding product lines, achieving cost synergies, or gaining competitive advantages.

Strategic fit is essential because it influences the success of integration, synergy realisation, and long-term value creation. Poor strategic fit can lead to cultural clashes, operational inefficiencies, loss of focus, and ultimately, failure to achieve expected benefits.

Financial health and valuation

Financial health and valuation are really the foundation of any merger or acquisition. Think of financial health like a company’s overall money situation. Valuation involves determining a company's actual worth by considering all its financial details and its potential for future profitability.

Knowing a company’s financial health helps you see if it’s stable and capable of growing after the merger. Valuation, on the other hand, enables you to determine a fair price, ensuring you don’t overpay and harm your finances.

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Sources used in this article:

1. Barratt and Redrow £2.5bn merger agreed as monopoly fear allayed
2. CMA blocks merger between Sainsbury’s and Asda - GOV.UK

Sources last checked: 27-10-2025