The merger of the two organizations can reduce market competition, open up new territories, provide access to new markets, expand the customer base and provide new sales opportunities – all of which potentially increase revenues. Thus, what does accretive mean?
Accretive Meaning in Performing the M&A Deals
Accretive means that everyone has an equal opportunity in the market: private companies are equal in their ability to enter the public market, and investors are equal in their ability to acquire a part of the company through open, public auctions. The only difference in opportunities between companies and investors here is that companies must still meet certain requirements in order to receive publicity status.
Based on the definition, it can be noted that there is a certain similarity between vertical and generic mergers, so it is not uncommon for experts to combine these two concepts under the single term “vertical integration”. The most common parameters based on which researchers propose to analyze the functioning of the organization are given. The results of the study indicate that the most popular objective parameters are the growth rate, organizational structure, age, and size of the company.
Accretive can also be understood as an association of companies from different sectors of the economy without the presence of unifying production cycles or capacities:
- An association of this type is the integration of unrelated companies that have neither technological nor target unity with each other’s core business.
- The logical difference between conglomerate M&A transactions and horizontal and vertical transactions is that a conglomerate is not an integrated structure of somehow related companies, but rather an investment strategy aimed at diversifying risks and requiring a constant revaluation of the asset portfolio.
The Meaning of Accretive Mergers
The process of accretive mergers of companies is complex and risky because it is quite problematic to predict the outcome of the transaction. According to a study by an international consulting company, about 70% of M&A transactions ended in failure and led to a decrease in business value. The main reason for the unfavorable outcome is, first of all, the lack of consideration of the specifics of a particular type of merger or acquisition. Experts noted the following key reasons for the weak manifestation of the synergistic effect.
For accretive mergers in the industry, the following motives can be noted, in particular:
- expansion of the geographical coverage of activities; diversification of the company’s activities or the range of goods and services it offers;
- consolidation of the company’s position in the market;
- as well as increasing the efficiency of production due to its consolidation and expansion of its profile, which allows enterprises to reduce unit costs per unit of output with the minimum production volumes necessary for efficiency.
The accretive merger can make it easier for companies to access capital, enhance their research and development capabilities, and ensure the best use of management skills. In addition, mergers can also be used to exit the market, whether because of a company’s failure or in connection with the restructuring of its activities.
But the processes of the accretive mean of companies are not without drawbacks, for example:
- conducting an M&A transaction is a complex and complex issue;
- the need for many preliminary procedures (financial analysis of activities, risk assessment, etc.);
- significant financial costs;
- the complexity of integration (especially with vertical mergers and acquisitions);
- possible problems within the enterprise (disagreement with the new internal policy).