In my opinion, the longer you’re involved in financial markets, the more you realize that deals can have a transformative impact on how an industry evolves.
We’ve seen it over and over again in the last decade.
In the dealmaking world, investment banks lie at the center of the universe.
When mergers and acquisitions are negotiated and then executed, the synergies of a deal become an important aspect to consider.
Synergies can take the form of potentially greater revenues or reduced costs.
If you merge two companies in the same industry, you will have duplicate marketing, finance, legal, and human resource staff serving one company.
There are savings to be had when analyzing the potential finances of the newly merged company.
In my view, another motivation for mergers is revenue growth.
A larger company buys a smaller one that has needed products or markets the bigger enterprise lacks.
Such examples include Amazon’s (AMZN) buyout of Whole Foods, Google’s (GOOGL) takeover of Youtube and Microsoft’s (MSFT) acquisition of LinkedIn.
There are many academic studies about how most mergers and acquisitions destroy shareholder value, with the fabled AOL-Time Warner being the most obvious.
However, in my opinion, deal synergy has real economic value that astute investors pay attention to when deals are announced.
In my opinion, if these advantages from a merger are real, the impact can be dramatic and enormous.